Transaction Account Guarantee Program

The typical FDIC protection is quite limited. Until the financial crisis, most types of bank accounts were covered up to a balance of $100,000. If a bank were to go bankrupt, the FDIC would ensure you would receive your cash up to that limit. The maximum was increased to $250,000 until December 31, 2013, at which point the maximum will revert to $100,000 for most accounts.

During the recession, the government created the Transaction Account Guarantee Program, one part of the Temporary Liquidity Guarantee Program, to provide bank customers with security for their entire deposits in some accounts through December 31, 2010. This coverage goes beyond the FDIC maximum.

At the beginning of the year, some banks opted out of the Transaction Account Guarantee Program. Those that have are required to post a notice in their branches and on their websites stating that they are sticking with regular FDIC coverage. This notice prompted a reader to email me the following:

Now that I opened a free checking account at Chase, I am often on the site looking at my account. They paid me the $100 incentive promptly, and they seem okay so far. But today I ran into this:

Is Chase participating in the FDIC’s Transaction Account Guarantee Program?

Beginning January 1, 2010, JPMorgan Chase Bank, N.A. will no longer participate in the FDIC’s Transaction Account Guarantee Program. As a result, after December 31, 2009, funds held in non-interest bearing transaction accounts* and IOLTA, IOLA and IOTA accounts will no longer be guaranteed in full under the Transaction Account Guarantee Program. However, these accounts will be insured up to $250,000 per depositor under the FDIC’s general deposit rules.

The standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and certain other retirement accounts, which will remain at $250,000 per depositor. See a banker for more information.

Most customers should not be concerned about this. It’s not common for an American to have more than $250,000, or even $100,000, in one bank. The bank is saving money by not participating in the Transaction Account Guarantee Program. This program, and in fact the increase in FDIC insurance from $100,000 to $250,000, is irrelevant for most individual customers except for the psychological aspect: government backing helps restore faith in the financial system.

Large companies, however, often have multiple transaction accounts, like demand deposit accounts, at one bank. The total deposits by one corporate entity or taxpayer identification number can significantly exceed the FDIC’s $250,000 maximum. With an unstable banking industry, corporate customers want to ensure there’s no risk of losing millions of dollars on deposit if a bank were to go into receivorship. When this risk has been averted and corporate customers are no longer on the edge of their seats waiting for the next bank to fail, banks see no reason to pay extra fees to the government for unnecessary coverage.

If you see this notice on your favorite bank’s website, it is not a sign that the bank is in trouble. The risk analysts, marketing experts, and other executives have decided that the risk of losing (mostly corporate) customers due to fear of losing deposits in a banking crisis is low enough that the bank won’t lose customers by limiting deposit insurance to FDIC maximums. The banks can take the money saved on government fee expenses and invest or return the extra cash to customers in the form of higher interest.