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A Popular Subsidy for Banks Was Killed in The Senate: Here’s Why

Dec. 28, 2012 2:29pm Guest Post

[Editor’s note: The following is a cross post by John Carney that originally appeared on CNBC.com]:

How did one of the most popular subsidies for big banks manage to get wiped off the books?

My brother Tim Carney explains that Senate Republicans earlier this month killed the Transaction Account Guarantee program with a parliamentary move that prevented Senate Majority leader Harry Reid from getting a straight up and down vote on it. But what’s most interesting is the special interest dynamics Tim describes.

The program, which is known as TAG, was launched during the financial crisis to support liquidity and bank stability. The basic idea was to cover non-interest bearing deposit accounts used for things like payrolls that exceeded the normal FDIC insurance limits. Banks could opt-in and pay a fee that was supposedly based on estimates of the program’s costs.

CNBCs John Carney: Why a Popular Subsidy for Banks Died in the Senate

Senate Majority Leader Harry Reid, D-Nev., is shown during a news conference, April 22, 2010. (Getty Images)

The fees, of course, were too low. TAG has been a money loser for the government. And Dodd-Frank made it a mandatory program, meaning that all banks had to pay the fee and participate in the program. This didn’t make the program “solvent” but it did stop banks from adopting business strategies that involved competing for large accounts based on their own safety and soundness rather than backing by the government.

The program has been very popular with banks. At year end 2011, 20 percent of all U.S. bank deposits were TAG insured, for a total of $1.6 trillion in deposits, according to a paper from the St. Louis Fed.

The biggest banks — those with assets of more than $15 billion — hold 90 percent of TAG-insured deposits, a far greater market share than the 74 percent of all U.S. bank deposits they hold. This has become big business for the big banks: 24 percent of deposits at those $15 billion plus bulge banks are TAG-insured. These banks wanted to see the TAG programs extended.

But it wasn’t only the big banks that wanted TAG extended. Small and community banks were pushing for an extension of the program. Some even wanted to make it permanent. They feared losing market share for big deposits to the big banks — on totally justifiable grounds that these banks are still considered too big to fail.

Senate Minority Leader Mitch McConnell walks toward his office after speaking on the Senate floor on Capitol Hill. McConnell and other congressional leaders will meet with President Obama Friday. (Getty)

The enemies of TAG were mutual funds and credit unions. The mutual fund companies, especially the money market funds, believed that TAG was diverting money away from their funds into government-backed bank accounts. With money-market funds paying such low interest rates these days, the price of having to go to zero-interest in a government-backed TAG account was very low.

Tim explains how the credit unions got involved:

Credit unions also helped kill TAG. They see community banks as their rivals, both on Main Street and on Capitol Hill. Community banks recently lobbied for regulations keeping credit unions from making more business loans. So some credit unions returned the favor, lobbying to kill the community banks’ TAG subsidy.

This seems like a good outcome from a dirty process. In some ways it is reassuring to know that it is possible to end a taxpayer subsidy popular with our biggest banks — even if it takes the selfishness of other special interest groups (in this case, the mutual funds and credit unions) to make that happen. A defeat for the big banks is rare and probably something to be celebrated.

There’s probably another way to look at this, however. The TAG accounts are popular, in part, because interest rates are so low. Were interest rates to increase — as they probably will sometime in the next few years — businesses would likely have taken money out of non-interest bearing TAG accounts to pursue a return on savings in other accounts. A government backstop is only worth so much foregone interest.

What this means is that the extension of the TAG accounts were, at best, only going to benefit the big banks for another couple of years. Most bankers believe interest rates will climb in 2014 or 2015, at which point money would have started leaving TAG accounts. What’s more, the biggest banks will probably gain some business in the meantime, as funds flow out of the community banks and into the implicitly-backed mega-banks.

