Community bankers who supported extension of the Transaction Account Guarantee for another two years have a right to be upset about the results of Thursday’s Senate vote on S.3637. The procedural 50-42 vote effectively killed the bill in the Senate.
The Congressional Budget Office’s analysis of the bill provided cover for most of the Republicans in the Senate to vote no. I have to say that the CBO analysis is highly questionable. Why, for example, is the CBO making a 10-year cost impact projection when the bill only seeks a two-year extension of TAG?
CBO says the FDIC would likely under-estimate the cost of future bank failures, and therefore charge a premium that is too low, presumably leaving taxpayers with the remainder of the cost. CBO puts that cost at $110 million in the next decade. It is amazing to me that CBO thinks it knows how to project the cost of future bank failures better than the FDIC.
Whenever a bank fails, the FDIC projects the cost to the Deposit Insurance Fund. The true cost often is not known for years, but history tells us the FDIC typically estimates conservatively, meaning they almost always project worst-case scenarios that result in estimated costs that exceed the actual costs. To the extent that bank failures are predictable, the FDIC does a pretty good job, so I don’t understand why the CBO builds its analysis on the idea that the FDIC will underestimate the cost.
I also wonder whether Sen. Reid was a true friend on this one. He was the author of S. 3637, which made him a hero in the eyes of TAG supporters, but by adopting procedure that prohibited amendments, there was no way to address the CBO analysis, accurate or not. If amendments had been allowed, certainly some amendment could have been offered to placate those really worried that the FDIC wouldn’t charge enough for the extra deposit insurance coverage.
The other disappointing character in this debate was the Wall Street Journal. The newspaper viciously editorialized against the extension of TAG. The newspaper always portrayed TAG as a taxpayer liability. It refused to acknowledge that the industry pays for the extra coverage. The WSJ, which I normally respect, got this one completely wrong.
There are still a couple of weeks to go before the end of the year. TAG advocates should continue to make their case until Dec. 31. Perhaps something will happen making it possible to insert a TAG extension into some other piece of must-pass legislation.