Protecting Your Business Bank Account

(from your bank during a recession)

By Benjamin Gisin
Business consultant and former banker

Many businesses have bank accounts whose balances exceed the standard $250,000 FDIC insurance limit either occasionally or at all times. A business bank account may be a lot of things, but money in the bank is not one of them. A business account (or any other bank account) is merely an accounting of your claim to what your bank owes you. The nation and world run not on money, but promises to supply money the bank does not have, popularly called bank credit. Bank credit is simply what banks owe depositors. When you write a check, what your bank owes you is transferred to what another bank owes the person you wrote the check to.

When debts owed to banks default, banks can quickly default on what they owe depositors. Every quarter banks send reports of their financial health to the FDIC. Based upon a formula of minimum reserves, capital and profitability, the FDIC (or state banking regulator) then decides when to close a bank.

Thanks to efforts of the FDIC, at year end 2008, the Transaction Account Guaranty Program (TAGP) was approved and implemented. The program essentially provides unlimited FDIC insurance on non-interest bearing transaction accounts, the most popular being checking accounts.

Unlike historical FDIC insurance, the TAGP program is optional for banks and banks may opt out. Over one fourth of all banks (2,076 banks) of the nation’s 7,830 banks (as of 6/30/10) have opted out of the TAGP program. This means that if your business account is at one of these banks that then fails, you are potentially at risk to loss.

With the wholesale closure of banks over the last 3 years, the FDIC has fine-tuned its closure process. As a matter or course, the FDIC and state banking regulators work hard to find another bank to assume the deposits (liabilities) of the failing bank. In most cases, bank account holders, regardless of the size of the bank account, simply get a notice that their deposit account has been assumed by another bank. However, in those cases where no other bank wants to assume the deposits of a failing bank, the FDIC will close the bank and send out checks for bank account balances up to the $250,000 limit. If your business account is at a failing bank that no one wants to buy and has no TAGP coverage, balances over $250,000 are lost.

The FDIC’s TAGP program may well be the most important service that determines where you have your business account. Regardless of rumblings that the economy is improving, the banking system is a long way from being out of the woods when it comes to non-performing loans and loan losses – the primary cause of bank failures. For perspective, following are the losses banks have taken in recent years, with 2005 being a benchmark for what a more normal year might be:

2005 banking loan losses: $ 31.6 billion

2008 banking loan losses: $100.4 billion
2009 banking loan losses: $187.5 billion
2010 banking loan losses $100.7 billion (for first six months only)

The message in these numbers is that bank loan losses for the first six months of 2010 are the highest ever in U.S. banking history.

Banks are required to post in their lobbies clear signs if they have opted out of the TAGP program. The next time you go to your bank, look for the signs and talk to your banker.

The TAGP program will expire at year-end 2010 and will be replaced by another program of unlimited transaction account guarantees that will run for two years, expiring 12/31/2012 under the provisions of the Frank-Dodd Act. The law does not allow banks to opt out of this program. Hence, the risk from now till 12/31/2010 is real for businesses that have their bank accounts at institutions who have opted out of the TAGP program.

The activities of the FDIC, in preserving depositors’ claims to what their banks owe them, has been the bedrock that has prevented the nation from falling into absolute chaos during this financial crisis, as was the case in the Great Depression of the 30s. ■

Benjamin Gisin consults business and agricultural enterprises facing challenges in their banking and credit relationships. He can be reached at benjamin@ida.net or calling (208) 681-2717.