Several conservative groups oppose the debt ceiling plan proposed by Sens. Harry Reid, left, and Mitch McConnell. (Photo by Alex Wong/Getty Images)

Some bankers even wondered, privately of course, whether the mega-banks got any benefit at all from TAG. Citigroup and the like just aren’t going to be allowed to fail, depositors know this very well. Few people are going to withdraw money just because the accounts at mega-banks lose their officially protected status.

The mega-banks also get to stop paying those pesky TAG fees, which were only being used to bailout the accounts of the small banks anyway. From the point of view of JP Morgan Chase, for instance, TAG fees were a subsidy to community banks. The threat of TAG fees rising to cover the cost of the program, of course, is now moot. (The mega-banks hated the idea of rising TAG fees because they would have paid the lion’s share of higher fees due to their high market share of these accounts, while recouping almost nothing since they’re never going to be allowed to fail.)

Conversations with lobbyists on Capitol Hill suggest that while the bank lobby was officially supporting an extension, they weren’t pushing that hard for it. Some on Capitol Hill were even under the impression that representatives on at least one of the big banks were quietly indicating they wouldn’t object to letting TAG die.

So perhaps TAG died not because the big banks were defeated but because the big banks didn’t care all that much about a program that was due to die by market forces anyway. They may even have wanted it to die since they and their customers know that all of their deposits are protected by an implicit guarantee that doesn’t cost a dime in fees.

–

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Comments (21)

term limits for congress
Posted on December 28, 2012 at 5:37pm
Too Big to Fail = No Need to Compete = Extension of the Regime

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- afishfarted
  Posted on December 28, 2012 at 8:09pm
  we have term limits. It’s called voting
  
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- G-WHIZ
  Posted on December 29, 2012 at 9:52am
  Doooon’t woooory!!! The Dem-0-c-RATS will “TAG” IT TO THE NEXT BLOATED BILL IN-AMMONGST THEIR PORK!!
  
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CommenterInChief
Posted on December 28, 2012 at 5:32pm
Wll explained. Thank you.

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Eugene1
Posted on December 28, 2012 at 5:18pm
Okay, this article only gave you a bent view of the TAG program. Notice that it was a guest opinion that originally posted on cnbc.com (and you trust info coming from CNBC?).

As a banker of almost 30 years, I can tell you TAG was NOT a subsidy for big banks or any banks. They had to pay to participate and they received zero dollars in return. The only pay out comes if a bank fails and a depositor (consumer or business) is caught with more than the FDIC allowed amount and could lose funds. The customer would then get their entire deposit account back if it was in a non-interest bearing account.

The benefit to small banks was that their larger clients did not bail on them and go to the bigger banks that were “too big to fail”. By not renewing this, we will see more deposit dollars migrate to these big banks and hurt the small community banks. Now does it make sense why credit unions would want TAG stopped? Credit Unions primarily compete against the small banks so this gives them an edge.

Isn’t it funny that credit unions don’t pay federal or state income taxes (subsidized by the American taxpayer), but want to compete against fully taxed banking institutions who pay millions in taxes? This inequity must be addressed and fixed. The question is could credit unions compete with banks if they weren’t subsidized and paid the same tax? In the words of the President, how about credit unions paying their “fair share”?

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- Micmac
  Posted on December 28, 2012 at 6:16pm
  I was thinking the same thing. Another step towards Corporatism. As it is Dodd-Franks is consolidating the small banks at an alarming rate that are the mas and pops that make loans big banks won’t make to keep their neighbors solvent.
  
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- piper60
  Posted on December 28, 2012 at 7:13pm
  When the Dems talk about somebody “paying their fair share.”It means:payMORE.
  
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AUsername
Posted on December 28, 2012 at 4:31pm
they don’t need a subsidy they need a crystal nacht for what there doing to this country and the average person.

