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You can keep your guarantee

Scott Jagow Nov 20, 2009

Let’s continue with the topics you’ve asked to hear more about. Steve asks: What’s the deal with banks opting out of the Temporary Liquidity Guarantee Program? Can you read anything into why a bank would opt out or stay in? Good question.

First, a little background. The FDIC created the TLGP and the TAGP (Transaction Account Guarantee Program) last year to encourage lending to consumers and businesses and to provide extra security for bank depositors. The TLGP backs unsecured debt to help banks build liquidity. The TAGP provides full coverage of non-interest bearing (checking) accounts. Currently, regular FDIC insurance covers up to $250,000 for each bank depositor. Banks in the TAGP have unlimited coverage.

As Steve points out, many banks have opted out of these programs — about 6,000 aren’t taking the debt guarantee. More than 1,000 don’t have the extra account insurance. Why?

It simply boils down to a cost/benefit analysis. The program is funded by fees that are separate from the regular FDIC fees banks pay. So banks have to consider their liquidity position and decide whether they need the extra insurance. Or in the case of the TAGP, if a bank has no depositors with more than $250,000, then the program makes no sense. It’s just like any kind of insurance. If you live in Florida, is paying premiums for earthquake insurance a good idea?

The FDIC explains it this way:

…there are many valid reasons why an entity may have chosen to opt out of the TLG Program. Entities must make individual decisions based upon their business needs, including the costs of the Program as well as the benefits of participation. The decision to opt out in no way signals anything, either positively or negatively, about the financial health of the entity. Depositors and investors may ask any of the entities on either of these lists for a further explanation concerning the entity’s decision to opt out of the TLG Program.

You’ll find the opted-out lists here.

When the program started a year ago, perhaps there was trepidation about opting out because a bank on the opt-out list might have been seen as less “safe.” Those concerns may have lessened, even though the threat of the commercial real estate bust is still hanging over many small banks.

Earlier this month, the large bank US Bancorp chose to opt out of TAGP, saying it was “a reflection of its strong capital and liquidity position.”

The FDIC is planning to phase out TAGP, but this week Congressman Barney Frank said he wanted to make the TLG program a permanent FDIC offering. He also wants to keep it walled off with its own fee structure. From Bloomberg:

“It’s an extension of a program that worked fairly well,” Frank, a Massachusetts Democrat, said during debate. The FDIC program “made a profit for the federal government.”

But apparently, many banks don’t think it makes sense for them.

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