Have you heard the news that as early as this December, the Federal Deposit Insurance Corporation may no longer insure bank accounts for small businesses? If you haven’t, you’re not alone. Now’s the time to educate yourself, especially if you’re a small business owner.
Dodd Frank Act
The extended guiding documents are found in Section 343 of the Dodd-Frank Act, which amends the Federal Deposit Insurance Act to include non interest bearing transaction accounts as a new “temporary deposit insurance” account category. It allowed for all funds – no limits and no maximum amounts – to be covered.
The insurance covers more than $1.4 trillion funds that usually cover a business’ payroll expenses and other similar purposes. The loss of small business deposits “has the real potential to slow down the economic recovery, and more importantly, jobs,” said Bill Isaac, who was at one time the face of FDIC and knows full well the repercussions of these problems. “Doing away with the insurance now would reroute funds to large banks, hurt small business and impede job growth,” he said.
In 2008, the government made a decision that received virtually no media attention and it’s likely it interested only a few specific sectors anyway. That decision was to start a new program – which kicked in late December 2010 – that would provide unlimited insurance on non interest bearing small business bank accounts.
The purpose was to provide an incentive for small businesses to maintain their loyalty to their local banks. On July 21, 2010, President Obama signed the Dodd Frank Wall Street Reform and Consumer Protection Act into law as of December of the same year. One significant change was that Dodd Frank raised permanently the standard maximum deposit insurance amounts to $250,000.
The caveat was that this particular insurance program would automatically expire in December 2012. Now, small banks around the country are concerned, as are small business owners. The program could be extended with a nod from the government, but if that doesn’t happen, small banks will find themselves without the resources to make loans in the communities they serve. Not only that, but small business owners will likely panic when they realize their business accounts are no longer insured.
Here’s where it gets interesting. This program affects every bank in the nation – whether it’s part of a global conglomerate or a small town credit union. Unfortunately, there will be plenty of small business owners who don’t make that connection and who will pull their funds out of their communities in lieu of a non-existent safety umbrellas they think a big bank would provide. If the program expires, it applies to all banks.
One trade group, The Independent Community Bankers of America, is aggressively lobbying Congress to extend the transaction account guarantee program. It argues the economy simply isn’t strong enough to drop this program – and likely won’t be for some time. “It’s a huge public policy question that should be resolved before we even get close to Dec. 31,” said Paul Merski, the banking group’s chief economist.
So why is it consumers would make the leap to a more recognized bank? Analysts believe they equate big government bailouts to the global banks. The “too big to fail” mentality would likely kick in and some would believe their money is safer in those institutes the government deems worthy enough to “bail out”. Meanwhile, for any small businesses that make these decisions will not only be disappointed that the lack of coverage followed their accounts but they’d also lose the familiarity of an established banking relationship.
Unfortunately, should another massive bank rescue be on the horizon, the fact is this country is ill-prepared to handle the catastrophe. It’s also difficult to assess just how devastating the expiration of these programs will be, too. If small businesses and banks fail, the communities they serve will surely pay the price – and these communities are located around the nation. It’s one crisis too many for millions in the U.S. – and one that could be avoided if lawmakers take care of business.
The FDIC defines a non interest bearing transaction account as a deposit account where interest is neither accrued nor paid; depositors are permitted to make an unlimited number of transfers and withdrawals; and the bank does not reserve the right to require advance notice of an intended withdrawal.
It’s important to keep in mind that December is still several months away – and when it comes to the financial sector, the only certainty is the uncertainty. Still, it’s important to not assume the government will make the decision to extend the programs, especially considering the state of affairs of today’s financial environment.
The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. As the FDIC celebrates its 75th anniversary, we present a historical perspective on the rich history of protecting consumers.