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September 23, 2017

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Banks urge US Congress to extend crisis-era deposit insurance program

NEW YORK--The expiration of special U.S. deposit insurance at the end of the year has spurred banks to lobby Congress to extend the program out of fear that companies will withdraw billions of dollars.

At issue is the Transaction Account Guarantee (TAG) program, which insures all bank deposits in checking accounts above the US$250,000 coverage already provided by the Federal Deposit Insurance Corp.

TAG primarily benefits businesses and local governments that need quick access to large amounts of cash for payroll and other needs.

About US$1.3 trillion of TAG-insured deposits that do not pay interest sit at large and small U.S. banks.

The TAG program was created by bank regulators and the U.S. Treasury during the 2008 financial crisis to attract cash for banks and reassure depositors that their money was safe. In 2010, Congress extended the TAG program through the end of 2012.

Without another extension, businesses are likely to shift their deposits to prime money-market accounts and other short-term alternatives.

"This program is the best deal around," said Robert Haas, senior treasury associate in charge of cash management and investments at the National Railroad Passenger Corp., the parent of Amtrak.

It addresses treasurers' two primary concerns: safety and a return on cash that comes from discounts banks give on other services in lieu of interest, he said.

If the program disappears, he will look at other options, Haas added.

A Lifeline for Small Banks

While the 10 largest U.S. banks hold 70 percent of TAG deposits, small banks have benefited by attracting deposits from local borrowers to fund loans that previously went to bigger banks, which are seen as safer. Community banks with under US$10 billion of assets hold about US$200 billion of TAG deposits — or about US$23 million per bank. "Extending TAG is our No. 1 priority this year," said Camden Fine, president of the Independent Community Bankers of America, who insists that business lending in distressed communities depends on the program. "Ending it will have a crippling impact on any kind of full economic recovery."

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