Question for the bankers amongst us

[c1ue]

I was in Delaware the last couple of days to open a bank account for my new company, and so was browsing the offerings of all of the various banks there.

One item struck my eye.

In Bank of America, a sign was posted saying that BofA was 'opting out' of the Transaction Account Program of the FDIC.

In Wilmington Savings Fund Society (WSFS Bank), the sign said WSFS Bank was 'opting in' to the Transaction Account Program of the FDIC.

The program in question:

http://www.fdic.gov/regulations/resources/TLGP/faq.html

If the institution is participating in the transaction account guarantee program, the notice must also state that funds held in noninterest-bearing transactions accounts at the entity are insured in full by the FDIC. These disclosures must be provided in simple, readily understandable text.
Under the Final Rule as amended, the definition of noninterest-bearing transaction accounts includes Interest on Lawyers Trust Accounts (and functionally equivalent accounts) and low-interest NOW accounts (defined as NOW accounts with interest rates no higher than 0.50 percent through June 30, 2010 and no higher than 0.25 percent after June 30, 2010). Thus, institutions that offer such accounts must comply with the disclosure requirements of the transaction account guarantee program.

Now, correct me if I'm wrong, but these transaction accounts are basically the accounts used by businesses - generally low or no interest bearing.

So does this mean BofA business accounts are now no longer protected as well as say WSFS Bank business accounts?

A question for the barts and mmreillys...

[mmr]

Re: Question for the bankers amongst us

Long story short, I think you're technically correct, although obviously you should confirm that the insurance coverage applies to your account with whichever bank you choose.

The TAGP (Transacation Account Guarantee Program) was basically designed to stop businesses with large uninsured balances from panicking and pulling their deposits, which was the final cause of death for Wachovia.

The FDIC has extended the program several times and increased the insurance costs to participating banks, which are now up to 0.25% on insured deposits. The program is now scheduled to expire at year-end 2010, although they have the right to extend coverage until year-end 2011.

Each time the program has been extended, more and more banks have opted out because:

- Commercial customers no longer feel like they need an explicit deposit guarantee. (It's good to be TBTF.)

- The bigger banks have more deposits than they can profitably invest, and might like to get rid of customers who don't take a loan or credit card to go with their deposits. B of A alone has ~$140 billion of excess reserves at the Fed earning 25 bps, last time I looked; between the insurance fees and normal operating costs of maintaining an account, a basic business checking account can be a money-losing proposition for the bank unless the business pays a lot of fees or uses other products.

As a practical matter, if B of A or Citi reach the point where depositors are taking losses, there will likely be much bigger problems to deal with...