An Overview of the Transaction Account
Guarantee (TAG) Program and the Potential
Impact of Its Expiration or Extension
Sean M. Hoskins
Analyst in Financial Economics
October 24, 2012
Congressional Research Service
7-5700
www.crs.gov
R42787
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
Summary
In September 2008, the ongoing financial turmoil became a financial panic—large financial
institutions were failing, the stock market was falling, and credit markets were freezing. The
federal government responded with a series of lending and guarantee programs to contain the
panic and to mitigate the damage to the broader economy. Among the many policy responses, the
Federal Deposit Insurance Corporation (FDIC) established the Transaction Account Guarantee
(TAG) program on October 14, 2008.
The FDIC’s initial TAG program provided unlimited deposit insurance for noninterest-bearing
transaction accounts (NIBTAs). A NIBTA is an account in which interest is neither accrued nor
paid and the depositor is permitted to make withdrawals at will. NIBTAs are frequently used by
businesses, local governments, and other entities as a cash management tool, often for payroll
transactions. In spite of a loss of confidence in other parts of the financial system, the insured
banking sector saw few bank runs during the financial crisis. The establishment of TAG in
addition to the existing deposit insurance may have helped bolster depositors’ confidence in
banks as reliable counterparties and prevented them from suddenly withdrawing their deposits.
The second TAG program, which was established by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (P.L. 111-203; the Dodd-Frank Act), was a temporary extension of the
original program with some changes. This TAG program is set to expire on December 31, 2012.
If the program expires, the $1.4 trillion currently insured by TAG in NIBTAs would no longer
have unlimited deposit insurance but would have the $250,000 standard maximum deposit
insurance amount. Changes to the FDIC’s authority made by the Dodd-Frank Act make it unlikely
that the FDIC could act to extend the program under its own authority. An extension may require
congressional action.
Opinions are divided on the merits of extending the program. Underlying the divergent policy
views are contrasting opinions about the state of the economic recovery and the role of the
government in guaranteeing bank liabilities and in determining the size of the traditional banking
system.
If the TAG program expires, depositors could keep their deposits in the traditional banking
system, or they may decide to transfer some or all of their deposits to nonbank investment
options. TAG deposits that remain in the banking system may migrate to the largest or most
interconnected banks if large depositors view these as safer, or TAG deposits could move away
from the largest banks in response to changes made by the Dodd-Frank Act. TAG deposits that go
to nonbanks may flow to money market funds, which are often cited as one of the most popular
short-term investment options. A decrease in deposits could affect the liquidity position of a given
bank—the ability of the bank to meet its liabilities—but the overall liquidity of the banking
system has increased since 2008.
If the TAG program is extended, the resulting risk exposure could put additional strain on the
FDIC’s Deposit Insurance Fund. In addition, a TAG extension could increase moral hazard by
neutralizing market mechanisms that penalize the banking system for taking on additional risk. A
TAG extension could take multiple forms, ranging from a permanent extension to a temporary,
voluntary extension with a short phase-out period.
Congressional Research Service
Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
Contents
Overview of the TAG Program........................................................................................................ 1
Potential Impacts if TAG Expires .................................................................................................... 4
Deposits Could Stay in the Traditional Banking Sector ............................................................ 5
Uninsured Deposits at Same Institution .............................................................................. 5
Insured Deposits.................................................................................................................. 5
Uninsured Deposits at Safer or Larger, More Interconnected Banks.................................. 5
Uninsured Deposits at Non-TBTF Institutions ................................................................... 7
Deposits Could Leave the Traditional Banking Sector.............................................................. 7
Potential Impacts if TAG is Extended............................................................................................ 10
Figures
Figure 1. St. Louis Federal Reserve Financial Stress Index ............................................................ 2
Figure 2. Amount Guaranteed by the TAG Program ....................................................................... 3
Figure 3. TAG-Insured Funds by Asset Size of Bank...................................................................... 6
Figure 4. Allocation of Short-Term Investments ............................................................................. 8
Figure 5. Nonfinancial Businesses’ Use of Checkable Deposits and Money Market Funds........... 9
Figure 6. Bank Failures and Banks on the Problem List ............................................................... 11
Tables
Table 1. NIBTA Statistics................................................................................................................. 7
Contacts
Author Contact Information........................................................................................................... 12
Congressional Research Service
Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
Overview of the TAG Program
In September 2008, ongoing financial turmoil escalated into a financial panic—large financial
institutions, such as Lehman Brothers and AIG, were failing, the stock market was falling, and
credit markets seized up as lenders became unwilling to extend or roll over short-term loans. The
federal government responded with a series of lending and guarantee programs to mitigate the
economic damage.1 Among the many policy responses, the Federal Deposit Insurance
Corporation (FDIC) established the Temporary Liquidity Guarantee Program (TLGP) on October
14, 2008, to strengthen confidence and to encourage liquidity in the banking system. TLGP had
two parts: a Debt Guarantee Program (DGP)2 and a Transaction Account Guarantee (TAG)
program.3 Although the DGP is no longer guaranteeing new debt, TAG continues to apply to new
deposit balances.
