FDIC Temporary Liquidity Guarantee Program

October 17, 2008 at 4:16 pm Leave a comment

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.

Entry filed under: Client Alerts, FDIC.

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