December 11, 2012 / 10:15 PM / 5 years ago

US Senate will debate extending crisis-era deposit insurance

WASHINGTON, Dec 11 (Reuters) - The U.S. Senate voted on Tuesday to begin debating a bill that would keep a financial crisis-era deposit insurance program in place for two more years, but it will likely face strong opposition from the Republican-controlled House of Representatives.

The Transaction Account Guarantee (TAG) program insures bank deposits above $250,000, the amount the Federal Deposit Insurance Corp normally covers, in checking accounts that do not collect interest. It is due to expire at the end of the year.

Bank lobbyists have said that letting the program end could lead U.S. companies to pull funds from bank accounts and invest elsewhere, adding to economic uncertainty as the United States grapples with expiring tax cuts and cuts in government spending.

The Senate voted 76-20 to debate the bill, sponsored by Senate Majority Leader Harry Reid, that would give the program two more years.

“With concerns about the fiscal cliff in the U.S. and continued instability in European markets, I believe a temporary extension is needed,” Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said in a statement.

“It provides the most certainty for businesses and financial institutions. It also provides time to prepare for the end of the program in two years,” he said.

The Senate is expected to take another vote on Thursday that would move the bill toward a final vote.

Even if it musters enough support in the Senate, it could face a tough path through the Republican-controlled House of Representatives, where some lawmakers have said the program should be allowed to end.

Regulators created the TAG program in 2008 to reassure depositors during the financial crisis and to ensure that businesses and local governments had access to cash. Lawmakers extended it as part of the 2010 Dodd-Frank Act, which was aimed at reforming Wall Street and protecting consumers.

Now, about $1.5 trillion sits in large business accounts insured by TAG, according to recent FDIC data. If the extra coverage lapses, supporters have said, businesses may view Treasury bills, money market accounts or other options as safer places to park cash.

A survey by the Association for Financial Professionals found that U.S. companies would cut bank account balances by 20 percent, on average, if the program expired.

“The TAG program for banks and credit unions has proven its value to millions of small business and municipal depositors,” the American Bankers Association and Independent Community Bankers of America said last week in a letter to lawmakers.

Big banks have downplayed the need for extra deposit insurance in the aftermath of the financial crisis.

Some Republicans, including leaders in the House of Representatives, have said that since the program was meant to be temporary, it should be allowed to expire.

A spokesman for House Majority Leader Eric Cantor said that Cantor “believes we should not continue to extend these guarantees.”

The Obama administration said in a statement on Tuesday that it supports a temporary extension of the program but that it would wind it down at some point.

FDIC Chairman Martin Gruenberg said last week that banks are in a strong enough liquidity position to weather the end of the extra deposit insurance but that the decision is up to Congress.

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