The Transaction Account Guarantee program was originally launched in 2008 by the Federal Deposit Insurance Corp. to help banks hold on to liquidity. The program gives unlimited federal guarantees to zero-interest bank deposits. This allows companies to park cash and not worry about the bank failure. Given the current low interest environment, giving up the token amount of interest can offset the worry about about the underlying bank’s failure.
However, the program is set to expire at the end of 2012.
As you might expect, banks are eager to have the program extended. The American Bankers Association has endorsed allowing the program to run for an additional two years. The Independent Community Bankers of America, a trade group for small banks, is pressing lawmakers for a five-year extension.It’s estimated that over $1 trillion is sitting in zero-interest bank deposits.
Money-market mutual-fund industry want to see the program end. They want a piece of that $1 trillion and think the Transaction Guarantee Program would shift several hundred billion dollars out of the zero interest bank accounts and into money-fund accounts. Of course a big chunk of that money would be funneled bank into the banks when the money-funds bought bank CDs and short term paper.
From an operations standpoint, the Transaction Account Guarantee program removes a risk from the matrix. You don’t need to worry about your operating account being in jeopardy for a bank failure.
- U.S. Guarantees Stir Debate by Alan Ziebel and Andrew Ackerman in the Wall Street Journal
- Geithner weighs in on TAG extension, QMs
- Safe for the 1 percent: FDIC often insures much more than $250,000 By Ellen Freilich
- Small banks fight for guarantees in Politico/