FDIC Temporary Liquidity Guaranty Program: Highlights for Financial Institutions

On Oct. 14, 2008, the FDIC announced the Temporary Liquidity Guaranty Program, or the Program, which is one of several recent government initiatives designed to improve the strength of financial institutions and enhance market liquidity.¹ While the long term impact of the Program remains unknown, all “eligible institutions” (as described in this advisory) are already subject to the Program on an interim basis and each eligible institution must determine whether to opt out of the Program on or before Nov. 12, 2008. This advisory will briefly summarize the major aspects of the Program.

The guarantees

The Program is composed of two distinct guarantees: a guarantee of newly issued senior unsecured debt of eligible institutions, the Debt Guarantee, and a guarantee of all non-interest bearing deposit accounts of FDIC depository institutions, the Deposit Guarantee. Four types of institutions are “eligible institutions” subject to the Program: 1) FDIC insured depository institutions, 2) bank holding companies, 3) financial holding companies, and 4) certain savings and loan holding companies.² Subsidiaries and affiliates of eligible institutions are not covered by the Program, unless they independently satisfy the definition of “eligible institution.”

The Debt Guarantee is intended to increase liquidity by helping eligible institutions to roll existing debt that is scheduled to mature before the beginning of the third quarter of 2009. Accordingly, the FDIC will guarantee the newly issued senior unsecured debt issued by an eligible institution. For the purposes of the Program, the FDIC defines senior unsecured debt broadly to include traditional promissory notes, commercial paper, inter-bank funding (including Fed Funds) and unsecured portions of secured debt (for example, a repurchase facility to the extent it is not secured).

However, there are a number of limits under the Debt Guarantee. First, the Debt Guarantee covers only debt issued between Oct. 14, 2008, and June 30, 2009. Second, the Debt Guarantee does not cover secured debt, subordinate debt or deposit liabilities. Third, the Debt Guarantee for each institution is limited to an amount equal to 125 percent of the amount of that institution's outstanding senior unsecured debt as of Sept. 30, 2008.³ Fourth, the Debt Guarantee lasts only until June 30, 2012, so debt issued with a longer tenor will only be guaranteed for part of its term. Finally, the FDIC will not guarantee debt issued to replace pre-paid debt that was scheduled to mature after June 30, 2009.⁴

The Deposit Guarantee provides an unlimited guarantee of funds held in non-interest-bearing deposit accounts until Dec. 31, 2009 (the same date that the temporary increase of the deposit insurance limit to $250,000 per depositor provided under the Bailout Bill is scheduled to expire). The Deposit Guarantee is aimed at preventing the flight of commercial accounts (such as payroll processing accounts) from smaller institutions and thus may be of particular benefit to certain community banks.

Guarantee period and opt outs

Both the Debt Guarantee and the Deposit Guarantee began applying to all eligible entities, without fees, on Oct. 14, 2008, and such initial coverage will last for 30 calendar days, until November 12. Institutions that do not wish to continue to participate in either or both parts of the Program must affirmatively opt out by contacting the FDIC on or before Nov. 12. Opt outs will not be permitted after Nov. 12. The formal requirements of opting out of the Program have not yet been elaborated by the FDIC.⁵ If an institution opts out of one or both parts of the Program, the automatic guarantees will expire on Nov. 12, 2008. At this time, it is not clear whether an institution that remains in the Debt Guarantee portion of the Program will be permitted to elect to have the Debt Guarantee not apply to a particular debt issuance.

Fees

The FDIC has waived all fees for the first 30 days of the Program. After Nov. 12, the following fees will be imposed on a going-forward basis:

• For eligible senior unsecured debt, an annualized fee of 75 basis points multiplied by the amount of debt guaranteed under the Program.
  
  
• For non-interest bearing deposit accounts, a 10 basis point fee will be applied to amounts in excess of $250,000 (the new, temporary deposit insurance limit).

If the fees collected under the Program do not cover the FDIC's losses under the Program, then the FDIC will collect a special assessment under the systemic risk exception of the FDIC Improvement Act of 1991⁶ to make whole the Deposit Insurance Fund. This special assessment would be levied on all eligible institutions, regardless of whether the institution opted out of either of both portions of the Program.

Conclusion

Each eligible institution must decide on or before to Nov. 12, 2008, whether to affirmatively opt out of either portion of the Program. Institutions that participate either part of the Program will be required to pay the fees set forth above and will also be subject to enhanced FDIC oversight to prevent rapid growth or excessive risk-taking, although the FDIC has not yet specified the form of such enhanced oversight. Given the hastiness with which the Program was put together by the FDIC, we expect the FDIC to provide updates on an ongoing basis; we anticipate that an interim final rule will be issued by the FDIC shortly after the Oct. 23 meeting of the FDIC Board of Directors.⁷

FOOTNOTES

1 Other major government actions include the so-called “Bailout Bill” signed into law by President Bush on Oct. 3, 2008 (the Emergency Economic Stabilization Act of 2008, H.R. 1424, 110 th Cong. 2 nd Ses. (2008)), which created the Troubled Assets Relief Program, or TARP, and the Treasury's plan to invest $250 billion into certain eligible banks.

2 Only savings and loan holding companies that engage only in activities that are permissible for financial holding companies to conduct under Section 4(k) of the Bank Holding Company Act (12 U.S.C. Section 1841 et seq.) are “eligible institutions” under the Program.

3 The FDIC will consider on a case-by-case basis the possibility of providing a guarantee to an eligible institution that had no outstanding senior unsecured debt on Sept. 30, 2008.

4 It is not clear how the FDIC will police the Program to prevent eligible institutions from using the Debt Guarantee, which is intended only to ease short-term liquidity problems, to replace later-maturing debt with FDIC guaranteed debt. Presumably the FDIC will issue interpretive guidance on this point at a future date.

5 It is anticipated that the opt-out form will be made available early in the week of Oct. 27 through the “FDIC Connect” portal.

6 12 U.S.C. Section 1823(c)(4)(G).

7 The FDIC has a special Web page covering the Program, including answers to frequently asked questions and archived copies of a series of FDIC technical briefings concerning the Program. The address is www.fdic.gov/regulations/resources/TLGP/index.html.