HOW ARE YOU HANDLING THE SUNSET OF 'TAG'--THE TRANSACTION ACCOUNT GUARANTEE PROGRAM?

The Headache: FDIC'S TAG Program--Transaction Account Guarantee--sunsets at yearend, as Congress did not extend it.

Our Question: Will your bank change strategy at all in deposit gathering or working with small businesses in 2013 as a result? Now that TAG is history, will banks in your market begin paying interest on business checking accounts to hold onto funds? Overall, what is your strategy handling the end of TAG?

The unprecedented TAG program provided for unlimited federal deposit insurance coverage for business checking accounts. With Congess failing to extend the program, bankers must now deal with the change.

The extension of TAG for a given period drew much controversy and deliberation. ABA supported this step, in recognition of some members' desire for TAG or something like it. This put the association up against such players as The Wall Street Journal, which ran multiple editorials opposing extension. (ABA President Frank Keating issued a statement when the Senate failed to take up a key vote that might have led to extension of TAG.)

Now that the debate is over, bankers in institutions large and small must deal with what is. So we asked Aspirin prescribers for their strategies and what they expect to see among their customers.

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Let's hear your views and ideas below! (Editorial Note: Contributions to Pass the Aspirin may also appear in our print edition. While we will ask for your e-mail address, this is only as an aid to verifying identity and will not be used for any marketing or promotional purpose. The e-mail address will not be published.)

Mike Murphy, executive vice-president/CFO and cashier, First American Bank, Norman, Okla. said:

I believe that TAG's expiration will impact funding at our bank, but only to a small degree. It should not impact our overall strategy of attracting and gaining relationships in the form of loans and other banking services desired by our customers. We already offer a wide variety of checking products for both personal and business account holders, including interest-bearing business accounts. I don't believe that customers will focus much on interest-bearing business accounts until interest rates increase to more normal levels. With rates so low, most customers have become desensitized to rate changes unless they are substantially over what the average market rates are. And we're not interested in competing against institutions that pay those high rates.

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December 20, 2012
Votes: +3

Sue Eno, president and CEO, Citizens National Bank, Cheboygan, Mich. said:

Our strategy will not change. We will continue to stay close to our customers and let them know all banks are in the same situation. We'll remind them that standard deposit insurance coverage did increase from $100,000 to $250,000, which is permanent, and that there are many ways to increase their FDIC coverage without having to move any of their money. And we'll be reminding them that our institution remains strong and that their money is safe.

With respect to paying interest on business accounts, we are not currently planning on moving that product line to interest bearing. Currently we pay an earnings credit, which is applied against the account holder's service charge. If we decide to start paying interest on our business accounts, we would give serious thought to stopping the earnings credit.

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December 20, 2012
Votes: +4

Bob Chapman, president and CEO, United Bancorp, Inc., Tecumseh, Mich. said:

First, we will be in contact with all our large depositors, to inform them of TAG's expiration and to answer any questions. Second, we will train all our front line staff to be able to answer questions on TAG if customers or noncustomers ask. Finally, we have added the Promontory Interfinancial Network's ICS (Insured Cash Sweep) product for those customers that are sensitive to FDIC coverage. [ICS service is endorsed by ABA's Corporation for American Banking.]

We don't anticipate adding interest payments in the immediate future. That's first because of where interest rates are today, and then the lack of loan demand--plus all banks in our area remain flush with deposits. But in the future as rates move up and loan demand picks up, I believe that paying interest on business checking accounts will come into play.

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December 20, 2012
Votes: +1

Brian Constable, executive vice-president and chief commercial banking officer, Sunwest Bank, Irvine, Calif. said:

No expected impact on us. Sunwest Bank a few months ago launched several different types of business checking accounts that offer interest. We did this to prepare for the potential expiration of TAG. Interestingly enough, the demand for the checking with interest product has been limited, not because of the unlimited FDIC insurance, but something more basic: Who is going to move from one bank to another for 10 basis points?

People still bank with people--bringing value; offering customize product and services; knowledgeable and experienced bankers and providing education. That is really why a business owner may move from one bank to another. If a bank is currently meeting the Tier 1 capital ratios and if the bank associates can talk intelligently and inform the client about TAG, TARP, and what is a Tier 1 Capital Ratio--I think most clients therefore will make the right decision. Although FDIC insurance is important, a well-informed client should also be taking into consideration the strength and security of the bank and put more assurance into the bank?s balance sheet versus FDIC insurance.

