As many of you are aware, the Transaction Account Guarantee Program (TAG) is scheduled to expire on December 31, 2012. The TAG program, which was originally a part of the Dodd-Frank Act, gave unlimited FDIC coverage to deposits held in non-interest bearing accounts and was designed to build confidence among depositors that their money would be insured. With the likely expiration of the program (lawmakers do still have the ability to extend it), deposits in noninterest bearing accounts will only be insured for amounts up to $250,000, beginning on January 1, 2013. This has led many community bankers and industry analysts to worry that accounts with balances above the $250,000 limit will see funds flow out of their institution and into institutions perceived as “safer” or “too big to fail”. This potential run-off of deposits could lead to difficulties in areas such as liquidity and funding, so it is important to be prepared for this scenario.
Ways to Prepare Your Institution
Below is a list of several actions that your institution might consider taking in anticipation of TAG not being extended. The focus here is on communication within your institution, communication with your customers, and proper assessment of your deposit accounts and balances.
• Ensure that all employees are aware of this event through emails or training sessions explaining the TAG Program and its likely expiration on December 31, 2012.
• Contact non-interest bearing deposit account holders via mail, e-mail, or phone explaining the TAG Program and its likely expiration on December 31, 2012.
• For large accounts with balances greater than $250,000, reach out by phone or in-person to try to maintain the relationship and ease any apprehension about TAG expiring.
• Educational materials for both employees and customers can include alternative methods of obtaining FDIC insurance for deposits. For example, Sweep and Repo accounts, as well as CDARS and IDC accounts, are viable methods of insuring large balances.
• Examine non-interest bearing deposit accounts and determine which ones have balances above $250,000. This will be essential information when it comes to assessing potential run-off.
• Pay particular attention to new accounts, or accounts that grew significantly while TAG was in place. These could be more likely to show volatility than accounts that were opened prior to TAG.
• Test Fed Funds lines and other contingent liquidity sources to ensure they will be available in the event your institution experiences run-off.
• Remove all notices of the enactment of the TAG Program from branches, websites, etc. by January 2, 2013 (suggested by FDIC).
Advice from the FDIC
From a regulatory standpoint, the FDIC recently stated that it is best practice to notify your institution’s customers about the upcoming expiration of the TAG program. They did not say that it was required, but did encourage it, and even provided sample language that could be provided to customers.
NOTICE: By federal law, as of 1/1/2013, funds in a noninterest-bearing transaction account (including an IOLTA/IOLA) will no longer receive unlimited deposit insurance coverage, but will be FDIC-insured to the legal maximum of $250,000 for each ownership category.
With the expiration of the TAG Program on the horizon, it will be a prudent business practice to plan for it. Educating your employees and depositors (especially those with balances of over $250,000), and assessing your position in terms of potential withdrawals are a few examples of actions to take to help prepare your institution.
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