Deadline for Filing Election Forms for the Temporary Liquidity Guarantee Program is this Friday, December 5, 2008

December 2, 2008 at 3:54 pm Leave a comment

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.

Because the decision to opt out of either component of the TLGP is irrevocable, each financial institution should carefully consider the costs and benefits of the program.  Regardless of the institution’s ultimate opt-out decision, the Election Form must be filed on or before this Friday, December 5, 2008

FDIC’s TAG Program
The TAG Program provides a temporary guarantee for funds held at FDIC-insured depository institutions in non-interest bearing transaction accounts above the existing deposit insurance limit.  The coverage became effective on October 14, 2008, and will continue through December 31, 2009.  The primary details of the TAG Program include the following:

  • Accounts Covered – The Final Rule defines “Non-interest bearing transaction accounts” as an account maintained at an FDIC-insured depository institution on which interest is neither accrued nor paid.  Unlike the interim rule, the Final Rule’s definition of non-interest bearing accounts includes IOLTAs and NOW accounts paying less than .50% interest. 
  • Program Costs – Participants in the TAG Program will be assessed 10 basis points on non-interest bearing transaction account balances in excess of $250,000.  
     
  • Disclosures – Participants in the TAG Program must prominently disclose in writing at all branches the financial institution’s decision to participate in or opt out of the TAG Program by December 19, 2008.  A copy of the disclosure language can be accessed here by clicking on the text of the Final Rule.  (NOTE: This disclosure requirement applies to all FDIC-insured banks, including those that opt out of the TAG Program).

FDIC’s Debt Guarantee Program
Through the DGP, the FDIC guarantees newly-issued senior unsecured debt issued by a bank or a bank holding company.  More specifically, upon the uncured failure of a bank to make a timely payment of principal or interest under an FDIC-guaranteed debt instrument, the FDIC—pursuant to the DGP—will pay the unpaid principal and interest. The Final Rule sets forth the following details about the DGP: 

  • Debts Covered – The Final Rule’s definition of senior unsecured debt includes commercial paper, unsecured promissory notes and CDs issued to other banks.  The term does not include fed funds and other debt with a maturity date of 30 days or less.  
     
  • Program Duration – The guarantee applies to newly issued debt and expires on the earlier of the debt’s maturity date or June 30, 2012, whichever arrives first.  
     
  • Use of Debt Proceeds – Without the FDIC’s prior approval, a financial institution cannot use the proceeds of debt guaranteed by the DGP to prepay a debt that is not FDIC-guaranteed or to issue debt to insiders or affiliates. 
  • Fees – The fee charged by the FDIC for covering a specific debt depends on the maturity date of the debt:
    • 50 basis points for debts maturing in 180 days or less;
    • 75 basis points for debts maturing in 181 to 364 days; 
    • 100 basis points for debts that mature in 365 or more days.
       
  • Quantity – The guarantee covers 125% of a financial institution’s senior unsecured debt outstanding on September 30, 2008.  To determine the amount of debt that will be covered, any financial institution that does not opt out of the DGP must report on its Election Form the amount of its outstanding senior unsecured debt as of September 30, 2008 that is scheduled to mature on or before June 30, 2009.  If a bank or bank holding company had no such debt outstanding on that date, the FDIC will guarantee up to 2% of its consolidated liabilities as of that date, provided that the guaranteed debt is issued at the bank level. Also, a financial institution must obtain the FDIC’s prior approval before exceeding the guarantee cap. Any financial institution that exceeds the guarantee limit without first obtaining the FDIC’s approval will have its guarantee fee increased by 100 basis points and may be subject to regulatory enforcement action.  
     
  • Disclosure Requirements – Any financial institution issuing debt covered by the DGP must include a disclosure on its debt instruments stating whether the debt represented by the instrument is guaranteed under the DGP.  The exact language to be included on the instrument can be found here.  
     
  • Master Agreement – Any financial institution participating in the DGP must agree to be bound by and comply with the terms of a “Master Agreement,” which can be accessed here

Entry filed under: Client Alerts, FDIC.

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