The term "transaction guarantee" refers to a U. The first component is the Debt Guarantee Program, which insures unsecured debt. It provides unlimited coverage for specified accounts. Ordinarily, the FDIC insures deposits placed in banks and other savings institutions through its general deposit insurance coverage. A stable NAV gives shareholders the impression of a high degree of safety similar to deposits but offering a higher return. Investors could actually lose money. Breaking the buck is a rare occurrence, though it happened in September Figure 5.
Note : Checkable deposits may include other types of deposits besides noninterest-bearing transaction accounts. Figure 5 shows that since the financial crisis peaked in , 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. 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.
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. 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.
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. The FDIC estimates that, for. Figure 6 shows that the number of bank failures has fallen from its peak in 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 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. Notes: The columns represent the total number of bank failures in a given year, though 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 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. 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.
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.
The assessments would be in addition to the assessments that the FDIC would otherwise collect. 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, , but was extended in March to apply to debt issued before October 31, The U.
Further, asset quality indicators show signs of continued improvement, and loan portfolios are growing. Overall, the banking industry is better off than it was a few short years ago. However, the dust from the recession has yet to fully settle and the industry is still in recovery. Specifically, many of the banks my fellow state regulators and I supervise continue to face a challenging economic environment with low loan demand and painfully low interest rates.
To fully appreciate the need to continue this program, we must recall its genesis. The program was crafted at the height of the financial crisis as nervous depositors began to move to institutions which they believed the U. Many of the provisions of the Dodd-Frank Act seek to address this inequity by increasing the prudential standards and creating a resolution regime for the nation's largest, most complex, and systemically significant financial institutions.
The federal regulators are doing a commendable job of writing and implementing these regulations, but much work remains. However, U. The term "foreign bank" does not include a foreign central bank or other similar non-U. In this context, the phrase "owed to an insured depository institution or a foreign bank" means owed to an insured depository institution or a foreign bank in its own capacity and not as agent.
How does the guarantee on noninterest-bearing transaction deposit accounts affect a customer's insurance coverage for other types of accounts? Does the full deposit insurance coverage for non-interest bearing deposit transaction accounts cover all such accounts in the bank regardless of ownership? For example does it include municipal or government deposits? Will public funds held in non-interest bearing transaction deposit accounts that are collateralized with pledged securities be included in the amount assessed for the guaranteed additional insurance?
Does the institution need to pledge against that part of their aggregate balance that is already covered by FDIC insurance? If a participating institution is required to pledge collateral for public deposits, this requirement is imposed by state law and not by the FDIC's regulations.
The amount of collateral would depend upon the wording and meaning of the state law. Any questions about the meaning of the applicable state law should be presented to the state regulator or State Department of Banking. Are accounts that waive fees or provide fee reducing credits considered "non-interest bearing" under the Temporary Liquidity Guarantee Program? Such account features do not prevent an account from qualifying under the Transaction Account Guarantee Program as a noninterest-bearing transaction account, as long as the account otherwise satisfies the definition.
Are interest-bearing accounts that offer zero interest covered under the Temporary Liquidity Guarantee Program? No, in general, only noninterest-bearing transaction accounts are covered. NOW accounts with interest rates of 0. Whether an account is noninterest-bearing will be determined by the account agreement regardless of the actual interest paid.
However, the FDIC will treat funds swept from a noninterest bearing transaction account into a noninterest-bearing savings account as being in the noninterest-bearing transaction account for purposes of the guarantee. Are cashier's checks and money orders covered under the Temporary Liquidity Guarantee Program? Cashier's checks and money orders issued by an insured depository institution are "deposits" as defined in the Federal Deposit Insurance Act.
In addition, these instruments are "demand deposits" and therefore "transaction accounts" as defined in Regulation D. Being "deposits" as well as "transaction accounts," these funds will be protected in full under the transaction account component of the program. Are escrow accounts covered under the Temporary Liquidity Guarantee Program? What is the amount of coverage on the title company's account at the bank if a depository institution opts out?
Escrow accounts are fully covered under the program if they are in noninterest-bearing transaction deposit accounts. To receive pass-through coverage, 1 the deposit account records generally must indicate the account's custodial or fiduciary nature and 2 the details of the relationship and the interests of other parties in the account must be ascertainable from the deposit account records or from records maintained in good faith and in the regular course of business by the depositor or by some person or entity that maintains such records for the depositor.
In its deposit insurance coverage regulations, the FDIC has indicated that an account held by an escrow agent or title company may by its terms indicate the existence of a fiduciary relationship. Will funds swept out of a noninterest-bearing transaction account be insured under the transaction account component of the Temporary Liquidity Guarantee Program? The FDIC will treat funds in sweep accounts in accordance with the usual rules and procedures for determining sweep balances at a failed depository institution.
Under these procedures, funds may be swept or transferred from a noninterest-bearing transaction account to another type of deposit or nondeposit account. The FDIC will treat the funds as being in the account to which the funds were transferred. An exception will exist, however, for funds swept from a noninterest-bearing transaction account to a noninterest-bearing savings account. Such swept funds will be treated as being in a noninterest-bearing transaction account.
As a result of this treatment, such swept funds will be insured under the transaction account guarantee component of the program. The treatment of sweeps from a noninterest-bearing transaction account out of an insured institution, such as a sweep to a mutual fund that is, the wiring of funds from the deposit account to an account maintained by the mutual fund at another insured depository institution , will be treated differently.
Under the FDIC's interim rule published in July of , external sweeps will not be completed after the failure of the insured depository institution. Thus, the funds will remain in the customer's noninterest-bearing transaction account, which will be insured under the transaction account guarantee component of the program. The funds in Eurodollar accounts after the completion of a sweep will not be protected for any amount under the FDIC's general deposit insurance regulations or transaction account guarantee component of the Temporary Liquidity Guarantee Program.
Rather, the customer will be treated as a general unsecured creditor. Eurodollar accounts—except for Eurodollar accounts owed to a bank—also do not qualify as senior unsecured debt and, thus, will not be guaranteed under the debt guarantee component of the program.
In the case of a repurchase sweep, under the interim rule published in July of , the FDIC will recognize the customer's ownership interest in securities to the extent that the repo sweep customer is the legal owner of identified securities subject to the repurchase agreement.
If the customer is not the legal owner of identified securities, the customer's rights will depend upon the nature of the customer's account. Assuming that the account is a noninterest-bearing transaction deposit account, the customer's funds will be fully protected under the transaction account guarantee component of the program. Similarly, in the case of an uncompleted external sweep, the result will depend upon whether the customer's deposit account is an interest-bearing account as opposed to a non-interest bearing transaction account.
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