New Deposit Insurance Goes To Senate

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A bill extending a federal program guaranteeing deposits in noninterest-bearing accounts at federally insured banks easily cleared a procedural hurdle on Tuesday, setting it up for a vote on final passage later this week.

But the bill, which is supported by most of the banking industry and by the White House, still faces an uphill battle in the Senate and the House.

The Senate voted 76-20 to continue debate on the bill, which would extend by two years a program created to help stabilize the banking system in the 2008 crisis. It was extended in 2010 until the end of this year.

Managed through the Federal Deposit Insurance Corporation, the so-called Transaction Account Guarantee program provides unlimited federal deposit insurance to what are known as transaction accounts — basically noninterest-bearing accounts generally used by businesses for payroll, accounts payable and other immediate needs.

Bankers at nearly all but the largest financial institutions have pleaded with Congress to extend the program after Dec. 31. About $1.5 trillion in transaction accounts would be affected, according to the Independent Community Bankers of America, and industry officials said they expected $200 billion to $300 billion to move out of banks if the program ended.

The F.D.I.C.’s standard deposit insurance covers amounts up to $250,000 per account, a limit that was raised from $100,000 before the financial crisis. The higher limit was made permanent in 2010; it is not being considered for change.

The Transaction Account Guarantee program is financed through assessments on banks by the F.D.I.C., similar to the standard deposit insurance program. Taxpayer money could be at risk if the fund did not have enough money to pay the insured accounts, but that has never happened. The F.D.I.C. says that accounts covered by transaction guarantee program have accounted for 3 percent of all losses because of bank failures.

The program is critically important to the smallest community banks, Senator Tim Johnson, a South

Dakota Democrat and supporter of the bill, said on the Senate floor Tuesday. “This program allows these institutions to serve the banking needs of the small businesses in their communities, keeping deposits local,” he said.

But procedural moves by the Senate majority leader, Harry Reid of Nevada, have left the bill’s future uncertain. Immediately after the 76-20 approval to move the bill forward, Mr. Reid said he would not allow any amendments to the bill, something Republicans oppose.

The two sides were still negotiating on whether amendments to the bill would be allowed. If an agreement is not reached, it is unlikely that Senate Republicans will help provide the 60 votes needed for the bill to pass the next procedural milestone.

The debate is occurring against the backdrop of the Senate’s fight over its rules regarding the filibuster, which center on whether every bill essentially should continue to require the support of 60 senators — rather than a simple majority of 51 — to pass.

The deposit insurance bill could also face a much tougher time in the House, where the mood has been one of allowing the supports and bailout programs put in place during the financial crisis to expire.

While the extension is being supported by the powerful American Bankers Association and by the Independent Community Bankers of America, it is opposed by the Financial Services Roundtable, which represents roughly 100 of the largest financial institutions, including banks, mutual fund companies and other asset managers.

Industry analysts say the big banks oppose the extension because they figure they are viewed by many depositors as too big to fail. “They basically are saying, ‘No one views us as a failure risk and so our clients are not going to flee,’ ” said Joshua Siegel, managing principal of StoneCastle Partners, an asset management firm that invests in banks.

Community bankers say their ability to make loans to small businesses will suffer if the program is withdrawn. Cynthia Blankenship, vice chairwoman of Bank of the West in Grapevine, Tex., a Dallas suburb, said that about 15 percent of its $350 million in assets were protected under the program.

“I don’t think all of our deposits under the program would go away if it expired,” she said. “But a lot of them will convert to interest-bearing accounts, which cost us more and drives up the price of credit.”

Curiously, the Credit Union National Association opposes the extension, putting its relatively small institutions on the same side as behemoths like Bank of America and Citigroup. Credit unions are trying to expand their lending to small businesses, and think ending the guarantee program would put them on a more level playing field.

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