Tag Archives: financial reform

More Perspective on TAG

In case you’re interested, here is an interesting (if you like this sort of thing) article on the TAG program I posted about earlier. I don’t necessarily agree with every point about why we should keep the guarantee program for bank deposits, but I do agree there is still a lot of uncertainty in the market right now and caution may not be a bad thing. Also, keeping the program is not a taxpayer funded project because banks are the ones paying into the insurance program.

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Main Street vs Wall Street

In 2008, the Federal Deposit Insurance Corporation (FDIC) established the Transaction Account Guarantee (TAG) program to instill public confidence in the banking system.  The program provided unlimited guarantees to non-interest bearing accounts through 2010 and then the program was extended to the end of this year (2012). 

And now in plain English (Sorry about that, too much banking jargon), banks pay into a federal program for insurance that guarantees depositors (anyone holding money in a bank) get their money bank if a bank fails and shuts down.  Deposits have traditionally only been insured up to a certain dollar amount and anything over the cap is uninsured.  In 2008, the TAG program raised the cap from $100,000 to $250,000 for deposit accounts and gave non-interest bearing accounts (like a traditional checking account) an unlimited guarantee.  This was supposed to inspire confidence in a banking system that was floundering due to the financial crisis that was really picking up steam in Fall, 2008.

Now, the Senate is supposed to vote today on whether or not to continue the program past December 31, 2012. 

The prevailing thinking is that this temporary guarantee helps community banks because they typically have less creative ways to structure accounts and keep dollars insured.  The reality may be different.  Earlier this summer, the Chairman of the FDIC, Martin Gruenberg, said most of the extra deposits protected by the temporary program were held in the Country’s 10 largest banks.  That doesn’t mean community banks–and their customers–haven’t benefitted from the program, but they may not have been the “biggest” beneficiaries.  Hopefully, small businesses, wherever they bank, have been able to benefit from the added security and will be able to move forward confidently no matter the outcome of today’s possible Senate vote.

If you’re a small business or have personal deposits at a local bank, visit your banker or go to the FDIC website and find out if your deposits are protected.  Chances are, your community banker will be able to make sure you’re covered one way or the other.

In Case You Hadn’t Noticed … your credit card terms are changing

As if there weren’t enough to keep track of in the world of personal finances, new rules regulating consumer credit cards took effect this past month.  The good news: these changes are beneficial to you, the consumer. 

The Federal Reserve is implementing these changes through the Truth in Lending Act, one of the more important regulations protecting consumers who borrow money.  The recent changes were approved in 2009 and were implemented in two different phases in February and August, 2010.  There are several notable changes, some of the most significant include:

Changes Implemented February 22, 2010:

  • All credit card companies must include a box on your statement that discloses how long it will take you to pay your entire balance if you only make the minimum monthly payment.  The idea being that if a card company is forced to admit how long it will actually take, the gory details will motivate you to get it paid off quicker.  In addition, companies must also show the monthly payment required in order to pay the entire balance in three years.
  • Your credit card company can’t raise your interest rate in the first year you have the card unless it was part of the original agreement you signed.  If they raise the rate after the first year they A) have to give you 45 days notice; B) may only charge the higher rate on new purchases; and C) must allow you to cancel the account if you don’t accept the changes.  Unfortunately, you are still responsible for the remaining card balance if you do decide to cancel.

Changes Implemented August 22, 2010:

  • In most cases, you may only be assessed a $25 fee for late payments.  Before August 22, you may have been charged up to $39 for every late payment.  And, your fee can’t be more than your minimum monthly payment so keep track of this change because it may have significant benefits if you do happen to pay late on occasion.
  • If your credit card company decides to increase your interest rate for any reason they must tell you why.  And if they increase the rate, they must also reevaluate your account in six months to see if you have earned the lower rate again.

There were other changes implemented on both these dates so if you want more information visit the Federal Reserve’s website and review their fact sheets:

                February 22

                August 22

And BEWARE, unscrupulous credit card companies are beginning to find ways around the new regulations by doing things like marketing business cards to consumers that are not subject to the new consumer protections.  As always, do your homework before getting a new card, and better yet, work with your local community banker to make sure you are getting a quality product that works for you.

FDIC 

How Quickly We Forget

Saturday afternoon I had nap duty with the little one while the rest of the family headed to the pool. I flipped past ESPN while looking for something worth watching and noticed O.J. Simpson’s Ford Bronco on the screen. That piqued my interest so I put down the remote. Turns out I had tuned into one of ESPN’s “30 for 30” films. The network has been celebrating its 30th anniversary by airing 30 original documentary pieces about significant sports moments since September 7, 1979. Until Saturday I hadn’t paid much attention but this one caught my eye right away. Entitled “June 7, 1994,” it detailed one day in 1994 that included a number of significant sporting events, the most memorable being O.J. Simpson’s surreal ride on the Los Angeles Freeway that was watched by some 95 million viewers. The funny thing about the film to me was that it was fascinating, but I remember almost nothing about it! Watching it Saturday I was struck by the throngs of media that descended on the police station, the crowds of people that gathered on the overpasses to watch O.J.’s Bronco pass underneath, and the mass confusion surrounding the whole saga. Why didn’t I remember anything from that day? This may be a poor example, but the thing I took away from watching this documentary was that it is so easy to forget the past. Winston Churchill said that “those who forget history are bound to repeat it.” I tie this back to banking as my introduction to discussing the historic Dodd-Frank Wall Street Reform and Consumer Protection Act (2010). This is a very significant piece of legislation, but whether it will be effective remains to be seen. In a historical context this Act is one in a long line of reforms that were all designed to improve and/or fix a financial system. In some cases, like the Federal Reserve Act (1913), reform was designed to create a system (The Federal Reserve) whereby the general public could depend on the banking system. More recent reform like the Gramm-Leach-Bliley Act (1999), repealed earlier legislation (Glass-Steagall, 1933) and loosened restrictions between banks, investment and securities firms, and insurance companies and allowed them to consolidate. The general consensus leading up to 1999 was that our financial world had advanced and this “old-fashioned” law was no longer needed in our sophisticated self-regulating world. Although many factors led to the financial crisis that came to a head in 2008, deregulation played a MAJOR role in the events that transpired. And this crisis is far from over, as the economic reverberations are still being felt in many different places around the world. So what did we learn from all this? Or putting it another way, what did we forget? The Dodd-Frank Act is a sweeping piece of legislation that will touch every corner of the financial services and banking industry. It created a new consumer protection council, permanently increased protection on FDIC insured deposits to $250,000, eliminated a federal regulatory agency, and that’s just the beginning. And finally, the Act also tried to tie up loose ends that came untied as a result of deregulation. It seems that we may have forgotten history and as a result we ended up repeating it. Some of the details and circumstances were different, but the results were not pretty in the 1920’s and 1930’s and the same holds true for 2007-2010. I’m not going to dig any deeper for now because I’d rather you think I know all the answers! What I do know is that the 2,300+ page bill is only the beginning of an avalanche of legislation and rule-writing that will transform the financial system once again. And for the record, the original Federal Reserve Act was only 32 pages. I’m hoping to spend some time discussing specific pieces of this new legislation in the coming months. I’m very interested to see how all of this pans out in Washington D.C. and I’m pretty sure I’ll have plenty to blog about from here on out.

FDIC