U.S. Senator Bob Corker, R-Tenn., a member of the Senate Banking Committee, today reiterated his opposition to further extension of the TAG (Transaction Account Guarantee) Program, S. 3637, in remarks on the Senate floor. The temporary measure established during the 2008 financial crisis provides unlimited federal insurance for noninterest-bearing business accounts. With banks now holding sufficient deposits to support their outstanding loans and data showing that large institutions are by far the largest holders of TAG deposits, the program's benefit to the community banking system is, at best, unclear.
In August, Corker wrote to FDIC Chairman Martin Gruenberg asking a number of questions about the necessity of extending the program with the banking system having emerged from a crisis. The FDIC's response did not provide sufficient evidence that maintaining TAG is justified by current measures of bank lending or liquidity.
Corker's floor remarks, as prepared, follow.
"Mr. President, I am here today to talk about the bill before the Senate, a two-year extension of the TAG program.
"As everyone knows, this would be the second two-year extension of an emergency measure taken during the height of the financial crisis that was meant to end once the crisis passed.
"I have exceptionally high regard for community bankers in Tennessee. They have had to deal with the financial crisis of 2008 and the recession it left in its wake. And if that wasn't bad enough, since the passage of Dodd-Frank, they've had to deal with an onslaught of new regulations.
"Many of these regulations, no doubt, were ill conceived. All of them have dramatically increased the compliance burden of being a small banking institution. Yet none of them have been on the table to be fixed or improved by the Senate since 2010. Obviously there were a lot of reasons for this. But it is a shame.
"But I am very hopeful that in the next Congress we will have a meaningful dialogue about striking a better balance in terms of bank regulation, particularly as it relates to our community banks.
"Some of what we passed in Dodd-Frank makes a great deal of sense, but much of it does not. And it's time for us to devote energy to fixing and improving the law where there are flaws. If we really want to help community banks, that is where we should focus our energy.
"Giving out limitless deposit insurance is what some people have decided is a consolation prize. That's too bad. We should fix Dodd-Frank if we want to help our community banks.
"But the vote in front of us is TAG extension. There are a series of policy reasons why it's time to end the TAG program. I will go through some of them.
"First, the FDIC's deposit insurance fund, or the "DIF," is undercapitalized. This is the fund of reserves meant to protect taxpayers against an unexpected loss stemming from bank failures. By law, the DIF is required to be at 1.35 percent of total outstanding deposits. It is, however, only at 0.35 percent today. I do not see the wisdom in extending insurance to $1.5 trillion in transaction deposits at a time when the deposit insurance fund is already undercapitalized.
"Second, there is ample liquidity in our banking system as-is to support loan demand. In fact, the ratio of loans to deposits is at historical lows. Liquidity to make loans is not the problem. Slow economic growth is the problem. Extending insurance to keep these deposits around, then, fixes a problem that simply does not exist.
"Third, the overwhelming majority of TAG deposits are actually with the largest banks. Some small banks have said they want an extension, but this is largely not a small bank product.
"Seventy-one percent of TAG deposits are in the largest banks. Sixty percent of TAG deposits are held by just the top five banks. I do not see the wisdom in leveraging the FDIC and the taxpayer to insure the deposits sitting at our country's largest financial institutions.
"Fourth, extension of the TAG program raises serious moral hazard issues. It encourages large deposits in banks that may be troubled with no market discipline. Moral hazard is why throughout the history of deposit insurance, it has always been limited. I think Washington has contributed enough to moral hazard problems over the past few years, and it's time for us to stop.
"Finally, if we really want to help community banks thrive and succeed, our focus should be on dialing back Washington's desire to micromanage our banking institutions.
"The regulatory pendulum of Washington trying to micromanage these institutions has absolutely gone too far. Our focus should be on getting the pendulum back to a more reasonable place. Extending limitless FDIC insurance for these transaction deposits does not further that policy objective. In fact it takes us in the other direction.
"Let me put it another way: How can we ever get Washington out of the business of telling banks where and when to lend if we are having Washington guarantee all of their deposits? The answer is that we can't.
"It's time to end this program. But even more importantly, it's time for members of the banking committee to take up the real challenges still facing our financial system.
"I am offering several amendments that help insulate the taxpayer. But in reality, it's time to fully end this program. And even more importantly, it's time for us, as members of the banking committee, to take up the real challenges still facing our financial system."