Tuesday, April 13, 2010

FDIC extends key deposit program

By David Ellis, staff writer

April 13, 2010: 11:46 AM ET

CNNMoney.com


NEW YORK (CNNMoney.com) -- Federal banking regulators voted Tuesday to extend a program that offers U.S. businesses unlimited insurance coverage on their bank accounts.

The FDIC's Transaction Account Guarantee program, which was launched in October 2008 to prevent firms from pulling their money out of small banks, was originally set to expire on June 30.

Board members of the Federal Deposit Insurance Corporation unanimously agreed Tuesday to extend the TAG program for an additional six months, with the option of expanding it until the end of 2011.Under the program, the FDIC guaranteed funds in noninterest-bearing transaction accounts beyond their traditional $250,000 limit.

James Chessen, chief economist of the American Bankers Association, praised the FDIC's decision. He said that the FDIC program has "provided stability and confidence for many bank depositors" and added that "it is as important as ever to assure depositors that their money is safe."

Approximately 6,400 lenders, or roughly 80% of all federally-insured banks participate in the program, according to sources. Many of those banks are local and community lenders, a group that is still grappling with commercial real estate loan losses and other problems.

Some experts were concerned that an end to the FDIC program would lead to more failures of smaller banks and additional hits to the FDIC's deposit insurance fund.

This fund, which covers customer deposits when a bank fails, slipped into the red last fall for the first time since 1991. The fund's deficit continued to balloon during the final three months of the year to nearly $21 billion - its largest deficit on record.

The FDIC also proposed a new system Tuesday for how it determines payments large banks must make in order to support the deposit insurance fund.

FDIC Chairman Sheila Bair said the new system, which would only include the 100 or so institutions that have $10 billion or more in assets, is expected to do a more effective job in gauging banks' risky behavior, particularly during periods of economic calm.

About 52% of the biggest financial institutions would end up paying less than what they do today, according to sources.