That the U.S. Federal Deposit Insurance Corporation (FDIC) insures deposits in people’s bank accounts up to $250,000 is fairly common knowledge. What is less known is that this $250,000 cap is, in many cases, a fiction, because companies and savvy, wealthy depositors can circumvent it, or avoid it altogether.
Two examples of this “the-sky-is-the-limit” insurance are so-called TAG accounts and CDAR accounts. TAG (Transaction Account Guarantee) accounts held about $1.5 trillion as of March 31, according to the FDIC’s latest quarterly banking profile. The accounts pay no interest, so their popularity is derived from their uncapped FDIC insurance which reassures companies who need to keep large amounts of cash at hand to finance inventories and payrolls that their deposits are safe even if something goes wrong at the bank.
The FDIC is funded by the banks it insures. When it closes a bank, it uses money it has already set aside to protect depositors and absorb any losses associated with the failure. TAG accounts were forged in the fire of the 2008 financial crisis by the FDIC, the U.S. Treasury and Federal Reserve Board and unveiled in a joint press conference.
In 2010, The Dodd-Frank Act required all banks to join the program. Since then the FDIC extended the guarantee until Dec. 31, 2012, citing “lingering effects” of the financial crisis and the risk that letting the TAG program expire when the economy was weak could cause some community banks already under stress to lose deposits and risk failure.
One group opposed to the extension is the Investment Company Institute, which represents investment funds, including the money market funds that could see some of the money corporations keep in the TAG accounts for their short-term cash management needs migrate back to money markets. Other opposition comes from those who cite the “moral hazard” argument that might apply to any form of insurance.