Newport Beach -- When Congress authorized the Transaction Account Guarantee (“TAG”) program in 2008, the measure was sold as as a temporary response to the financial crisis. The Federal Deposit Insurance Corporation now covers up to $250,000 per bank deposit account, but TAG provides unlimited coverage for non-interest-bearing transaction accounts. The banks do not pay for the TAG insurance.
The theory was that smaller banks which do not fall under the comfortable umbrella of “too big to fail” needed insurance to keep from losing important business customers. The trouble is, the largest banks led by JPMorgan, Wells Fargo and Citigroup were the main beneficiaries.
As the Wall Street Journal noted last month: “FDIC data show that the giant banks benefit most from TAG and rely on it for a larger share of deposits than do the little guys. So TAG is rightly seen as a subsidy for all banks, and especially giant ones.” Yet for some reason the WSJ is the only major media outlet that is opposing this odious subsidy for the largest banks.
Banks such as WFC and US Bancorp used TAG to swell their funding base and thereby came to dominate the market for new mortgages. Together, WFC and USB now account for half of the new origination market for home mortgages. Allowing TAG to expire at the end of this month would help to restore some competitive balance in the market for mortgage loans. Yet there is not a peep about this important issue from the New York Times, Bloomberg, Financial Times or Reuters.
In the case of JPM, the hundreds of billions of dollars in new deposits helped to fuel the speculative mischief we now know as the “London Whale” trade. Faced with vast amounts of cash that the bank could not deploy in the loan market, JPM instead gave the TAG funds to the JPM office of the chief investment officer. The London-based trader Bruno Iksil and his colleagues gambled the excess funds generated by TAG in the OTC derivatives market, causing a significant financial and reputational loss for the bank.
Despite what JPM says about hedging and all of the bad acts by employees happening in 2012, in fact JPM CEO Jamie Dimon was fully aware of the risk as early as 2010. That is when the bank actually considered taking a special reserve against the trades by Iksil because of the illiquid nature of the OTC derivatives contracts used in his strategy. Were it not for TAG, the London Whale trade and billions of dollars in losses to the largest US bank might not have happened at all.
In the case of other institutions, the excess funds generated by TAG have depressed asset returns and actually hurt the financial position of these banks. But none of these facts dissuades the Independent Community Bankers Association in Washington from pushing for an extension of TAG. Despite the evidence that the TAG program has caused more harm than good for small and large banks, and fueled unsafe and unsound practices in larger zombie banks, the ICBA still wants to see TAG extended for another two years.
Republicans in the House and Senate are opposed to extension of TAG as is the FDIC itself, although the agency won’t say so publicly. The reasons virtually all regulators support an end to TAG is that deposits in all banks continue to grow strongly even with the impending end of the subsidy. Keep in mind that banks are not actually paying for the additional FDIC insurance for transaction accounts via higher assessments.
The most recent data from the FDIC and Fed show deposits are growing at a rapid pace, this even though the reflation policies being pursued by the central bank have driven yields on bank paper down to just about nada. This rise in deposits is an extension of a well-established trend that has left small banks at near historic levels of liquidity.
Quarterly FDIC Call Report data for banks not ranked among the top 25 in terms of assets shows that deposit growth at these banks has so far outstripped their lending. Their aggregate loan to deposit ratio has fallen from 94.6% as of 12/31/2008 to 79.5% as of 6/30/2012, a near generational low. In fact, these banks could lose all of their current TAG funding and still remain well below their average loan to deposit ratios of the past several decades. Where is the problem?
So as in the case of JPM and the London Whale, it seems appropriate to ask why the smaller banks are pushing so hard for renewal of TAG – especially when the small banks have no deficit in terms of funding. Lending by smaller banks is weak at best, so why should taxpayers be supporting federal subsidies for bank funding?
"We've now seen … an extended period of increasing loan balances. But that's still relatively modest. What we really would like to see is more revenue being generated by expanded lending," FDIC Chairman Martin Gruenberg said at the release of the Quarterly Banking Profile this week.
This taxpayer-funded subsidy is helping the largest banks the most, so why is the ICBA so focused on getting an extension through Congress. The answer it seems is Washington politics. I hear that the ICBA has told Democratic Senate Leader Harry Reid they can deliver 7 Republicans for a cloture vote. With the Democrats (who always support more subsidies for large banks) a vote on the TAG extension bill could happen in a couple of legislative days. Yet most of the media refuses to engage on this issue.
Sometimes trade associations like the ICBA follow policies that help their senior officials more than the members. The leadership of the ICBA has made renewal of TAG their number one priority in 2012. Indeed, I am told that the top people in the ICBA will lose their jobs if TAG is not extended. But, of note, both the Financial Services Roundtable and the Credit Union Association are working to kill TAG.
A recent poll conducted by American Banker shows that, in fact, most bankers believe that TAG can be allowed to expire without any impact on community banks. But there remains a hard-core group of smaller banks that believe they deserve taxpayer subsidies in order to counter the perceived advantage that large banks have via “Too Big to Fail.” While such arguments may generate sympathy in the halls of Congress, adding a new permanent subsidy for small community banks is not the answer.
The better course is to let TAG expire and work to end TBTF for the largest banks. But the only way to make this a reality is for members of the public and the media to get angry at this latest attempt by the banking industry to extract yet another taxpayer subsidy from Washington. Remember, the ICBA is not offering to pay for the additional FDIC insurance in the TAG program via higher assessments. This is just another unfunded government welfare subsidy for all banks, large and small.