Posts filed under ‘FDIC’
FDIC Extends the Debt Guarantee Component of Its Temporary Liquidity Guarantee Program With Surcharges to Bolster the Deposit Insurance Fund
On Tuesday, the Federal Deposit Insurance Corporation (FDIC) voted to extend the debt guarantee portion of its Temporary Liquidity Guarantee Program (TLGP) from June 30, 2009 through October 31, 2009. Depository institutions and holding companies that participated in the guaranteed debt portion of the TLGP may continue to issue guaranteed debt through October 31, 2009 without application. Other participating entities must apply to the FDIC by June 30, 2009, to issue guaranteed debt during this extended period and also must apply to issue any non-guaranteed debt after June 30, 2009. The guarantee on debt issued before April 1, 2009 will expire by June 30, 2012 and, for debt issued on or after April 1, 2009, will expire by December 31, 2012.
Along with this extension, the FDIC will impose a surcharge on debt issued on or after April 1, 2009 with a maturity of one year or more. The surcharge will range from ten to 50 basis points depending on whether the issuer is a bank or bank holding company and when the debt matures. The surcharges are in addition to current fees for guaranteed debt and will be deposited into the Deposit Insurance Fund (DIF). The addition of these funds to the DIF “should enable the FDIC to meaningfully reduce the 20 basis-point special assessment proposed by the board on Feb. 27,” said FDIC Chairman Sheila Bair.
FDIC to Financial Institutions: “Don’t Gamble With Government-Guaranteed Funds!”
The FDIC continues to increase its scrutiny of “weakened” financial institutions. The latest restrictions, issued March 3, 2009, are contained in a financial institution guidance letter (the Letter) that addresses FDIC concerns over the use of “volatile or special” funding by financial institutions that are in a “weakened condition.” The Letter also reflects increasing FDIC concern over the possible misuse of FDIC-sponsored liquidity programs, such as the Temporary Liquidity Guarantee Program. Although directed primarily at financial institutions with a CAMELS rating of 3, 4 or 5, the Letter also contains instructions for 1- and 2-rated institutions. Read a copy of the entire Letter. Here’s an overview of some of the Letter’s specifics:
- The Letter reminds financial institutions that received a CAMELS rating of 3, 4 or 5 in their most recent exam that any plans to “aggressively grow assets” or to “significantly shift balance sheet composition to riskier asset classes” may constitute unsafe and unsound banking practices.
- The Letter warns that FDIC scrutiny of such activities will be even greater if such activities are funded by brokered deposits, stating, “deposits or other funds that are newly insured or guaranteed pursuant to temporary FDIC programs, secured borrowings or other volatile wholesale funding sources.
- “Instead of increasing exposure to risk, 3-, 4- and 5-rated financial institutions are expected to implement a plan to stabilize or reduce their risk exposure and to limit their current growth.
- According to the Letter, the plan should not include the use of volatile liabilities or temporarily expanded FDIC insurance or liability guarantees to fund aggressive asset growth or otherwise materially increase the institution’s risk profile.
- The Letter reiterates, however, that “prudent lending practices” do not increase an institution’s risk profile.
- Even if an institution received a CAMELS rating of 1 or 2 in its most recent exam, the Letter warns that aggressive growth strategies or reliance on non-core liabilities to fund riskier asset classes may result in (1) heightened off-site monitoring, (2) more extensive on-site examinations or, in specific circumstances, (3) increased deposit insurance premiums.
The Letter addresses two of the FDIC’s current concerns. First, the FDIC is continually concerned that weak financial institutions are implementing growth strategies that add additional risk exposures. Second, the FDIC is attempting to prevent institution’s from increasing their risk exposure at the expense of FDIC liquidity programs. This type of scrutiny will only increase throughout 2009.
Economic Stimulus Legislation Adds to Executive Compensation Restrictions for TARP Participants
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). While many aspects of this “stimulus” legislation have been debated publicly for weeks, new executive compensation restrictions for financial institutions participating in the Troubled Asset Relief Program (TARP) were inserted just one day before the final congressional vote took place. Unlike the Secretary of Treasury’s February 4th revisions to the TARP executive compensation rules, which are not retroactive, these new executive compensation restrictions will apply to all TARP participants, including those that have already received funding under TARP. Here is a brief overview of these new restrictions.