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- Frederick_Douglass_Republican
  Posted on December 28, 2012 at 5:37pm
  And they can hold elections again a week after the crystal nacht and they will be re-elected yet again. A nation who’s majority no longer is worthy of freedom will lead to the entire nations’ enslavement. And here we are
  
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Oldguy89
Posted on December 28, 2012 at 4:00pm
ok so here’s the real deal on this. If a business has say one million or any thing above 250K then the account is fully insured for what ever amount is in the account, as long as it is a business non-interesting bearing account. This allowed business to park money in one account for the purpose of payroll, bills, etc, now a business will have to have several accounts to hold say a million or even more. besides if a bank fails, I would doubt that the government would bail out a business that lost every thing over 250K, THE BANK YES, BUT CERTAINLY NOT A BUSINESS.

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Restoration & Improvement
Posted on December 28, 2012 at 3:53pm
Anytime a government program gets killed, that a good thing, no matter what it is. There should be more of it. We should start judging politicians(crooks) on how many law and programs the repealed. Every time they pass a new law or program, they screw up something else.
These people all need a pay cut by 50%.
We need term limits now, a flat tax, but that won’t happen with all the tax accountant and attorneys’ fighting to keep, if not make more confusing the current tax code.
Just think if we had a flat tax, lets say 12% for individual with a minimum and 18 to 20% for business. No deductions on anything. We could get rid of over 80% of the IRS alone. No more bitching and moaning about tax breaks, and subsidies.
Noooooo, that would be the correct thing to do, too much common sense. we can’t do that.
I am sick and tired of overpaid morons who thing they are something special tell me how to live my life and then charge me an outrageous amount for lousy service.
Another thing, the 17th amendment should be repealed. Senator’s should be appointed the state legislatures as originally intended. That would take a lot of money out of politics. While I’m at it, shift all Senate and Congress salaries/benefits to their respective states. And cut their salaries and term limit them. We should extend the congressional seat to 4 year and term limit at 2 terms.
Look, I’m saving money already. It all adds up

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marybethelizabeth
Posted on December 28, 2012 at 3:35pm
Why is theblaze trying to embarrass Mr Carney by reprinting this disorganized self contradicting malarcky?

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- Fubared
  Posted on December 28, 2012 at 3:46pm
  Why is MBE trying to sound like it has a lick of common sense?
  
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- OhioRifleman
  Posted on December 28, 2012 at 3:53pm
  It makes sense to me. You must be too moronic to understand it.
  
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- Walkabout
  Posted on December 28, 2012 at 3:57pm
  Well Mary you did not point out any contradictions. So I must assume you are panicked. LMAO
  
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- Walkabout
  Posted on December 28, 2012 at 4:02pm
  I belong to 2 credit unions. It is all very proletarian without all that socialist lying cr/p.
  
  Banks love it. MBE loves it. Credit unions hate it. Not a hard choice to decide which way to go.
  
  After this performance I got to wonder if MBE is a paid troll. Her rant came out of nowhere. Maybe not, after all TARP made it possible for her Messiah to become president.
  
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afishfarted
Posted on December 28, 2012 at 3:02pm
You can bet your bottom dollar these republicans are gonna get a HUGE campaign donation. I know my senator–Corker–has a very friendly relationship with J P Morgan.
Connect the dots, folks

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civilwarcometh
Posted on December 28, 2012 at 2:40pm
More like 2 girls fighting over a barbie doll. Time to end this government BS. We need men with ball’s to run for office. Like this guy!!!http://weaselzippers.us/2012/12/28/arizona-sheriff-joe-arpaio-to-send-armed-volunteers-to-protect-schools/

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- oldguy49
  Posted on December 28, 2012 at 2:48pm
  yep..he will be homeland security cheif
  
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gyro
Posted on December 28, 2012 at 2:37pm
ok this seemed confusing to read
short notes needed as I cant figure out who wins who loses or who cares

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- SciPro
  Posted on December 28, 2012 at 3:33pm
  Gyro .. I have to agree with you a bit. Still, banks love it, and some think that’s bad. Personally I don’t, with the right rules, backstopping your money can never be bad … you would think! But Banks are the enemy these days .. haven’t you heard?
  
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