The TAG program currently provides unlimited deposit insurance for $1.4 trillion in noninterest-
bearing transaction accounts (NIBTAs).4 NIBTAs are accounts that do not pay interest and allow
the depositor to make withdrawals without giving advanced notice to the bank. NIBTAs are
frequently used by businesses and local governments as a cash management tool, often for payroll
transactions, but any depositor whose account meets the eligibility criteria receives unlimited
deposit insurance coverage.5 In spite of a loss of confidence in other parts of the financial system,
the insured banking sector saw few bank runs during the financial panic. The establishment of
TAG, in addition to the existing deposit insurance and other measures taken by regulators, may
have bolstered depositors’ confidence in banks as reliable counterparties.
Deposit insurance brings stability to the banking sector by giving depositors confidence that if
their bank fails, they will not lose the money in their insured accounts. Deposit insurance,
however, also reduces the incentive of depositors to monitor their banks and ensure that their
banks are not assuming unnecessary risks. Deposit insurance can potentially create moral hazard
by neutralizing market mechanisms that penalize the banking system for taking on additional risk.
1 This section was prepared using material from CRS Report R41073, Government Interventions in Response to
Financial Turmoil, by Baird Webel and Marc Labonte and CRS Report R40843, Bank Failures and the Federal
Deposit Insurance Corporation, by Darryl E. Getter.
2 The Debt Guarantee Program guarantees bank debt, including commercial paper, interbank funding debt, promissory
notes, and any unsecured portion of secured debt. The program originally applied to debt issued before June 30, 2009,
but was extended in March 2009 to apply to debt issued before October 31, 2009. The guarantee remains in effect until
December 31, 2012.
3 The FDIC established the program using its systemic risk exception to the least-cost resolution requirement of the
Federal Deposit Insurance Act. See CRS Report WSLG37, Extending the FDIC’s Transaction Account Guarantee
Program Given the Uncertain Economic Outlook?, by M. Maureen Murphy. For the initial announcement of the TLGP,
see Federal Deposit Insurance Corporation, “FDIC Announces Plan to Free Up Bank Liquidity,” at
http://www.fdic.gov/news/news/press/2008/pr08100.html.
4 The $1.4 trillion total refers to the total amount of deposits in TAG accounts that is above the $250,000 standard
maximum deposit insurance amount. See Federal Deposit Insurance Corporation, Quarterly Banking Profile, Second
Quarter 2012, June 2012, at http://www2.fdic.gov/qbp/2012jun/qbp.pdf.
5 Not all accounts at an insured depository are insured; FDIC insurance only applies to certain types of accounts and
usually up to a $250,000 standard maximum deposit insurance amount. See Federal Deposit Insurance Corporation,
Your Insured Deposits, at http://www.fdic.gov/deposit/deposits/insured/.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
In addition to other regulatory efforts taken to minimize moral hazard, deposit insurance has
historically had an upper limit on the amount insured to minimize this loss of market discipline.6
During the financial crisis, policymakers reassessed the tradeoff between the stability and the
moral hazard created by deposit insurance. Extending deposit insurance to some uninsured
accounts through TAG may have strengthened the banking system by discouraging some
borrowers from withdrawing their deposits during the height of the financial stress.7 Figure 1
shows the St. Louis Federal Reserve Financial Stress Index, an index composed of 18 data series
that provides one measure of financial stress. According to this index, financial stress in 2012 is
elevated compared with the lows of 2006 and 2007, but has fallen from the high points of the
financial crisis in 2008 and 2009 and is closer to the historical average of the late 1990s and the
early 2000s.
