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.
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.
(Read more: Obama Is Haunted by Budget Crises Past)
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.
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.
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.
Follow me on Twitter @Carney