During the financial crisis, as community banks began failing, the amount of money in all accounts insured by the FDIC was raised from $100,000 to $250,000. However, non-interest-bearing accounts, typically used for payroll contain much more than $250,000. To address this matter, the FDIC approved a temporary program to provide unlimited insurance for these accounts. The premise for the program was that small businesses would keep their payroll accounts at local banks if they felt all of it remained safe. The program provides unlimited insurance for $1.4 trillion in non-interest-bearing transaction accounts.
In 2010, Congress extended the unlimited coverage for two years with the Dodd-Frank law. The agency is now operating on the assumption the program’s life is over, according to an FDIC official, and insurance will be limited to $250,000 for those accounts.
If this program that insures small business accounts expires at the end of December, small companies may shift billions of dollars in deposits from community banks to the nation’s largest banks. Big banks don’t offer this type of insurance either, but the public perception is that they are too big to fail.
Small bank lending to small firms will be hurt if the program ends this year.
The Independent Community Bankers of America, a trade group, is lobbying Congress to extend the transaction account guarantee program, arguing the economy isn’t yet healthy enough to eliminate it.
Bill Isaac, who led the FDIC during the 1980’s banking crisis says that doing away with the insurance now would reroute funds to large banks, hurt small business and impede job growth.
What do you think the effects of this law’s expiration will have? Do you think it’s something that we should have had in the first place and that we should or shouldn’t extend? Please let me know in the comments below.