Straight Talk — Extending TAG

The Transaction Account Guarantee Program should be extended. I am somewhat surprised the Congress hasn't already taken action to extend the program (as of this writing on Dec. 3), but there is still time before the program expires on Dec. 31..The argument for letting TAG expire is that it just puts more pressure on the federal safety net. TAG, critics will say, simply encourages more of the bailout mentality that saved Citigroup, BofA and AIG. But that argument is exactly backwards. Letting TAG expire would exacerbate the too-big-to-fail problem..Keep in mind that banks pay for the additional coverage they offer customers through TAG. The FDIC figures the risk and like any good insurer charges the banks a commensurate premium. Deposit insurance is funded by the industry; in no way is this a taxpayer hand-out..Because of past bailouts, the public perceives that the largest banks in the country have that protection whether they pay for it or not. So if you get rid of TAG, the TBTF banks will essentially get out of paying for insurance that everyone believes they have anyway. At least under TAG, the FDIC gets some money for that protection..Because the public perceives the big banks to be too big to fail, TAG money currently in community banks will flow to the biggest banks if TAG expires. Letting TAG expire will be just one more public policy decision — along with unreasonably complex Basel III rules and a seemingly endless stream of new Dodd-Frank Act rules — to squeeze community banks..Nobody is arguing that TAG should be made permanent. It was designed to be a temporary program. Now, however, is not the time to end it. The slow economy and pending fiscal cliff issues make this a tough time to pull a major source of liquidity from community banks. My thought is the program should be phased out as interest rates rise. TAG protection only applies to non-interest bearing accounts. At some point, the interest rate environment will make non-interest bearing accounts uncompetitive. Money will migrate out of these accounts due to natural market forces. This would be a logical time to terminate TAG. Pulling the plug on the program now changes the rules in the middle of the game for both community banks and depositors. Let's change the rules when market forces render those rules moot..Everyone wants to get past the bailout mentality that led to the need for TAG in the first place. But let's be clear. TBTF banks will grow even bigger if TAG goes away, giving them even more leverage against their community bank competitors.