WASHINGTON — A federal program giving unlimited insurance guarantees to some no-interest bank accounts, enacted at the height of the financial crisis, will die out at the end of the year after the defeat Thursday of a Senate plan to extend it.
The Senate majority leader, Harry Reid, Democrat of Nevada, led efforts to add two more years to the life of the Transaction Account Guarantee program, but Republican opponents used a procedural vote on the bill’s budgetary impact to effectively kill it.
Noninterest-bearing transaction accounts are used by businesses, local governments, hospitals and farmers who need a safe place to keep money on a short-term basis for such recurring expenses as payrolls.
Critics of open-ended government backing of the program said the accounts had also become a haven for the wealthy and a deterrent to people investing in more risky job-creating enterprises.
With the measure’s demise, federally backed insurance for so-called TAG accounts will revert to the $250,000 level that applies to most other bank accounts. The increased insurance protection was put in place in October 2008 as the financial crisis raised fears of a run on banks. It was revised and renewed in the 2010 Dodd-Frank financial overhaul act.
At the end of September, about $1.5 trillion was guaranteed in transaction accounts at American banks and thrifts, according to the Federal Deposit Insurance Corporation.
The two-year extension was supported by smaller community banks that argued that the financial recovery was still fragile and that the shrinking of federal protections would result in depositors moving their money to big banks that are less vulnerable to future financial downturns.
The extension was opposed by credit unions seeking the same advantages as banks, and by conservative groups who associated the TAG program with the federal bailouts of 2008 and 2009 and said the program was no longer needed.
“We are not in a financial crisis anymore,” said Senator Pat Toomey, Republican of Pennsylvania. “I don’t understand how you can justify it now.” Republicans were also upset that Senator Reid used tactics to keep them from amending the bill.
In July, Timothy Geithner, the Treasury secretary, said that “our judgment so far has been it’s not necessary to extend it” when asked about the program at a Senate Banking Committee hearing, The White House, in a statement issued Tuesday, said it supported the bill but was re-evaluating “the use of this emergency measure created during extraordinary times and a responsible approach to winding down the program.”
The bill failed after Republicans, led by Senator Toomey, said it did not meet a requirement that legislation not add to the federal deficit. The vote to waive that requirement was 50-42, well short of the 60 needed. Opponents said the TAG program had cost the F.D.I.C. almost $2.5 billion, although supporters argued that those losses were covered by insurance premiums that banks paid the F.D.I.C.
The Independent Community Bankers of America had warned that failure to extend the TAG program would destabilize smaller community banks and lead to a concentration of funds in a small number of large institutions.
Deposit Insurance Bill Dies in the Senate
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Deposit Insurance Bill Dies in the Senate