Figure 1. St. Louis Federal Reserve Financial Stress Index
Source: Federal Reserve Bank of St. Louis, at http://research.stlouisfed.org/fred2/series/STLFSI.
Notes: For more on the methodology of the St. Louis Financial Stress Index, see http://research.stlouisfed.org/
publications/net/NETJan2010Appendix.pdf. Shaded areas indicate U.S. recessions.
The TAG program established by the FDIC expired on December 31, 2010, and was replaced on
the same day by the TAG program as established by Section 343 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (P.L. 111-203; the Dodd-Frank Act). The “TAG program,”
therefore, refers to two similar but distinct programs. Though both TAG programs provided
unlimited deposit insurance to NIBTAs, they also differ in several ways. The TAG program
created by the FDIC was a voluntary program in which eligible financial institutions were
automatically registered to participate unless they opted out.8 The Dodd-Frank Act, however,
made all FDIC-insured banks part of TAG by temporarily changing “the definition of insured
deposits to include the entire balance of noninterest-bearing transaction accounts.”9 The TAG
6 See FDIC, “Options for Addressing Moral Hazard,” at http://www.fdic.gov/deposit/deposits/international/guidance/
guidance/moralhazard.pdf.
7 Some have described the 2008 financial panic as a bank run on parts of the financial system that are outside of insured
depositories. For example, see Gary Gorton, “Slapped in the Face by the Invisible Hand: Banking and the Panic of
2007,” May 9, 2009, at http://www.frbatlanta.org/news/CONFEREN/09fmc/gorton.pdf.
8 For more on the FDIC’s assessments and how they are calculated, see CRS Report R41718, Federal Deposit
Insurance for Banks and Credit Unions, by Darryl E. Getter and Victor Tineo.
9 See Letter from Martin J. Gruenberg, FDIC acting chairman, to Honorable Shelley Moore Capito, chairman,
(continued...)
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
program created by the Dodd-Frank Act also had a more restrictive definition of NIBTA than the
FDIC program.10
Since TAG was first established, the amount of deposits insured by TAG has increased, as shown
in Figure 2. On December 31, 2008, shortly after TAG was implemented, the program guaranteed
approximately $722 billion. When the FDIC extended TAG at the end of 2009, participating
institutions were given the opportunity to exit the program. Many of the largest banks opted out,
causing a large drop in the amount of deposits insured by TAG.11 On December 31, 2010, the
Dodd-Frank Act’s change to the definition of insured deposit became effective; all eligible
NIBTAs were covered, increasing the amount of deposits insured by TAG to approximately $1.4
trillion (on December 31, 2010, there was a one-day overlap of the original FDIC TAG program
and the Dodd-Frank TAG program, as illustrated below in Figure 2).
Figure 2. Amount Guaranteed by the TAG Program
$ in billions
$1,600
Guaranteed Under
$1,400
FDIC's TAG
$1,200
Guaranteed Under
Dodd-Frank Act's TAG
$1,000
$800
$600
$400
$200
$0
08
09
09 09 09
10
10
0 10 11 11 11 011 12 12
Q4 20Q1 20Q2 20Q3 20Q4 20Q1 20Q2 20Q3 201Q4 20Q1 20Q2 20Q3 20Q4 2 Q1 20Q2 20
Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile, at http://www2.fdic.gov/qbp/2012jun/
qbp.pdf.
(...continued)
Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, House of
Representatives, June 29, 2012, at http://www.aba.com/Issues/Index/Documents/FDICResponsetoCapitoonTAG.pdf.
10 The TAG program as established by the Dodd-Frank Act does not include Negotiable Order of Withdrawal (NOW)
accounts, which were part of the FDIC program. Interest on Lawyer Trust Accounts (IOLTAs) were not included in the
original Dodd-Frank Act definition of NIBTA but were added to TAG by P.L. 111-343.
11 See FDIC, “Temporary Liquidity Guarantee Program Opt-Out Lists,” at http://www.fdic.gov/regulations/resources/
TLGP/optout.html.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
What is a noninterest-bearing transaction account?
