One example: unlimited insurance for $1.5 trillion in noninterest-bearing deposits at banks, largely used by businesses to park cash. This is a different program from the $250,000 insurance provided to most accounts. The Federal Deposit Insurance Corp. first provided the special backing in October 2008 during the worst of the financial crisis.
In 2010, Congress extended it through 2012. Now, with Congress returning this week and the Dec. 31 deadline looming, banks are fighting for yet another extension. At the end of August, 80 state bankers' groups wrote to congressional leaders in favor of this.
But the government should hold its ground. Banks are in far better shape than in 2008. There is no liquidity issue, capital is stronger and credit quality is improving. Meanwhile, businesses that have parked funds in these accounts aren't likely to pull the money out en masse. They have few alternatives. Multinationals aren't about to shift funds to, say, shaky European banks. And businesses can't pick up much in the way of additional yield by transferring funds to money-market accounts.
The unlimited insurance also acts as a subsidy to banks, helping keep down their cost of funding. That is one likely reason why banks are arguing for an extension, given that the superlow-interest-rate environment is squeezing net interest margins.
Small banks argue that an abrupt end to the insurance plan would lead businesses to move deposits to too-big-to-fail banks, giving them yet another advantage. As it is, though, the program has disproportionately benefited the biggest banks.
Noninterest-bearing deposits have more than doubled at bigger banks from the period just before the program started to June. Smaller banks, meanwhile, have seen such deposits grow just 28%. And nearly half of all such deposits are held by just the four, biggest U.S. banks J.P. Morgan Chase, Bank of America, Citigroup and Wells Fargo.
In letters to Congress, banks have tried to link the expiration of this insurance to the looming "fiscal cliff." The argument is that a loss of the insurance will lead to an outflow of deposits, curtailing lending at the worst possible time.
Yet that sounds spurious. Banks themselves have argued that tepid lending growth is due to a lack of demand, not supply of credit. And it isn't as if banks don't have a cushion in this regard.
FDIC data showed that at the end of June, net loans and leases were equal to 73% of deposits at banks with less than $1 billion in assets and 71% for banks with assets above this level. This is a historically low level.
What's more, the potentially flighty nature of these deposits argues against banks using them to fund most loans anyway.
Some might argue for a gradual wind down to give businesses and banks time to adjust and for the interest-rate environment to become more "normal." Yet that is what Congress essentially did with its 2010 extension. A further two-year delay risks making the program permanent, especially since there is no telling how long the Federal Reserve may keep rates at superlow levels.
The government and Fed have already taken huge risks by intervening so heavily in the economy and financial markets. The last thing they should do is send signals that such intervention will become permanent.
