UPDATE 1-Senate vote deals blow to crisis-era deposit insurance
* Bill to extend TAG program fails in procedural vote
* Republicans say program unnecessary in post-crisis world
* Small banks support program; cite sluggish economy
Dec 13 (Reuters) - Efforts by small banks to protect a financial crisis-era deposit insurance program suffered a significant setback on Thursday when a bill to extend the program failed to survive a procedural vote in the U.S. Senate.
The Transaction Account Guarantee (TAG) program insures bank deposits above the $250,000 normally covered by the Federal Deposit Insurance Corp in checking accounts that do not collect interest. It is set to expire at the end of the year.
Lobbyists for small banks have argued that letting the program end would lead U.S. companies to pull funds from bank accounts and invest elsewhere, roiling community banks that are still grappling with the sluggish economic recovery.
The bill, sponsored by Majority Leader Harry Reid, would have extended the program for two more years. But it failed to garner the 60 votes needed to overcome a procedural challenge raised by Republican senators.
The blow means it is increasingly likely TAG will expire at the end of the year.
Republican leaders in the U.S. House of Representatives have said the program should end. Bank lobbyists had hoped a strong Senate vote to extend the program would be enough to sway House leaders.
Senate Republicans said on Thursday that the extra deposit insurance is no longer needed several years after the 2007-2009 financial crisis.
Financial regulators created TAG in 2008 to reassure depositors and induce them not to pull their cash from their bank accounts. Lawmakers gave the program an extra two years as part of the Dodd-Frank law.
Large business accounts hold about $1.5 trillion insured by TAG, according to FDIC data. If the coverage lapses, supporters have said, businesses may view Treasury bills, money market accounts or other options as safer places to park cash.
In addition to bank groups, a number of local chambers of commerce, retail associations and other trade groups have supported renewal of TAG for another two years.
But big banks have said they no longer need the extra coverage. And other critics argue that TAG was always meant to be temporary.
Republicans said Senate Democratic leaders were pushing for the program to appease banks that had been hurt by the Democrat-backed 2010 Dodd-Frank financial oversight law.
"The only reason we're doing it this way is because my friends on the other side of the aisle know that the provisions in Dodd-Frank are hurting community bankers and they're trying to throw out a bone," said Senator Bob Corker, a Tennessee Republican and member of the Senate Banking Committee.
Republicans forced a procedural vote on the bill by saying it violated spending limits set in a 2011 law. Fifty senators voted to waive the rules, falling short of the 60-vote threshold needed to overcome the challenge.
Supporters still may try to extend the extra insurance by including it in another bill, perhaps as part of a deficit reduction package. That was the route bank lobbyists hoped the House would take to approve the extension.
Frank Keating, president of the American Bankers Association, said small businesses would benefit from the TAG program but that banks were prepared to operate without it.
"Banks already have been communicating about the possible expiration of TAG and will work with their business customers to demonstrate the safety of their deposits," Keating said in a statement after the vote.
FDIC Chairman Martin Gruenberg has said banks are in a strong enough position to weather the end of the extra deposit insurance.