The Dodd-Frank Act defines a noninterest-bearing transaction account as
a deposit or account maintained at an insured depository institution (1) with respect to
which interest is neither accrued nor paid; (2) on which the depositor or account holder
is permitted to make withdrawals by negotiable or transferable instrument, payment
orders of withdrawal, telephone or other electronic media transfers, or other similar
items for the purpose of making payments or transfers to third parties or others; and (3)
on which the insured depository institution does not reserve the right to require
advance notice of an intended withdrawal.12
The Dodd-Frank Act’s changes to the definition of insured deposits are temporary and due to
expire on January 1, 2013; the unlimited deposit insurance for NIBTAs expires on that date and
returns to the FDIC’s $250,000 standard maximum deposit insurance amount. As explained by
Maureen Murphy in CRS Legal Sidebar WSLG37, Extending the FDIC’s Transaction Account
Guarantee Program Given the Uncertain Economic Outlook?,
although section 1105 of Dodd-Frank provides the FDIC with authority to institute a widely
available program of emergency assistance, it is limited to situations involving a liquidity
crisis. Invoking the authority to institute a broad program requires a detailed determination
by the FDIC and the Board of Governors of the Federal Reserve System (Fed Board) that a
liquidity event exists and that failure to take action would have serious adverse effects on
U.S. financial stability or economic conditions. Additionally, the authority appears to be
limited to guaranteeing debt obligations rather than expanding deposit insurance coverage.
Though the FDIC established TAG in 2008, changes to the FDIC’s authority made by the Dodd-
Frank Act may prevent the FDIC from having the option of extending TAG. An extension of TAG,
therefore, may require congressional action.
Potential Impacts if TAG Expires
NIBTAs constitute one of several cash management tools used by businesses, non-profits,
governments, and other entities. They provide depositors with easy access to their money,
allowing them to make transfers and to write checks to pay their vendors and employees. If TAG
expires, however, depositors may change their perception of the safety of NIBTAs, causing them
to reevaluate how they allocate their money across the various options in the financial system. As
is discussed in the following sections, the use of NIBTAs could return to pre-TAG levels if TAG
expires. Changes in the financial and regulatory environment since 2008, however, could also
result in a different allocation than the pre-TAG levels.
Three factors are typically important to depositors when determining where to place their money:
safety, liquidity, and yield.13 Depositors would prefer to have more of all three, but face trade-
offs. For example, generally speaking, there is a trade-off between safety and yield on an
12 P.L. 111-203, Section 343.
13 See Bank of America Merrill Lynch, “Life After Full FDIC Insurance,” at http://corp.bankofamerica.com/
documents/10157/67594/LifeAfterFDIC.pdf.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
investment; the more at risk an investor’s money is, the higher the possible return if the risk does
not eventuate. There is also a trade-off between yield and liquidity. To have a higher return, an
investor may have to sacrifice liquidity (the ease with which an asset can be converted into cash).
Certificates of deposit, for example, may pay a higher interest rate than a typical savings account,
but there are restrictions on when the money can be withdrawn.
Depositors’ preferences for safety, liquidity, and yield will determine how they allocate their
money across the various options they face. If TAG expires, the options available to depositors
can be simplified to two general choices: (1) depositors could leave some or all of their money in
the traditional, insured banking sector or (2) they could move some or all of their money out of
the traditional banking sector.
Deposits Could Stay in the Traditional Banking Sector
Uninsured Deposits at Same Institution
If TAG expires, depositors may choose to leave their deposits as uninsured deposits at their
existing banks.14 NIBTAs have grown by approximately $1 trillion from $1.3 trillion in the third
quarter of 2008 (before TAG was implemented) to $2.3 trillion in the second quarter of 2012.15
NIBTAs were used at relatively high rates before TAG and their growth may not be due solely to
the guarantee offered by TAG; changes in economic and financial conditions since TAG was
introduced may make NIBTAs an appealing choice. The expiration of unlimited insurance may
increase the risk of NIBTAs, but even without TAG, the high degree of liquidity offered by
NIBTAs may incentivize some borrowers to keep their money as uninsured deposits.
Insured Deposits
Depositors who place a high value on safety may transfer their uninsured deposits to various
accounts in different insured banks so that each account is under the maximum insured level.
Although this option may minimize risk, it would increase the transaction costs for the
depositor—there would be more accounts to keep track of and possibly more types of fees to be
aware of at different banks.16
Uninsured Deposits at Safer or Larger, More Interconnected Banks
Some depositors may attempt to recapture the safety they would lose if TAG expires by shifting
their deposits to safer banks, which for some may mean to one of the largest or most
interconnected banks. Safer banks, such as those with higher capital levels or with less
concentration in a risky asset class, may be perceived as less likely to fail and, therefore, less
likely to cause depositors with uninsured deposits to lose some of their deposits.
