Area banks brace for withdrawals as TAG program expires

December 23, 2012

Washington area community banks say they are bracing for large scale withdrawals when a special federal guarantee expires on Dec. 31 that safeguards money held in accounts that don’t earn interest.

The temporary provision, called the Transaction Account Guarantee, was put into place by the Federal Deposit Insurance Corp. during the recession. It insures all funds in non-interest bearing bank accounts, which are typically used by municipalities and small businesses for payrolls. Once the provision expires, the FDIC will insure up to $250,000 in any given account, up from $100,000 before the financial crisis.

When the program was first implemented in October 2008, some financial institutions such as Sandy Spring Bank in Olney say they had an influx of new clients and deposits.

“The combination of the TAG program and falling interest rates led to a dramatic increase [in new customers and deposits] for us,” said John F. Goedeke Jr., a senior vice president at Sandy Spring Bank. “People started closing up their money market accounts. The logical place to put that money was in checking accounts where it was insured.”

But that’s about to change. Earlier this month, the Senate decided to not renew the measure — and there is little chance, area bankers say, that the program will be resuscitated next year.

Area banks say they’re anticipating a wave of withdrawals as customers move their money to larger banks that they perceive as more secure.

“We’re well-capitalized, profitable, have a great credit rating,” said Ron Paul, chairman and chief executive of EagleBank in Bethesda. “Nonetheless, I think [customers] are going to go back to the mega banks. They’ve been assured by the government that mega banks are too big to fail. It’s a horrible, bad, poorly-thought out situation.”

Some organizations, such as the American Health Assistance Foundation, require that all funds be FDIC insured. Now that the TAG program is set to expire, the Clarksburg-based nonprofit is looking for other places to put its funds.

“Like many organizations, we want our money insured,” said Dave Marks, director of finance and administration. “We don’t want our money at risk, and we’re looking to put our investments in a safe place.”

The FDIC is requiring banks to notify clients with more than $250,000 in their accounts of upcoming changes. Some, like Sandy Spring Bank, have taken the opportunity to reassure clients that their money will continue to be safe.

“We’ve compiled a list of customers with balances in excess of $250,000 and are sending them a letter, explaining why TAG was implemented and telling them that the performance of the bank is very strong,” said Goedeke of Sandy Spring Bank, adding that less than 5 percent of the bank’s accounts would be affected.

Some banks, though, worry that TAG’s expiration could affect the amount of money available to the bank to make loans to community residents and small businesses.

“The reduction of our liquidity is going to have a substantial impact on our lending,” Paul said. “It’s a very, very big black eye for community banks — and I think it’s an even bigger black eye for the local economy.”

Abha Bhattarai covers local banking, retail and hospitality for The Washington Post’s Capital Business section.
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