Consumers Beware – Big Banks To Abandon Extra Checking Insurance

Consumers need to be aware that three big U.S. banks––Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co.––all announced that they would no longer be insuring checking accounts in the United States above the nationally guaranteed limit of $250,000 (as insured by the FDIC). This decision came a year after the federal government set up a program designed to assuage the fears of runs on the banks.

The potential crisis that could result from a banking run has largely been averted, and the banks are reacting accordingly. Bank of America Corporation had previously announced that it would opt out on October 16.

According to various spokesmen for Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co., the banks will exit the Transaction Account Guarantee Program on December 31, 2009. The Transaction Account Guarantee Program was set up by the FDIC (Federal Deposit Insurance Corporation) as an emergency response last October, intending to ameliorate the damage that a collapse of major investment banks such as Bear Stearns would have otherwise caused. Without the measure, consumer and investor panic might have resulted in a much more severe banking crisis.

The FDIC announced in August that it would be increasing fees for any banks that remain in the TAG Program past December 31. It is clear that U.S. officials are deliberately trying to encourage banks to return to self-sufficiency, and that by instituting fees on the emergency program, they are sending a message that the measure was intended to be a temporary one to avert financial disaster, not a permanent solution. Fortunately, most U.S. banks are back on track, if not already there, and it is good news when major banks can confidently remove themselves from government insurance programs.

However, not all banks have received bailouts like America’s biggest banks, and not all banks will be fully recovered by year’s end. Some smaller banks have announced partial exit plans from the TAG Program. This is a compromise meant to demonstrate progress, and the motivation for compromising is so they can avoid signaling some kind of weakness in their companies. By going halfway, these banks are able to recover without the risks they would otherwise face.

Emergency measures aren’t restricted just to TAG, though. The checking account insurance program is scheduled to terminate on June 30, 2010, and the FDIC has also ended its guarantees of bank bonds, as of October 31. These all signal a return to normalcy, if not growth, in the banking industry.

According to Citigroup spokesman Alex Samuelson, “As the economic environment normalizes, and with Citi now one of the best-capitalized financial institutions in the world with a deliberately liquid and flexible balance sheet, certain temporary programs have served their intended purpose.”

This news comes at a time when consumer lending has been tight and the unemployment rate continues to climb. There is no guarantee that these economic factors will significantly improve in the near future, but one thing is certain: they are not able to improve without a stable banking system behind them.