14 In addition to leaving all of their uninsured deposits in a single account, depositors could set up a sweep account in
which some amount of money is swept into an interest-bearing account at the end of the day. For more on sweeps, see
http://www.fdic.gov/deposit/deposits/unlimited/faq.pdf.
15 Alec Phillips, Goldman Sachs Global Economics, “FDIC Deposit Guarantees: Another Year-End Risk.”
16 To facilitate managing different accounts, a depositor can hire a financial services provider to manage the division of
accounts across multiple banks. For example, see PrimeVest Financial Services Inc., at http://www.primevest.com/
individual-investors/PV-9005_F.pdf. Financial management services can reduce, but not eliminate, transaction costs.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
Depositors may move their accounts to one of the largest or most interconnected17 banks if they
believe those banks are in practice “too big to fail” (TBTF). A bank is said to be TBTF if
policymakers are likely to judge that its failure would cause unacceptable disruptions to the
overall financial system and would act to prevent failure.18 If a depositor thinks policymakers
would not allow a particular bank to fail, then the depositor may view their uninsured deposits as
safer than if the deposits were in a bank that would be allowed to fail. Figure 3 illustrates the
current distribution of TAG funds by bank size. Approximately 75% of TAG funds are in the 19
banks with more than $100 billion in assets, though those 19 banks account for 61% of total
assets in the insured banking system.19 Table 1 shows statistics on TAG accounts by bank size.
The largest banks have more accounts per institution and higher average account balances than
smaller banks. Even with TAG in place, the largest banks hold a disproportionately large share of
TAG accounts. The expiration of TAG may increase the concentration of deposits in the largest
banks.
Figure 3. TAG-Insured Funds by Asset Size of Bank
$ in billions
$48, 3%
$78, 6%
Less than $1 Billion
$107, 8%
$1 - $10 Billion
$108, 8%
$10 - $50 Billion
$50 - $100 Billion
Over $100 Billion
$1,042, 75%
Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile, at http://www2.fdic.gov/qbp/2012jun/
qbp.pdf.
17 An institution may pose a systemic risk due its interconnectedness with other firms. For an analysis of different types
of systemic risk, see Governor Daniel K. Tarullo, Board of Governor of the Federal Reserve System, “Regulating
Systemic Risk,” at http://www.federalreserve.gov/newsevents/speech/tarullo20110331a.htm.
18 For more on the regulation of TBTF institutions in the Dodd-Frank Act, see CRS Report R42150, Systemically
Important or “Too Big to Fail” Financial Institutions, by Marc Labonte.
19 FDIC, “Statistics on Depository Institutions,” at http://www2.fdic.gov/SDI/.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
Table 1. NIBTA Statistics
Average Number of NIBTAs Per
Asset Size of Bank
Average NIBTA Size ($000)
Institution
Less than $1 billion
$714
16
$1 - $10 billion
$974
202
$10 - $50 billion
$1,460
1,240
$50 - $100 billion
$1,939
3,775
Over $100 billion
$2,788
21,602
Total $2,029
107
Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile, at http://www2.fdic.gov/qbp/2012jun/
qbp.pdf.
A potential indicator of the different views of large and small banks about the usefulness of TAG
is the percentage of each group that opted out of the FDIC’s TAG program when given the option.
As mentioned previously, the original TAG program established by the FDIC was optional; at
certain points banks were given the ability to opt out. When the FDIC version of TAG expired on
December 31, 2010, 31% of banks with assets over $10 billion were still participating in TAG
whereas 75% of banks with less than $10 billion in assets were in the program.20 The higher
participation rate by smaller banks may signal that they believed they needed the program to
attract funds whereas the larger banks were less likely to view the program as necessary. Others
may argue that decisions to participate in TAG may not have been driven by the actual usefulness
of the program as much as by a possible stigma associated with participating in a program
developed in response to the financial crisis. Either way, it is possible that since the end of 2010,
both large and small banks may have changed their views on the value of the program.
