By: Julie Story
As of January 1, 2013, trillions of dollars in bank deposits are expected to lose federal insurance when the transaction account guarantee insurance program expires. Although banks lobbied hard for the extension of TAG insurance - in which the Federal Insurance Deposit Corp. extends unlimited insurance to certain deposits - it appears that this temporary program will be allowed to expire without Congressional intervention.
Several entities relied on TAG insurance following the financial crisis, ranging from business clients and nonprofits to municipalities and towns. Once the insurance is no longer valid, the FDIC will only be able to insure up to $250,000 in each non-interest bearing account.
Many institutions, particularly community banks, are now seeking out other methods to ensure that the $1.5 trillion in deposits they hold will not cause business customers to flee when TAG expires. Currently, depositors are prohibited from spreading out more than $1 million across four accounts in the same bank, according to the New York Times. To lower the risks of customers pulling out their funds when TAG expires, some smaller banks are turning to cash management companies that can split up funds into multiple $250,000 blocks and distribute them evenly among a network of banks, the Times reports.
A number of specialized firms said they have seen an influx in these requests over the last several months, with some banks asking them to manage billions of dollars in deposits.
Many smaller banks rely on specialized cash management firms to protect customers
The Times notes that this new banking strategy is largely specific to smaller banks, such as community institutions, rather than large national entities. Many larger banks have primarily stalled on seeking alternatives to TAG insurance, noting their belief that the government will find some way to continue insuring the trillions in deposits. This was largely evidenced by the big bank bailouts experienced when the economy fell.
"Those deposits would go to the big banks because the general perception is the government won't let them fail," Tim Zimmerman, president of Standard Bank, told the Pittsburgh Tribune Review. "That's why this is so disturbing. The big banks, who caused the financial crisis, are the ones who would benefit from not extending the TAG program."
However, many community banks have seen a strong uptick in the number of high net-worth customers and business clients who are enticed by more favorable fee structures and products. As a result, most are not taking chances.