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December 20, 2012
Votes: +0

Blair Hillyer, president and CEO, First National Bank of Dennison, Ohio said:

Frankly, since we have picked up a ton of deposits from the eastern Ohio Utica Shale boom, we felt like the expiration of the TAG program would help us. We were expecting some deposits to leave the bank and we wanted this to happen. Some of the gas customers were building up big balances, since they knew they were insured. We were feeling strains on some of our ratios due to the dramatic growth. In the old days we would have welcomed those deposits. But with the low interest rates and a general lack of loan demand, it is a good time for them to find another location.

Never thought I'd see the day where our efforts to gain DDA deposits would cease.

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December 20, 2012
Votes: +2

Peter Clements, president & CEO, The Bank of Southside Virginia, Carson, Va. said:

Our view is that TAG was a "necessary evil" when it was enacted, but that it did serve a useful purpose during the financial crisis. That being said, the improving capitalization and liquidity of most banks around the country has made the renewal of the program something we did not support, as a bank. We understand the concerns of other banks, but, philosophically, it needed to sunset. We do not expect significant runoff, but are prepared in case there is a contraction in deposits. While some banks could pursue an interest rate strategy on demand deposits we believe that would only do damage to our already stressed interest rate margin by attracting interest-sensitive deposits. We will have to respond to market conditions and have a defensive product in place, but we do not plan to pursue this as a growth strategy.

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December 20, 2012
Votes: +3

Joshua Guttau, president and CFO, Treynor (Iowa) State Bank said:

I don't believe this will have much impact on our bank, as we did not see a lot of money come in due to TAG. We will not plan to pay interest on business checking due to this. Interest rates are so low right now that I don't think that is the client's focus. There may be a small amount of deposits we have that may move from non-interest to an interest account, given the fact that both alternatives will now be at the same insurance level.

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December 21, 2012
Votes: +0

Mike Moebs, economist and CEO, Moebs Services, Lake Bluff, Ill. said:

Here are my comments and advice:

* This is very big for mutual funds--they want the $1 trillion back they have lost in the past 5 years.

* One mutual fund has been hounding me for my personal checking account.

* About $400 billion will move the first 30 to 90 days.

* Make sure you have a list of all your customers who have more than $25,000 in their checking accounts and especially those over $250,000.

* Call the customers with lots in their checking and say you appreciate their business, tell them what's going on, and make sure you keep them.

The wild, wild west of checking starts in 11 days!!

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December 21, 2012
Votes: -1

Cindy Scott said:

	We are working with Promontory to offer a DDA called ICS Demand as an alternative to TAG. They split large deposits into deposits of $250,000 or less that are then placed with other participating banks in order to ensure 100% FDIC insurance coverage. The customer deals only with us so we don't lose any of the relationship.
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December 21, 2012
Votes: +0

Deborah Cole, president and CEO, Citizens Savings Bank and Trust, Nashville, Tenn. said:

TAG proved a beneficial concept in the retention of municipal and large corporate funds. FDIC data reflect a tremendous increase in deposits insured through the TAG program. The economy is still fragile and the TAG program should have been extended. As a result of the TAG program not being extended at this time, customers may move funds to larger banks, which some customers view as safer due merely to their size. Payment of interest on commercial checking accounts is a very likely response to the TAG program not being extended.

The Transaction Account Guarantee (TAG) program was beneficial for small community banks. While the financial crisis that started in 2008 was not due to the activities of community banks, but rather to the systemically critical banks, community banks suffered. TAG provided assurance to customers who held transaction accounts in excess of the FDIC insurance coverage. Unfortunately, community banks were viewed the same as the institutions causing the systemic risk. In some cases, small community banks were viewed as a higher-risk institution.

Customers are concerned with the safety of their funds. Community banks will need to expend considerable efforts to assure customers their deposits are still safe in an effort to prevent significant deposit withdrawals from transaction accounts which exceed FDIC coverage. Significant withdrawals and continued economic problems will cause liquidity concerns for some community banks.

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December 22, 2012
Votes: +0