Economic News & Analysis—December 31, 2012
Deposit guarantee sunset may put money in motion
By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist, and John Manley, CFA, Chief Equity Strategist

Brian Jacobsen photo


  • The Transaction Account Guarantee (TAG) program gave noninterest-bearing transaction accounts unlimited deposit insurance.
  • Although the program was replaced at the end of 2010, the provisions remained in place under the Dodd-Frank Act.
  • These provisions are set to expire at the end of this month, and money may be put into motion.
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Banks prominently display the letters FDIC—four letters that give depositors a lot of comfort. The Federal Deposit Insurance Corporation (FDIC) insures deposit accounts at banks for up to $250,000.

In 2008, because of the lingering effects of the financial crisis, the FDIC made this deposit insurance unlimited for noninterest-bearing transaction accounts through the TAG program. According to the FDIC, the program did a lot to restore depositor confidence in America’s banks.

Then, as of December 31, 2010, TAG was rendered redundant and was replaced by Section 343 of the Dodd-Frank Act, which amended the Federal Deposit Insurance Act to give separate insurance coverage to noninterest-bearing transaction accounts. This new insurance program was initially scheduled to expire in two years—that is, on December 31, 2012.

What the expiration of TAG could mean for banks and short-term interest rates

Consider that at the end of 2009, banks had approximately $266 billion in accounts that were above the $250,000 FDIC insurance threshold. As of March 31, 2012, that amount had grown to $1.507 trillion. According to FDIC reports, the average account size is $2 million, which says to me that a lot of this money is from corporations or institutions, not from individuals. At the expiration of the TAG program, some of this money may be put into motion.

Given that the money is currently sitting in noninterest-bearing accounts, depositors may move it to institutions they view as the safest of the safe. It’s possible that a lot of depositors have no concerns about the safety of the banks they currently use and will keep their money where it is. Smaller banks have allegedly been lobbying to have the deposit insurance program extended, perhaps out of concern that depositors will move money out of the smaller banks into larger ones. It’s also possible that some of the money could move into money market instruments or other cash-management accounts that hold things like commercial paper, Treasury bills, and the like.

I expect that the expiration of this extra deposit insurance program will put downward pressure on short-term interest rates. Although, most people may not notice the extra downward pressure—it’s not like those rates aren’t already low. While the expiration of the TAG program is notable, it may not be something that moves markets.

The views expressed are as of 12-31-12 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

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  • Not FDIC Insured
  • No Bank Guarantee
  • May Lose Value