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Bank customers withdrawing money at fastest rate since Sept. 11 terrorist attacks

180px-National_Bank_OamaruCustomers of America’s largest banks withdrew money this month at the fastest weekly pace since the Sept. 11 terrorist attacks as the Transaction Account Guarantee — or TAG program — ended.

Data from the Federal Reserve revealed that net withdrawals across 25 of the largest U.S. lenders totaled $114.1 billion, pushing deposits down to $5.37 trillion. Customers could be shifting money no longer insured by the U.S. government under the TAG program that ended last month, Bloomberg reports.

The TAG program places an FDIC-backed guarantee on non-interest bearing transaction accounts with more than $250,000. Before the program ended, approximately 13 percent of all bank deposits were held under the TAG program. Some analysts and investors expected the termination of the program to push deposits away from the U.S. banking system.

“What you are seeing now is probably TAG money,” Subadra Rajappa, a fixed-income strategist at Morgan Stanley, said, according to Bloomberg. “Some of the banks’ corporate customers have said they were going to take the money out [if the program expired].”

Some industry groups, including the Independent Community Bankers of America and American Bankers Association, urged Congress to extend the TAG program to prevent a shift in deposits.

“We knew that fund managers would re-evaluate where they want to keep their money—in a non-interest bearing account, another account at the bank or in other investments,” James Chessen, the chief economist at the ABA, said, Bloomberg reports. “If it continues there will be a reason to be concerned.”

Peter J. Wallison, a fellow in financial policy studies at the American Enterprise Institute, said, however, that Congress should allow the program to expire, as it would have an adverse effect on the economy.

“[T]his money is the hottest of the hot,” Wallison said, according to American Banker. “Since TAG accounts earn no interest and are withdrawable on demand, these funds will all disappear if the economy ever begins to recover and interest rates start to rise…When bank and liquidity and capital decline, banks stop lending. If interest rates began to rise because the economy was recovering, the recovery would be cut short, or at least curtailed…Finally, for all the concern in Congress and elsewhere about banks that are too big to fail, the TAG program makes the problem worse.”

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