U.S. Senator Pat Toomey (R-Pa.) today defeated the extension of a 2008 emergency bailout program for banks and their wealthiest customers by raising a budget point of order on the Senate floor.
Known as the Transaction Account Guarantee (TAG), the program was created in 2008 as an emergency TARP measure to provide unlimited FDIC protection to non-interest bearing transaction accounts, above and beyond the normal $250,000 FDIC guarantee. The program is used primarily by corporate and municipality accounts and wealthy individuals. Today's vote sought to extend TAG for another two years.
To protect taxpayers, Sen. Toomey raised a budget point of order today, objecting to the TAG bill because it violates the Budget Control Act passed by Congress and signed into law by President Obama last year by $110 million over 10 years.
Sen. Toomey spoke on the floor today in opposition to TAG. A transcript and video of his remarks are below.
SEN. TOOMEY: Thank you Mr. President, I rise this morning to address legislation that's under consideration, the extension of what is known as the TAG program - the acronym stands for the Transaction Account Guarantee. I want to discuss this a little bit and give the reasons for my opposition to the extension of this program.
First, a little bit of history about this. Many people are familiar with the FDIC insurance program. It's a long standing program that provides a limited guarantee on bank deposits. Actually for a very long period of time, for, I think it was over twenty-five years starting in 1980, the limit on the dollar amount of a balance that would get this FDIC guarantee was a $100,000. That limit was raised for all accounts to $250,000 during the financial crisis of 2008 and then subsequently, this new program was created, this Transaction Account Guarantee program, which provides an unlimited guarantee. There's no limit whatsoever for a large category of deposits, not all deposits, but all non-interest bearing transaction deposits, which is a long way of saying pretty much checking accounts, although it would include other things. So, as you might imagine, there are many large corporations, municipalities, very wealthy individuals who have these large accounts, and today those accounts are guaranteed without limit, and the proposal that we have is to extend this guarantee which is set to expire on Dec. 31 - to extend it for two more years.
Now, let me be clear about one thing right off the bat. This is a taxpayer-provided guarantee. The taxpayers are on the hook for these deposits. And if anybody has any doubt about that I would refer them to the FDIC's webpage - the home page of the FDIC's website. It states very clearly that FDIC's insurance is backed by the full faith and credit of the United States government. Now obviously that means the taxpayers. So American tax payers are on the hook for the full amount of these transaction guarantees.
So let me explain why I think this is problematic. And the first reason is a simple one. We're not in a financial crisis anymore. Oh we've got a miserable economy, but we certainly don't have a free-fall fiscal disaster with financial institutions collapsing. We don't have the fall of 2008 anymore. There's actually quite a lot of stability in financial institutions. And you could have a very interesting debate about whether this was ever a good idea, but I don't understand how you can justify it now, in an environment where - that doesn't even faintly resemble the crisis circumstances of 2008. And if we're going to extend it now for two more years when there's clearly no need for it, it certainly seems to me to suggest an interest in making this a permanent feature of the American banking system - permanent, unlimited guarantees, the socialization of deposits in this country which, I think, is a terrible idea.
Secondly, this is a big contingent liability for taxpayers. It's about one and a half trillion dollars in deposits right now that fall into this category and are being guaranteed and will continue to be guaranteed if the guarantee were extended. It's also worth noting that this mostly benefits the big banks. It's big banks, not surprisingly, that have a disproportionate share of big accounts. In fact, the 19 largest banks hold two-thirds of all the deposits and accounts that are guaranteed under the TAG program. So this is a nice big help to a lot of big banks.
I would argue that there's something maybe even worse than all of this about this. I believe that the very existence of the TAG program actually increases the risk of bank failures. And here's the reason why.
In the absence of these unlimited guarantees, a corporation or a municipality or a wealthy individual or an institution making a large deposit - an amount that exceeds the limited FDIC's traditional guarantee - such an institution is going to do its due diligence on the strength of the bank. It's going to want to understand that this bank is properly run, is prudently managed. And that due diligence is a discipline that the market imposes on the banking system. The banks have to prove to potential depositors that they are well-run, that they are sensible and prudent and aren't taking too much risk in order for the depositors to be confident that they'll ever be able to get their money back.
And so that's a very important mechanism that imposes a discipline that helps to keep banks doing prudent things. With this unlimited transaction guarantee, nobody has to worry about whether the bank is well-run because the government, the taxpayer, is there to return all their money if the bank messes up. And that removes that very important discipline, and in the process, I think, actually increases the risk that more financial institutions, more banks would in time fail because they're not held to a higher standard by their depositors and that the taxpayers therefore would be picking up an even larger tab than what some might project.
I would also argue that the premiums systematically under-fund this program. There are premiums that are charged of the banks in return for this. But banks would be adamantly insisting that they have the option to opt out if this weren't being subsidized. The fact is, it is subsidized. So the taxpayers are not even getting, in my view, an adequate premium for the risk they're taking - not that they should be in the business of taking this risk in the first place.
The last point I want to make about the banks is - I don't think this is good for the banks themselves because this is the kind of government program that inevitably leads to a lot of people in this town thinking they've got the right to force the banks to do whatever they want to do, including giving away goods and services, and it is justified on the grounds that, well, this is a reasonable thing for us to ask of these banks since after all, we the taxpayer, we the government provide them with this guarantee.
So I think this is not in the interest of the banks themselves.
Now I will tell you, I am sympathetic to the argument that some of my friends in the community banking world have made - the argument that with Dodd-Frank, we codify too-big-to-fail. We create a whole category of large financial institutions and we designate them - we call them - we use a different acronym - we call them systemically important financial institutions. Most people see that as another way of saying too-big-to-fail. And having codified that, our community bankers argue that that gives these banks an unfair competitive advantage in attracting depositors. I'm sympathetic to that argument, but I would argue that first of all, it is seldom a good idea to counter one bad government policy with another one. Compounding errors usually takes you in the wrong direction. Secondly, what we need to do is reform Dodd-Frank - we need to do a lot in reforming Dodd-Frank in my view - that's the right way to deal with this perception of a competitive advantage. We ought to be providing a lot of regulatory relief for community banks, and I say that as someone who has been actively involved in the community banking industry personally. And I also would suggest that there are other ways that community banks can, in fact, successfully compete against the large banks other than about this guarantee of deposits.
My last point, Mr. President, is that last year, we ran a deficit of $1.1 trillion. This coming year unfortunately, it looks like we're likely to do something like that again. This bill violates the Budget Control Act - the cap, the limit that we put on spending; it exceeds that; it creates a new amount of spending above and beyond what was contemplated there. And I think that is a huge problem in and of itself. So I would oppose this legislation on the substance of it, but in particular, I'm objecting to the fact that it does exceed this budgetary authority.
So Mr. President, at the appropriate time, I intend to raise a budget point of order. If that is now, I will do it now-
Mr. President, the pending measure, Senate Bill 3637, the Transaction Account Guarantee Act, exceeds the Banking Committee's section 302(a) allocation of new budget authority and outlays deemed by the Budget Control Act of 2011. Therefore, I raise a point of order against this measure pursuant to section 302(f) of the Congressional Budget Act of 1974.