Uninsured Deposits at Non-TBTF Institutions
Although some deposits may migrate to the largest institutions due to a perception of their
implicit guarantee, it is also possible that deposits may migrate away from those institutions due
to regulatory changes made by the Dodd-Frank Act. For example, the Dodd-Frank Act created a
special resolution regime administered by the FDIC for failing firms that pose a threat to financial
stability.21 Some market participants may view the steps taken by the Dodd-Frank Act to remove
TBTF status as credible and think they would recover even less of their uninsured deposits at a
large firm than at a smaller or less interconnected institution. In that case, uninsured depositors
may move their TAG deposits away from large institutions and use smaller banks.
Deposits Could Leave the Traditional Banking Sector
FDIC-insured institutions comprise the traditional banking sector. The traditional banking sector,
however, is not the only place depositors can deposit their money. Depositors can effectively
“deposit” their money in other nonbank options by buying shares in a money market fund
(MMF), by buying U.S. Treasuries, or by choosing one of the many other available options, such
20 FDIC, Quarterly Banking Profile, Fourth Quarter 2010, p. 23, at http://www2.fdic.gov/qbp/2010dec/qbp.pdf.
21 CRS Report R42150, Systemically Important or “Too Big to Fail” Financial Institutions, by Marc Labonte.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
as commercial paper, Fannie Mae and Freddie Mac securities, repurchase agreements, enhanced
cash funds, and municipal securities. As shown in Figure 4, money market funds are the second-
most popular individual form of short-term investment according to a survey of financial
professionals and will be the focus of this section.
Figure 4. Allocation of Short-Term Investments
100%
90%
23
27
25
37
80%
42
42
51
70%
29
Bank Deposits
60%
31
39
MMFs
50%
4
32
25
Treasury Bills
40%
2
30
19
Other
8
30%
9
8
44
6
4
20%
40
28
10%
22
26
22
26
0%
2006 2007 2008 2009 2010 2011 2012
Source: Association for Financial Professionals, 2012 AFP Liquidity Survey.
Notes: May not sum to 100% due to rounding. The “Other” category includes commercial paper, Fannie Mae
and Freddie Mac securities, repurchase agreements, enhanced cash funds, municipal securities, and several other
options. For the complete list, see the 2012 AFP Liquidity Survey.
Money market funds are mutual funds that invest in money market securities. Money market
securities are short-term financial instruments with relatively high liquidities and short maturities
of between several days and about a year. They are instruments of short-term borrowing and
lending. Examples of money market securities include negotiable certificates of deposit (CDs),22
bankers’ acceptances,23 U.S. Treasury bills, commercial paper,24 debt issued by municipalities,
and repurchase agreements (repos).25 Money market funds, therefore, act as intermediaries
between shareholders who demand liquid investments and borrowers who desire short-term
funding.
Money market funds attempt to keep a stable net asset value (NAV) on their shares, typically of
$1.00. A stable NAV gives shareholders the impression of a high degree of safety similar to
deposits but offering a higher return.26 If a money market fund falls below a $1.00 NAV, then the
22 A CD is a negotiable certificate issued by a bank in return for a deposit of money.
23 A banker’s acceptance is a short-term credit investment where the repayment of principal and payment of interest is
guaranteed by a bank.
24 Commercial paper is short-term unsecured debt issued by companies in the form of promissory notes as an obligation
of the issuer.
25 A repo is a contract in which the seller of securities agrees to buy them back at a specified time and price.
26 See Securities and Exchange Commission, Roundtable on Money Market Funds and Systemic Risk, at
http://www.sec.gov/spotlight/mmf-risk/mmf-risk-transcript-051011.htm.
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fund is said to “break the buck,” and part of the fund’s shareholders’ invested principal is in
jeopardy. Investors could actually lose money. Breaking the buck is a rare occurrence, though it
happened in September 2008.27 In response, many withdrew their money from money market
funds and deposited it in banks, as seen in Figure 5.
Figure 5. Nonfinancial Businesses’ Use of Checkable Deposits and
Money Market Funds
$ in billions
$1,000
$900
FDI
FD C established the TAG
hed t
$900
he TAG
program in October 200
ober
8
$800
Checkable Deposi
abl
ts
$700
Money Market Funds
$600
$500
$400
$300
$200
$100
$0
1999Q
199
1
9Q
2000Q1
00Q
2001Q1
2001Q
2002Q
200
1
2Q
2003Q1
003Q
2004Q
2004 1 2005Q1
05Q
2006Q1
2006Q
2007Q
200
1
7Q
2008Q1
008Q
2009Q1
2009
2010Q
201
1
0Q
2011Q1
011Q
2012Q
201
1
2Q
Source: Data from the Federal Reserve System, Flow of Funds Accounts of the United States, Table L. 101, at
http://www.federalreserve.gov/releases/z1/. The figure is modeled off of a similar chart by Alec Phillips, Goldman
Sachs Global Economics, “FDIC Deposit Guarantees: Another Year-End Risk.”
