On August 27, 2009, the board of the Federal Deposit Insurance Corporation (“FDIC”) unanimously voted to adopt a final rule providing for a six month extension of the Transaction Account Guarantee Program (“TAG”) with an increased fee structure. Institutions participating in the TAG must opt out by November 2, 2009 if they do not want to continue participation past December 31, 2009 under the modified fee system.
The TAG was established in October 2008 as part of the FDIC’s Temporary Liquidity Program. The program offered insured institutions the ability to receive unlimited deposit insurance coverage for funds held in qualifying noninterest-bearing transaction accounts. The TAG was intended to facilitate liquidity and stability in view of the economic crisis of late 2008 and 2009. Institutions that chose to participate in the TAG pay an annualized ten (10) basis point assessment quarterly on any non-interest bearing transaction account amounts that exceed the existing $250,000 deposit insurance limit.
The TAG was scheduled to expire on December 31, 2009. The FDIC has decided to extend the program for an additional six months, until June 30, 2009. While noting evidence that confidence in the banking system has improved recently, the FDIC board believes that an extension is necessary to provide an orderly phase-out of the program.
However, participation in the extension period will come with an increased fee. The FDIC has indicated that it is raising the fees in order to balance that income with potential TAG losses during the extension period. Beginning on January 1, 2010, participating institutions that have not opted out of the extension will pay an annualized fee based on its “Risk Category.” An institution’s “Risk Category” is the same category that the FDIC has assigned to the institution for purposes of its usual risk-based deposit insurance assessment. During the extension period, the increased TAG fees will be fifteen (15) basis points for Risk Category I, twenty (20) basis points for Risk Category II and twenty-five (25) basis points for institutions in Risk Category III or IV. As is currently the case, the TAG fee will be assessed only against deposit amounts in any noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000, as reported in the quarterly Call Report.
Institutions that desire to continue participating in the extension with the increased fees need do nothing. Institutions that do not want to continue in the TAG past December 31, 2009 must opt out. The option to opt out is irrevocable. Opting out requires sending an email to firstname.lastname@example.org no later that November 2, 2009 that includes certain information specified in the final rule. The FDIC also provided sample customer disclosures to be used by institutions that opt out of the extension, to replace the disclosure that has been used while participating.
In adopting the extension, the FDIC rejected comments suggesting that an extension of the TAG would place institutions that opt out of the extension at an unfair competitive disadvantage. The FDIC adopted the extension because of its belief that, notwithstanding improvements in financial markets that have occurred, significant portions of the banking industry would benefit. The FDIC noted that “[p]rogess toward a stable, fully functioning financial marketplace has been made” and credited the TAG’s role in that progress. However, concern was expressed that the progress could be impaired if the TAG was eliminated too abruptly. Any competitive disadvantage to institutions choosing not to participate in the extension was deemed by the FDIC to be outweighed by the benefit the extension would provide toward continued stabilization of and public confidence in financial markets and the banking industry.