Restrictions on Golden Parachute Payments. ARRA bans any “golden parachute payment” to a TARP participant’s senior executive officers or any of the institution’s next five most highly-compensated employees for the entire period in which Treasury holds the institution’s preferred shares. ARRA defines “golden parachute payment” broadly, covering any payment for departure from an institution for any reason, except for payments for services performed or benefits accrued.
This provision clearly targets the handsome severance packages received by chief executives at large, failing financial institutions. Unfortunately, the law does not distinguish between such packages and standard retirement packages received by most workers in the broader economy. Hopefully, in his rules implementing this provision, the Secretary of the Treasury will provide for such a distinction in his interpretation of the exception for “services performed or benefits accrued.”
Restrictions on Incentive Compensation. Employees subject to ARRA’s incentive compensation restrictions will be banned from receiving or accruing any bonus, retention award or incentive compensation, other than long-term restricted stock (in an amount that does not exceed 1/3 of the executive’s total annual compensation and does not fully vest until the government is repaid) for as long as the U.S. Treasury holds preferred shares of his or her employer. (more…)
FDIC Announces Monitoring Process for Financial Stability Programs
In a recent financial institution newsletter (the Letter), the FDIC announced its “expectation” that state nonmember institutions institute a process to monitor “their use of capital injections, liquidity support and/or financing guarantees obtained through recent financial stability programs.” (A copy of the letter is available here.) The stated purpose of the monitoring requirement is to help measure the impact of recent financial stability programs on the lending practices of participating institutions. Here’s a quick overview of the Letter:
- Which institutions are covered by the Letter? The Letter applies to all state nonmember institutions that have (1) received funds under the TARP Capital Purchase Program, (2) issued FDIC-guaranteed debt, or (3) received funding from the Federal Reserve’s expanded borrowing facilities.
- What activities should be monitored? Covered institutions should document how funds obtained from or guaranteed by federal liquidity-enhancement programs are used to promote lending activities, as described in the November 10, 2008, Interagency Statement on Responsible Lending (see FIL-128- 2008).
- Why does the FDIC want to monitor the conduct of these institutions? According to the Letter, the FDIC expects the results of the monitoring programs to illustrate whether federal programs are supporting credit markets and strengthening bank capital. In addition, the FDIC anticipates results of the monitoring processes should demonstrate whether participation in these federal programs has reduced unnecessary foreclosures.
- How will a covered institution report the results of its monitoring program? Covered institutions should be prepared to describe their use of federal programs during bank examinations. The Letter also encourages covered institutions to summarize such information in published annual reports and financial statements.
This Letter probably represents the first of many reporting/monitoring requirements for institutions that participate in federal liquidity-enhancement programs like TARP or the Temporary Liquidity Guarantee Program. Like all reporting requirements, covered institutions should begin implementing a compliance monitoring system now, so that all relevant information is available during examinations.
Deadline for Filing Election Forms for the Temporary Liquidity Guarantee Program is this Friday, December 5, 2008
On November 21, 2008, the FDIC issued its final rule (the Final Rule) implementing the Temporary Liquidity Guarantee Program (TLGP). The TLGP, developed to counter the system-wide crisis in the nation’s financial sector, has two components: (1) the Transaction Account Guarantee Program (TAG Program) and (2) the Debt Guarantee Program (DGP). A financial institution may opt out of the TAG Program, the DGP or both programs.
Regardless of whether a financial institution opts out of any component of the TLGP, the FDIC is requiring all financial institutions to file the FDIC Temporary Liquidity Guarantee Program Election Form (Election Form), using FDICconnect, no later than 11:59 p.m., Eastern Standard Time, December 5, 2008. Any financial institution electing to opt out of either component of the TLGP must indicate its election on the Election Form. In addition, any financial institution that does not elect to opt out of the DGP must make certain disclosures, which are described below, on the Election Form. A copy of the Election Form is available here.
FDIC Extends Opt-Out Deadline
On November 3, 2008, the FDIC announced that it has extended the opt-out deadline for participation in its Temporary Liquidity Guarantee program (“Program”) to December 5, 2008. The original deadline for opting out of the Program was November 12, 2008.
