As this recent post describes, many small businesses still face difficulties getting financing. Now, it's possible that things might get even tougher next year. That's because the FDIC insurance on balances topping $250,000 in non-interest bearing transaction accounts is slated to stop at the end of this year. As of the end of last year, $1.4 trillion in transaction accounts in banks across the U.S. exceeded the basic FDIC coverage limit of $250,000 per account, but remains fully insured until the end of this year, the FDIC reports. During 2011, the amount of money in deposits that received the temporary coverage jumped by 63.2 percent, also according to the FDIC.
The FDIC's coverage on these funds has been in place for several years; it was designed to maintain consumers' confidence in the banking system even as the financial crisis unfolded. An FDIC announcement from November 2010 states, "Beginning December 31, 2010, through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. The unlimited insurance coverage is available to all depositors, including consumers, businesses and government entities."
The end of insurance coverage on accounts exceeding $250,000 could impact not only the banks themselves, but their small business customers, according to the Independent Community Bankers of America (ICBA). The ICBA describes how this might play out: Businesses with accounts above the $250,000 insurance limit could decide to pull their funds, particularly from smaller, community banks. Although these banks are more likely to make loans to small business owners (as also described in the post) they can't boast of an implicit government guarantee that some of the too-big-to-fail financial institutions enjoy. Without this insurance, a business owner might conclude that all account balances over $250,000 are at risk, and decide to move them. Many small businesses and government entities use transaction accounts to fund payroll and other operating expenses, the ICBA notes.
If smaller businesses and government entities decide en masse to move their deposits, community banks would have even fewer funds to loan out. In a 2011 survey, more than half of community bankers said the FDIC insurance benefits small business customers more than any other type of customer.
So, the ICBA has been a vocal supporter of extending the insurance program. Last month, several dozen state community banking associations wrote Senate and House leaders, urging them "to quickly pass legislation to continue full FDIC coverage for non-interest-bearing transaction accounts." The Conference of State Bank Supervisors also supports extending the insurance.
The ICBA notes that the cost of the insurance is picked up by the banks (presumably, along with their clients) and not by taxpayers. "Notably, this coverage is not "free" nor supported by taxpayers. Banks fully pay to have this coverage through their FDIC insurance premiums," the ICBA states. Moreover, by encouraging small businesses and government entities to patronize smaller banks, rather than working only with the behemoths, the insurance helps keep deposits disbursed throughout the banking system. Without it, more money would be concentrated in just a few mega-banks, the ICBA says.
