Community bankers who expect the U.S. Senate to pass a bill tomorrow that would extend a program intended to help them retain deposits also believe they will have a tougher time getting the measure though the House.

Facing strong opposition in that Republican-controlled chamber, including from Majority Leader Eric Cantor of Virginia and incoming Financial Services Committee Chairman Jeb Hensarling of Texas, supporters of the Transaction Account Guarantee program may now try to add the extension to fiscal cliff legislation.

While leading House Republicans oppose the extension, many rank-and-file members “are not going to want to pick a fight with community banks,” said Brian Gardner, senior vice president of Washington research at investment bank Keefe Bruyette & Woods Inc. “If it gets through the Senate, the House will go along and let it get into a fiscal cliff bill.”

The TAG program guarantees $1.5 trillion in non-interest bearing accounts above the Federal Deposit Insurance Corp.'s general limit of $250,000. It was created in 2008 and extended in 2010 to provide unlimited backing for the accounts to keep them in community banks. Republicans have labeled TAG as a bailout-era program that shouldn't be extended.

Small businesses, local governments and non-profit organizations use the transaction accounts for payroll and other recurring expenses.

The FDIC said in a Dec. 4 report that community banks now have sufficient liquidity to manage TAG's expiration even if the deposits it attracts do migrate to bigger institutions.

While Treasury Secretary Timothy F. Geithner angered community bankers during a Senate Banking Committee hearing in July when he said, “it's not necessary to extend” the TAG program, the White House issued a statement this week supporting the measure.

“While the administration supports a temporary extension of the program, it remains committed to actively evaluating the use of this emergency measure created during extraordinary times and a responsible approach to winding down the program,” according to a statement issued by the White House yesterday.

Cantor objects to the extension because the program was supposed to be temporary, said his spokesman, Roy Cooper. “When initiated at the height of the financial crisis, this was intended to be a temporary guarantee program,” Cooper wrote in an e-mail. “The majority leader believes we should not continue to extend these taxpayer guarantees and therefore opposes the proposal.”

Depositors' Assumptions

While community banks are healthier than they were in 2008, many such bankers worry they'll lose transaction accounts to bigger rivals because of a public perception that big institutions will be rescued by the government if there is another crisis.

“If they could extend this just 24 months and say it's over, that would be fine to get over the hump,” said James Getz, chairman and chief executive officer of $1.8 billion-asset Tristate Capital Bank in Pittsburgh. “For Main Street America this recession is not over.”

That view was supported by Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat.

“Our nation's economy is certainly in a different place than it was in 2008 at the height of the financial crisis when this program was created, but with concerns about the fiscal cliff in the U.S. and continued instability in European markets, I believe a temporary extension is needed,” Johnson said on the Senate floor yesterday.

Majority Leader Harry Reid of Nevada is sponsoring the extension bill in the Senate. He has described it as a “must-do” before the end of the year.

James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association, said members of House doesn't share that sense of urgency.

“Based on conversation held thus far, it has not garnered must-pass legislation status and you certainly want it to get that status as time winds down in this Congress,” he said.

“House conservatives want to shrink the government safety net and that means letting TAG expire,” said Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC. “I think for this to get enacted into law, it needs to be part of a much bigger package.”

Gardner, the Keefe Bruyette & Woods Inc. Washington analyst, said the strategy of tying the measure to the fiscal cliff bill faces the risk that House leaders will block unrelated amendments if the bill appears overloaded with them. He put the extension's chance of passage in the House at about 50 percent, calling it a “crapshoot.”

Broader Package

Still, Independent Community Bankers of America chief economist Paul Merski said he supports the fiscal-cliff strategy to extend TAG.

“Once it demonstrates it has the support in the Senate it could be rolled into a broader package,” Merski said. “Because of the timing” during the lame-duck session “there's not going to be much appetite for stand-alone bills.”

ICBA has sent multiple letters to lawmakers urging them to support the extension.

“Congress shouldn't be rolling the dice with the fate of $1.5 trillion in deposits that will become uninsured and a risk asset for businesses and state treasurers overnight if TAG is allowed to expire on Dec. 31,” Camden Fine, president and CEO of ICBA, said in a Dec. 4 statement. “The good news is that Congress holds the power right now to ensure these deposits remain insured.”

The issue also has divided the banking industry. The Financial Services Roundtable, whose members include big banks such as JPMorgan Chase & Co. and Citigroup Inc., sent a letter to Reid and Senate Minority Leader Mitch McConnell of Kentucky calling TAG's extension unnecessary. Merski said the Roundtable opposition helps the community banks.

“It demonstrates how this is opposed by a handful of the mega banks while over 7,000 mid-sized banks are supporting it,” Merski said. “It sets up a distinct vote.”

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