Note: Checkable deposits may include other types of deposits besides noninterest-bearing transaction accounts.
Figure 5 shows that since the financial crisis peaked in 2008, non-financial businesses have
increased their holdings of checkable deposits and decreased their holdings of money market
funds. If one of the reasons that money flowed to deposits was the presence of TAG, it is possible
that the expiration of TAG could lead to a partial reversal. However, one of the often cited
benefits of money market funds is that they have traditionally earned a higher yield than bank
deposits;28 but money market funds are currently earning historically low returns, lowering the
opportunity cost of holding noninterest-bearing deposits.29 There is also uncertainty surrounding
the future regulation of money market funds. The Financial Stability Oversight Council (FSOC),30
a council of financial regulators that is charged with monitoring systemic risk in the financial
system and coordinating several federal financial regulators, has identified structural
vulnerabilities in money market funds which could affect financial stability.31 It is unclear if the
27 See CRS Report R41073, Government Interventions in Response to Financial Turmoil, by Baird Webel and Marc
Labonte.
28 See Securities and Exchange Commission, Roundtable on Money Market Funds and Systemic Risk, at
http://www.sec.gov/spotlight/mmf-risk/mmf-risk-transcript-051011.htm.
29 Investment Company Institute, 2012 Investment Company Fact Book, Ch. 2: Recent Mutual Fund Trends, at
http://www.icifactbook.org/fb_ch2.html.
30 For more on the FSOC, see CRS Report R42083, Financial Stability Oversight Council: A Framework to Mitigate
Systemic Risk, by Edward V. Murphy.
31 Financial Stability Oversight Council, 2011 Annual Report, p. 13, at http://www.treasury.gov/initiatives/fsoc/
Documents/FSOCAR2011.pdf.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
Securities and Exchange Commission (SEC), the primary regulator of money market funds, will
impose additional regulation.32 Although deposits could flow to money market funds if TAG
expires, the uncertainty about future regulation and the low yields makes it unclear how much
would leave TAG accounts.
Potential Impacts if TAG is Extended
Some have raised concerns about what effect an extension of TAG would have on the FDIC’s
Deposit Insurance Fund (DIF).33 Under the program as established by the Dodd-Frank Act, TAG
insurance functions as part of the FDIC’s traditional insurance. FDIC institutions pay an
insurance premium into the DIF based on their risk—financial institutions that pose more risk to
the DIF are assessed higher deposit insurance premiums relative to those that pose lower risk. If a
member institution fails, the proceeds in the DIF are used to prevent insured depositors from
losing any of their insured deposits.34
For a risk-based insurance system to function effectively, the entity setting the insurance premium
must accurately forecast future risk or be able to recoup losses ex post. If the FDIC can
successfully estimate the future cost that TAG funds would impose on the DIF, then the premiums
could be set to cover the expected losses. However, problems may arise if the insurance is
underpriced due to an underestimation of future losses. If future losses cause the DIF to become
depleted, the DIF may have to borrow from the Treasury to protect depositors, putting taxpayers
at risk.35 Although predicting the future cost of TAG to the DIF (which is a function of the
number of future bank failures, the size of banks that would fail, and the amount of TAG funds in
failed banks) is beyond the scope of this report, looking at the effect of TAG on the DIF since the
beginning of 2011 can inform thinking about the future cost if TAG is extended. The FDIC
estimates that, for
the 108 banks that failed in 2011 and the first quarter of 2012, TAG deposits amounted to 3
percent of deposits on average. Allocating DIF losses between these deposits and other
deposits would result in an estimated TAG cost over these five quarters of about $270
million, or about 3 percent of the total $9.3 billion estimated cost of failures during this
period.36
32 Securities and Exchange Commission, “Statement of SEC Chairman Mary L. Schapiro on Money Market Fund
Reform,” press release, August 22, 2012, at http://www.sec.gov/news/press/2012/2012-166.htm. In the press release,
Chairman Schapiro stated, “I—together with many other regulators and commentators from both political parties and
various political philosophies—consider the structural reform of money markets one of the pieces of unfinished
business from the financial crisis.” At the time of the press release, the SEC had not reached a consensus on possible
reforms.
