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Thursday, July 5, 2012

FDIC Responds to Rep. Capito’s TAG Program Questions

FDIC Acting Chairman Martin Gruenberg responded to House Financial Institutions Subcommittee Chairman Shelley Moore Capito’s June 7 letter asking the agency for its perspective on the performance of the Transaction Account Guarantee (TAG) program.

Capito asked Gruenberg a series of questions about the program’s cost, effect on the Deposit Insurance Fund (DIF), effect on the banking system’s overall liquidity, and the consequences of its expiration slated for the end of this year.

Gruenberg did not take a position in his letter.
Given the uncertainty in the current economic outlook, it is difficult at this time to anticipate the consequences of the program’s expiration at the end of this year.
Gruenberg added that banks have considerable experience in managing liquidity.
[W]e expect that they can generally adjust appropriately to large inflows or outflows of deposits. However, significant changes in the economic environment could have an impact on industry liquidity.
Gruenberg also noted:
  • The TAG program’s costs have been about 3% of all failure costs - $2.2 billion in the first two years and $270 million over the last five quarters since Dodd-Frank extended the coverage - and the agency expects losses to continue at the 3% level.
  • The FDIC set current premiums with TAG losses in mind, and so far those losses haven’t been large enough to affect the DIF’s ability to reach the minimum 1.35% reserve ratio by September 2020.
  • Almost two-thirds of the increase in insured deposits since the end of 2010 are attributable to increases in TAG deposits. 
  • The 10 largest banks, with 52% of industry assets, account for 70% of all TAG deposits. Banks below $1 billion, with 10% of industry assets, account for 3.4% of TAG deposits.
ABA has also been aggressively seeking TAG program details from the FDIC and gathering opinions from across the industry on the issue. The 112th Congress will have to make a decision on the program’s future with limited days left in its final session.

Read Gruenberg’s letter.

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