Taxpayer-Backed Bank Program TAG-ged for Termination

Published January 22, 2013

Ronald Reagan once said, “A government bureau is the nearest thing to eternal life we’ll ever see on this earth.” If he were alive today, Reagan would probably be pleasantly surprised to discover not all federal enterprises are immortal—among them the recently terminated Transaction Account Guarantee (TAG) program.

Created as a temporary measure in 2008, TAG was intended to provide stability and liquidity for customers with large deposits for purposes such as payrolls. Although the Federal Deposit Insurance Corporation (FDIC) already backs deposits of up to $250,000 per account, TAG offered an additional, unlimited guarantee for non-interest-bearing accounts. TAG’s protection, as with the FDIC’s, is based on the full faith and credit of the U.S. government.

Extended Two Years

TAG was scheduled to end after two years but was extended in 2010 for two more years through the Dodd-Frank financial industry legislation. Smaller banks lobbied lawmakers for yet another lease on TAG’s life beyond 2012. Without such a backstop, they argued, they would lose out to larger banks deemed “too big to fail” by the federal government.

Critics, however, noted those big banks were receiving the most benefits under TAG. According to the StoneCastle Partners cash management firm, more than 80 percent of TAG-covered deposits were at banks with more than $50 billion of assets.

Of equal concern to fiscal policy analysts was the program’s potential for massive taxpayer liabilities. Insured banks were holding roughly $1.5 trillion of TAG-related deposits. Taxpayers could have been forced to cover losses if an insured bank failed and the deposit insurance premiums the federal government collected did not cover the losses.

‘Unprecedented, Unproductive, Regressive’

On December 7 a coalition of 14 conservative, libertarian, and free-market organizations led by the Competitive Enterprise Institute (CEI) sent a letter to the U.S. Senate. The groups called TAG an “unprecedented, unproductive, and regressive bailout” which, along with tax increases then being proposed, “further encourages the wealthy to sit on their money rather than invest in job-creating new businesses.”

In a floor debate on December 13, Sen. Pat Toomey (R-PA) said continuing TAG was ultimately “not in the interest of the banks themselves.” He reasoned a mechanism like TAG “inevitably leads to a lot of people in this town thinking they have the right to force banks to do whatever they want them to do, including giving away goods.”

That same day, the TAG extension was defeated in the Senate on a procedural rule. TAG officially went over the “fiscal cliff” on New Year’s Day.

Pursuing Regulatory Reform

Now, many organizations are separately pursuing reforms to what they see as the real threat to small and large banks alike—overregulation from the Dodd-Frank “financial reform.”

“Congress should pursue bipartisan regulatory relief measures that benefit all banks, credit unions, and the economy as a whole,” said John Berlau, CEI’s senior fellow for finance and access to capital.