The Program has two parts: the debt guarantee component and/or the transaction account guarantee component. In order to opt out of one or both components, an eligible financial institution must inform the FDIC by completing the Election Form via FDICconnect by December 5, 2008.
You may review the FDIC’s announcement and obtain a copy of the Election Form by clicking here.
FDIC Temporary Liquidity Guarantee Program
Earlier this week, Treasury Secretary Paulson triggered the systemic risk exception to the “least cost resolution” requirements of Section 13 of the FDIC Act. Based upon this authority, the FDIC Board of Directors approved the Temporary Liquidity Guarantee Program. Under the program, FDIC will guarantee newly issued senior unsecured debt of eligible institutions and provide full deposit insurance coverage for non-interest bearing deposit transaction accounts (i.e., non-interest bearing demand deposit accounts) at FDIC-insured institutions, regardless of dollar amount.
General Considerations
- Institutions eligible to participate consist of FDIC-insured institutions and bank holding companies, financial holding companies, and savings and loan holding companies that engage only in activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act. FDIC, in consultation with an institution’s primary regulator, will determine eligibility.
- Coverage for all eligible institutions is automatic for the first 30 days of the program at no cost.
- Institutions may opt out of either or both components of the program, but must do so before the end of the initial 30-day period.
- Participating institutions will be subject to enhanced supervisory oversight to prevent rapid growth or excessive risk-taking.
- A special assessment will be collected to cover any losses not covered by fees imposed in connection with the program. This assessment will apply to all insured institutions, whether or not they choose to remain in the program. The assessment will be computed based upon the amount of an institution’s average total assets during the period, minus the sum of (A) the amount of the institution’s average total tangible equity, plus (B) the amount of the institution’s average total subordinated debt.
- FDIC and the primary regulators will issue additional guidance regarding the program.
Senior Unsecured Debt Guarantee
- Applies to senior unsecured debt newly issued between October 14, 2008 and June 30, 2009. Applicable debt will include promissory notes, commercial paper, inter-bank funding and any unsecured portion of secured debt. Deposits and non-contractual obligations are not included.
- Guarantee generally will be limited to 125% of an institution’s eligible debt outstanding as of September 30, 2008, determined on an aggregated basis (as opposed to type). For institutions with no eligible debt outstanding as of September 30, 2008, FDIC and the institution’s primary regulator will consider eligibility and limits on a case-by-case basis. Interested institutions should contact their primary regulator to begin discussions. Because most community bank holding companies will not have outstanding eligible debt, it will be necessary for these institutions to negotiate the availability and extent of the guarantee with FDIC and their primary regulator.
- Prepayment of term debt instruments expiring between October 14, 2008 and June 30, 2009 will not be permitted in connection with this program.
- Coverage under this program will be provided only until June 30, 2012, even if the underlying obligation matures at a later date.
- As noted above, there are no fees in connection with the program for the first 30 days. After this time, FDIC will collect an annualized guarantee fee in an amount equal to 75 basis points (0.75%) multiplied by the amount of debt guaranteed under the program.
- FDIC recommends that instruments guaranteed under this program are eligible to be delivered as collateral for other borrowings and will coordinate with primary regulators on this point.
Deposit Account Insurance
- Applies to all funds held by FDIC-insured institutions in all non-interest bearing transaction deposit (i.e., demand deposit) accounts until December 31, 2009.
- As noted above, there are no fees in connection with the program for the first 30 days. After this time, FDIC will impose a 10 basis point (0.10%) surcharge on an institution’s current assessment rate. The surcharge will apply to all deposits not otherwise covered by the existing deposit insurance limit of $250,000. Resulting fees will be collected during the normal assessment cycle.
What Does This Mean To You?
If you are an eligible institution, you need to decide whether to remain in either or both components of the program. If you wish to opt out, you must do so before the end of the initial 30-day period of the program. At this point, the only apparent downsides to continued participation are marginally enhanced supervision and payment of the additional guarantee fees. In most cases, these would be outweighed by the direct program benefits as well as the indirect public relations benefits.
If you are, or intend to become, a depositor or unsecured lender to an eligible institution, you need to determine whether the institution will continue to participate in the program.
