When Washington Abandons Routine Business it Harms Banks and Depositors

Washington is playing Kabuki Theater on too-much versus too-little spending on entitlements. This ideological snit is so intense and chronic that little else gets done.  Deposit insurance for non-interest bearing transaction accounts was approved before and has worked very well for community banks, commercial depositors, and indirectly for consumers.  Banks pay for the insurance, so Washington cannot pretend it’s a spending or tax issue, but the program has reached the date that Dodd-Frank specified for it to need re-approval.  Alas, Washington is now too busy with televised histrionics to rubber-stamp a fresh approval for this useful program.

A few years ago when bank failures were a distinct fear, the Dodd Frank legislation included several steps to lower the risks in the financial system.  It directed the FDIC to increase deposit insurance on retail account so that big depositors were less inclined to withdraw their deposits.  Huge loans (aka TARP loans) were made to the biggest banks so that they had sufficient reserves to satisfy demand for rapid withdrawals, especially by large corporate depositors.  The FDIC was directed to increase the deposit insurance for so-called non-interest bearing transaction accounts and that insurance on those accounts stands at $1.6 Trillion, a massive success.

Non-interest bearing transaction accounts are used by companies that conduct big-ticket sales and purchases.  Real-estate attorneys, brokerage firms, and grocery wholesalers are examples of firms who would use these accounts.  The increase in transaction account insurance was important to community banks and they gladly paid the insurance premiums because insurance gave their corporate depositors safety similar to that available from the largest of banks.  Deposit insurance allowed customers reassurance so that they could focus on the many attractive features of dealing with a smaller bank. 

But at the end of 2012, unless re-approved, the increased level of deposit insurance will come to an end.  Community banks correctly think that may push their large customers to migrate to one of the largest banks, the “too big to fail” banks.  The flight of large depositors could undermine a community bank’s financial health and that could be felt by its retail depositors in the form of reduced ability to lend, possibly closures, or mergers with larger banks.   Indeed the flood of cash exiting from uninsured transaction accounts is expected to push up T-bill yields.

As ordinary consumers, businessmen and bankers, we have no choice but to keep working in our chosen roles.  Much of what we do is routine and mundane but nevertheless important to those who count on us.  Evidently Washington feels exempt from conducting the nation’s routine business — including allowing good programs to continue. 

Alan Daley is a retired businessman living in Florida and following public policy issues from a consumer’s perspective.

FacebooktwitterredditlinkedinFacebooktwitterredditlinkedin