When the financial crisis hit in 2008, one of the steps taken by the FDIC to shore up confidence in the U.S. economy was to increase deposit insurance from $100,000 to $250,000. Additionally, the FDIC created a temporary liquidity guarantee program—Transaction Account Guarantee (TAG) program—on non-interest-bearing transaction accounts (a category which includes most traditional checking accounts, but does not encompass interest-bearing money market deposit accounts). The original expiration deadlines for those actions were extended as part of the Dodd Frank legislation, but are now set to expire at the end of this year.
Both TAG and the FDIC deposit insurance increase were implemented with the intention of stabilizing a shaky banking system, protecting deposits at smaller banks, and bolstering liquidity. The measures have been very popular, and are generally considered to have been effective. The concern now is that ending these programs may make banks (especially smaller banks) less willing to lend, hurting liquidity. Municipalities and small and mid-sized businesses may be concerned about the security of their deposits, and smaller banks would be justifiably worried about the possibility of a subsequent “run” on the banks, as people move money from smaller banks and into larger banks.
Whether or not that reasoning makes sense (we have all seen the fallacy of the notion that big banks are “too big to fail”), it is human nature to want to look out for our own self-interests. With TAG protections applied to approximately 20 percent of total U.S. bank deposits as of the end of 2011, there is a significant chunk of change that may be perceived to be at risk. You can’t help but wondering if now, at the very beginning of a still-tentative recovery, is the best time to be winding down popular programs that provide the most valuable assets of all in an economy: security, confidence and reassurance.