Former FDIC Chairman Sheila Bair said this week that the expiring Transaction Account Guarantee should be extended and then gradually phased out in the next two years.
An abrupt expiration, Bair said, could lead to funds within the accounts rapidly exiting the banking industry, American Banker reports.
“Ending it full tilt, going from unlimited [coverage] to zero at the end of the year, with all the other stuff going on at the end of the year, is probably not a good idea,” Bair said, according to American Banker. “We don’t have money market funds fixed yet and whether people want to admit it or not, a lot of that money is going to go back into the money market fund industry when the program goes away.”
Bair said that Congress could phase out the TAG program by lowering the unlimited coverage of non-interest-bearing checking accounts to $1 million through 2013. Then, in 2014, the could could be lowered again before returning the program to its normal $250,000 level in 2015.
“The important thing here is that there is an acknowledgment by a former head of the FDIC that extending the TAG program is appropriate in this economic environment,” American Bank Association Chief Economist James Chessen said. “Her voice is adding to a chorus that says ‘extend TAG in one form or another.’”