33 See Letter from Martin J. Gruenberg, FDIC acting chairman, to Honorable Shelley Moore Capito, chairman,
Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, House of
Representatives, June 29, 2012, at http://www.aba.com/Issues/Index/Documents/FDICResponsetoCapitoonTAG.pdf.
34 See “Insurance Fund(s) Insolvency and Taxpayer Risk” in CRS Report R41718, Federal Deposit Insurance for
Banks and Credit Unions, by Darryl E. Getter and Victor Tineo.
35 Ibid.
36 See Letter from Martin J. Gruenberg, FDIC acting chairman, to Honorable Shelley Moore Capito, chairman,
Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, House of
Representatives, June 29, 2012, at http://www.aba.com/Issues/Index/Documents/FDICResponsetoCapitoonTAG.pdf.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
Figure 6 shows that the number of bank failures has fallen from its peak in 2010 whereas the
number of institutions on the FDIC’s “problem list,” which is one potential indicator of the
number of banks that are at risk of failing in the future, is still elevated. Most of the bank failures
since January 2011 have been smaller banks which, as mentioned previously, had relatively few
TAG deposits. If either the number of banks that fail or the type of banks that fail in the future is
different, then estimates of future losses based on the past losses of TAG to the DIF would be
inaccurate.
Figure 6. Bank Failures and Banks on the Problem List
200
1000
180
900
Failures (left scale)
160
800
Problem List (right scale)
140
700
120
es
600
List
100
500
m
Failur
80
400
Proble
60
300
40
200
20
100
0
0
2005
2006
2007
2008
2009
2010
2011
2012*
Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile, at http://www2.fdic.gov/qbp/2012jun/
qbp.pdf.
Notes: The columns represent the total number of bank failures in a given year, though 2012 only includes the
first two quarters. The series represents the total number of banks on the problem list at the end of the given
year, though 2012 includes the banks on the problem list at the end of the second quarter.
Although extending TAG may impose additional costs on the DIF, the benefit of extending TAG,
on the other hand, may be that it maintains confidence in the banking system and prevents future
bank failures that would have required drawing on the DIF. The counterfactual cannot be known
with certainty, making it difficult to estimate the costs and benefits of extending TAG.
An additional potential cost of extending TAG would be the moral hazard associated with deposit
insurance. In the context of deposit insurance, moral hazard can manifest itself in two ways:
“first, explicit deposit insurance gives insured banks incentives to pursue added risks because
they can capture any profits but shift any losses to the government. Second, explicit deposit
insurance reduces incentives by depositors and shareholders to monitor their banks.”37 Banks’
additional incentive to take further risks and the depositors’ reduced incentive to monitor could
increase the likelihood that some banks may fail. More immediately, moral hazard could impair
the quality of credit intermediation decisions in the economy. The reduced market discipline
caused by deposit insurance could incentivize banks to issue loans that do not accurately price the
underlying risk.
37 Patricia A. McCoy, “The Moral Hazard Implications of Deposit Insurance: Theory and Evidence,” February 18,
2007, at http://www.imf.org/external/np/seminars/eng/2006/mfl/pam.pdf.
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Overview of the TAG Program and the Potential Impact of Its Expiration or Extension
Moral hazard can be minimized through at least two different channels. First, a bank may have
other creditors who do not have insured deposits. Those creditors would still have the incentive to
monitor the bank for excessive risk-taking, though having fewer uninsured depositors may
potentially reduce the effectiveness of the monitoring. Second, bank regulators examine banks
and attempt to prevent them from acting in a way that could put insured deposits at risk.38
Regulators are supposed to take prompt corrective action against institutions as necessary to
minimize losses to the DIF.39
Author Contact Information
Sean M. Hoskins
Analyst in Financial Economics
shoskins@crs.loc.gov, 7-8958
38 CRS Report R40249, Who Regulates Whom? An Overview of U.S. Financial Supervision, by Mark Jickling and
Edward V. Murphy.
39 See FDIC, “Formal Administrative Actions,” at http://www.fdic.gov/regulations/safety/manual/section15-1.pdf.
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