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FDIC Mulls To Extend Transaction Account Guarantee Program

Federal Deposit Insurance Corporation (FDIC) is likely to extend the Transaction Account Guarantee (TAG) program, which is set to expire on June 30, 2010, for another six months or till the end of this year, reported Reuters citing Wall Street Journal

According to FDIC data, approxiamtely $834.3bn was guaranteed in the transaction accounts as of December 31, 2009. The program was the most widely used component of the FDIC’s overall guarantee program, with about 6,900 of the 8,000 or so US banks and thrifts choosing to participate.

Reportedly, Washington-based ABA and the Independent Community Bankers of America have requested the FDIC to carry on with the program, citing economic vulnerability and increassing failures among smaller banks.

Citigroup, JPMorgan Chase and Wells Fargo preferred to come out of the program at the end of 2009 following indications by FDIC that it would raise the fees for bank that comes under coverage after December 31, 2009.

The move indicates that the US government is not yet prepared to terminate the temporary measures undertaken in October 2008 during the financial crisis to support the banking system by providing guarantee for non-interest-bearing transaction accounts.

Industry experts are of the opinion that terminating the TAG program could lead to more bank failures as businesses would pull funds from banks that they believe are in trouble.

The FDIC board is expected to take a decision along with few changes like determining the insurance fees for small and big banks.

James Chessen, chief economist at American Bankers Association, has stated that the FDIC board probably will extend the TAG program, which gave companies unlimited support for non-interest accounts during the financial crisis, reported Businessweek.

Chris Cole, senior regulatory counsel for the Washington-based ICBA, has stated that the FDIC board may propose new rules for risk- adjusted insurance premiums for larger institutions, likely eliminating the reliance on long-term debt ratings.