Banks push to keep bailout-era lifeline

The financial industry is hoping to avoid its own “fiscal cliff” at the end of the year when a guarantee program for bank accounts is set to expire.

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The Transaction Account Guarantee (TAG) program, which was created during the financial crisis, provides government guarantees to non-interest bearing bank accounts used by small businesses and municipalities. The program serves as a backstop for accounts worth more than $1.4 trillion.

Banking lobbies warn that the expiration of the program could destabilize financial markets and are beginning a last-minute push for an extension in the lame-duck session of Congress.

“It’s kind of the fiscal cliff of the financial sector,” said Paul Merski, executive vice president for congressional relations for the Independent Community Bankers of America. “$1.4 trillion is a serious amount of cash to become uninsured abruptly at the stroke of midnight.”

Lobbyists for banks say they already have significant support for another two-year extension of the program, which was first created in 2008, and are working to make sure it’s included in whatever legislation makes it to President Obama’s desk before the end of the year.

The TAG program applies to transaction accounts, which businesses and governments typically use to set aside large amounts of cash for brief periods of time.

Although the program was originally created at the height of the financial crisis to prevent bank runs, financial lobbyists contend the economy is still too tenuous to do away with the lifeline that it provides.

In addition, the current bottom-barrel interest rates pushed by the Federal Reserve is driving many businesses to simply keep their funds in such cash-heavy accounts, which could continue to use the added government support.

And while the government is backing those accounts, banks insist taxpayer dollars are not at risk under the program, since participants pay extra deposit insurance for the service.

The ICBA and the American Bankers Association sent a letter to lawmakers in September warning that the economy was not healthy enough to remove the safety net.

“While policy makers had expected the economy to be on solid footing by year-end 2012 when Congress extended the TAG program in 2010, the fact is that the economy is still fragile,” they wrote. “Businesses … are increasingly nervous about the path of the economy. Extending the TAG program for an additional two years will take at least one important piece of uncertainty off the table at year-end.”

Banks have some big names in their corner. Senate Banking Committee Chairman Tim Johnson (D-S.D.), and Rep. Barney Frank (D-Mass.), the ranking member of the House Financial Services Committee, have both urged an extension.

One question is where the Obama administration falls on the issue.

Treasury Secretary Timothy Geithner told the Senate Banking Committee in July that he believed the program should not be renewed. But the White House tried to include a two-year extension in the latest continuing resolution passed by Congress in September, leading bank lobbyists to believe the administration is on board.

“I’m 100 percent confident that the Treasury and the administration is supportive of this,” said Merski.

Opponents of an extension argue the program is a leftover from the financial crisis that is well past its expiration date.

“TAG was an emergency measure … when there was broad-based lack of confidence in the solvency of the banking system,” said Dr. Robert Shapiro, a former economic adviser under President Clinton who founded Sonecon, an economic advisory firm.

“There’s really no justification for this except during periods of panic about stability and solvency.”

The Wall Street Journal’s editorial board strongly opposed another extension of the program in an August editorial, arguing it distorts the market and rewards poorly run banks. At the July hearing with Geithner, Sen. Bob Corker (R-Tenn.) warned that the guarantee was driving funds into those accounts, creating potential moral hazard problems where risk is encouraged.

“I’m reticent to continue things like that,” Corker said at a Senate Banking Committee hearing.

Nonetheless, bank lobbyists are confident that if they can fit a TAG extension into whatever final legislative package emerges from the 112th Congress, it could survive.

“If it were included, I don’t see anyone standing on principle, so to speak, to pull it out,” said James Ballentine, the ABA’s chief lobbyist.

The bigger challenge is making sure it does not get lost in the shuffle during the frantic final days of the year.

“Every day that goes by, chairs get pulled away like musical chairs,” said Ballentine. “We’re just trying to get to the right people who will be in the room.”