FDIC Interim Rule on Temporary Increase in Standard Coverage Amount and on Mortgage Servicing Accounts
Maximum Deposit Insurance Raised to $250,000
In a meeting held last Friday, October 10, 2008, the Federal Deposit Insurance Corporation (FDIC) Board of Directors adopted an interim rule with respect to deposit insurance coverage amounts and treatment of funds held in mortgage servicing accounts. The rule, effective October 10, 2008, raises the “standard maximum deposit insurance amount” (SMDIA), 12 C.F.R. 300.1(n), from $100,000 to $250,000 for the period October 3, 2008 until December 31, 2009. This is a conforming change to the temporary adjustment specified in the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343 (October 3, 2008).
Deposit Insurance For Mortgage Servicing Accounts
The same interim rule also adjusts the method of insuring certain funds held in mortgage servicing accounts maintained in a custodial or other fiduciary capacity. Before the amendment, 12 C.F.R. 300.7(d) provided that principal and interest payments held in such accounts would be allocated on a pass-through basis for the interest of each owner (mortgagee, investor or security holder) of such accounts for purposes of computing SMDIA. Given the growth of securitization vehicles involving mortgage loans (including multi-layered structures), the FDIC is concerned about the impact on investors in the event of the failure of an FDIC-insured depository institution. Going forward, 12 C.F.R. 300.7(d) provides that accounts containing such principal and interest payments will be insured “for the cumulative balance paid into the account by the mortgagors, up to a limit of the SMDIA per mortgagor.” Thus, such funds will not be allocated to and aggregated with other deposits of investors OR mortgagors for purposes of SMDIA. Tax and insurance escrow deposits held in mortgage servicing accounts will continue to be allocated on a pass-through basis to individual mortgagors and aggregated with their other deposits for purposes of computing SMDIA.
Click here for a link to the interim rule.
FDIC Deposit Insurance
Recent bank failures across the country have fueled a lot of discussion regarding the safety and security of deposits at financial institutions. Ensuring bank customers that their deposits are safe is key to the health of our banking system. To that end, the FDIC, in their Summer, 2008, issue of FDIC Consumer News (now available online), has published some helpful tips and information regarding FDIC deposit insurance. In addition, this fall, the agency will host free telephone seminars regarding its deposit insurance rules. Listed below are a few key points regarding FDIC deposit insurance coverage:
- Deposits within the FDIC’s insurance limits are safe regardless of the bank’s financial condition.
- The FDIC’s guarantee is ironclad. It has fully paid all insured deposits since its creation in 1933.
- Deposit accounts protected by the FDIC include checking accounts, savings accounts, money market deposit accounts, and certificates of deposit (CD’s).
- Non-deposit products, such as stocks, bonds, and mutual funds, are not protected by FDIC insurance.
- The FDIC’s basic insurance coverage is $100,000 per depositor, per institution. However, individuals may qualify for more than $100,000 of coverage at one insured bank if they own deposit accounts in different “ownership categories,” such as single accounts, joint accounts, certain retirement accounts, and trust accounts. Individual Retirement Accounts (IRAs) are insured for $250,000. By holding accounts in different ownership categories, the maximum FDIC insurance coverage that a married couple could qualify for at one institution is $900,000.
- Consumers wishing to estimate their deposit insurance coverage can access the FDIC’s Electronic Deposit Insurance Estimator by clicking here. A version for bankers is available here.
- When a bank fails, the FDIC provides quick access to insured funds, usually on the first business day after the failure. It is also possible to recover money over the FDIC’s insurance limits, depending upon how much the FDIC recovers by selling the bank’s assets.
What This Means To You
Financial Institutions should take an active role in maintaining customer confidence in the security of their deposits. Customer service personnel should be familiar with FDIC deposit insurance rules, and should be prepared to speak with concerned customers about the safety of their deposits. The FDIC materials referenced above will help financial institutions prepare their employees to handle this task.
For more information about FDIC insurance coverage, call the FDIC toll-free at 1-877-ASK-FDIC, or visit their website at www.fdic.gov. Issues of FDIC Consumer News are available here. More information regarding the FDIC’s telephone seminars can be viewed by clicking here.
