FDIC Temporary Liquidity Guarantee Program Deadline Looms - by Will Taylor for WIB Liquidity Management Workshop
Thoughts for banks to consider when assessing the impact of TLGP
December 5 is the deadline for banks to elect to opt-out or to remain in the FDIC’s Temporary Liquidity Guarantee Program (TLGP). After being initially introduced in October, the TLGP was revised with the FDIC Board’s adoption of the final rule on November 21. The objective of this research report is to identify some of the issues to consider and resources which may answer further questions. We are aware of a number of misconceptions which have formed in the minds of advisors, attorneys, brokers, and banks about the program. Banks must investigate the issues which may potentially impact their institutions. The TLGP is divided into two separate programs which are stand-alone. A bank may opt-out or remain in each of these two programs independently: · The TLGP transaction account guarantee program offers unlimited insurance for certain transaction accounts, including NOW accounts and other transaction accounts which pay interest equal to or less than 0.50%. The TLGP debt guarantee program which offers FDIC guarantees to certain unsecured debt (as defined by the FDIC, including certain CDs to other financial institutions). The debt guarantee specifically excludes obligations maturing in less than 30 days, including short-term Fed Funds.
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Note: The TLGP programs are totally unrelated to the Treasury’s TARP Capital Purchase Program. Because of the modest cost of the transaction account program (10bp), we expect most banks to remain in this program. The FDIC’s TLGP website contains the final rule, FAQ, and more information helpful in assessing the impact of the transaction account guarantee program.
TLGP Debt Guarantee Program
The TLGP debt guarantee program offers FDIC coverage of certain unsecured debt issued by banks and/or bank holding companies. This is completely separate and does not relate to either the automatic higher deposit insurance coverage or the optional TLGP transaction account guarantee program. Following is a brief summary of the terms of the TLGP debt guarantee program: · Eligible issuers include both banks and bank holding companies. The issuance limits of a bank and a bank holding company may be combined for debt issuance at the bank level. Issuance limits are as follows: o 125% limit - The maximum amount of outstanding debt that is guaranteed under the debt guarantee program for each participating entity at any time is limited to
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125 percent of the par value of the participating entity’s senior unsecured debt, as that term is defined in § 370.2(e)(1)(i), that was outstanding as of the close of business September 30, 2008 and that was scheduled to mature on or before June 30, 2009. o Alternative limit for institutions with no unsecured debt (or only Fed Funds) outstanding at September 30, 2008 – the debt guarantee limit is two percent of the institution’s consolidated total liabilities as of September 30, 2008. o Request for approval for non-insured institutions – A participating entity (other than an insured depository institution – for example, a holding company) can request to have some amount of debt covered by the debt guarantee program. The FDIC, after consultation with the appropriate Federal banking agency, will decide, on a case-by-case basis, whether such a request will be granted and, if granted, what the entity’s debt guarantee limit will be. o Exceptions – The FDIC can make exceptions to the issuance limit of any participant in the program, either increasing or decreasing the entity’s issuance limit. · Senior unsecured debt o Is evidenced by a written agreement or trade confirmation; o Has a specified and fixed principal; o Is noncontingent and contains no embedded options, forwards, swaps, or other derivatives; and o Is not, by its terms, subordinated to any other liability. o Has a stated maturity of more than 30 days.
Examples of senior unsecured debt include: · · · · · Federal funds purchased maturing in over 30 days; Promissory notes; Commercial paper; Unsubordinated unsecured notes, including zero-coupon bonds; U.S. dollar denominated certificates of deposit owed to an insured depository institution, an insured credit union as defined in the Federal Credit Union Act, or a foreign bank
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U.S. dollar denominated deposits in an IBF of an insured depository institution owed to an insured depository institution or a foreign bank, and U.S. dollar denominated deposits on the books and records of foreign branches of U.S. insured depository institutions that are owed to an insured depository institution or a foreign bank.
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Examples of debt excluded from the program include: · · · · · · · · · · Any obligation with a stated maturity of "one month"; Obligations from guarantees or other contingent liabilities; Derivatives; Derivative-linked products; Debts that are paired or bundled with other securities; Convertible debt; Capital notes; The unsecured portion of otherwise secured debt; Negotiable certificates of deposit; Deposits denominated in a foreign currency or other foreign deposits (except those otherwise permitted in the rule); Revolving credit agreements; Structured notes; Instruments that are used for trade credit; Retail debt securities; Any funds regardless of form that are swept from individual, partnership, or corporate accounts held at depository institutions; Loans from affiliates, including parents and subsidiaries, and institution affiliated parties.
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Fee Schedule Following is the fee schedule for debt covered under the program:
For debt with a maturity of: The annualized assessment rate (in basis points) is: 180 days or less 181-364 days 365 days or greater 50 75 100
Deciding to Opt-Out or Remain In the TLGP Debt Guarantee Program
Before deciding whether to opt-out or remain in the TLGP Debt Guarantee Program, banks must evaluate the advantages (including potential debt issuance opportunities) and disadvantages (including potential costs on guaranteed debt). Following are some considerations
Identifying Existing Unsecured Debt
Remember that the guarantee only applies to and the fee is only assessed on newly issued, guaranteed debt. It appears as if the operative date for “newly issued” is October 14, 2008; however, the FDIC’s fee for the program is only retroactive to November 13, 2008. While most banks and bank holding companies will be able to identify their guaranteed debt with ease, there is one notable exception requiring special attention. Since many banks do accept deposits, evidenced by non-negotiable Certificates of Deposit, from other banks, credit unions, or foreign banks, it is important to review such activities as they may qualify as guaranteed debt under the TLGP program and be subject to the fee. Unlike the interim rule introduced in October, the final rule includes “U.S. dollar denominated certificates of deposit owed to an insured depository institution, an insured credit union as defined in the Federal Credit Union Act, or a foreign bank”. The FDIC, however, has clarified through their FAQ document on the TLGP that fees will only be assessed to the extent that those deposits exceed the insured deposit limit (currently $250,000). The debt guarantee excludes debt issued to another bank “as agent”. This designation is important for participants in the CDARS program. The FDIC has a specific Q&A on CDARS deposits which notes that “if a bank owns CDs placed through the CDARS network solely in its own capacity and not as agent, the CD would be eligible to be guaranteed under the Temporary Liquidity Guarantee Program. However, if the bank holds the CD as agent for its customer, it would not be eligible.” Banks that issue CDs through QwickRate and other sources often issue non-negotiable CDs to banks and credit unions; however, we understand that the vast majority of such
deposits are under the insured deposit limit. To the extent that they exceed the insured deposit limit, the TLGP debt guarantee program could well apply.
Keeping Within Debt Limits
The TLGP debt guarantee program has specific limits on the amounts that banks can issue under the program and banks have limited options (which do involve a fee) to issue unguaranteed debt which would otherwise qualify under the debt guarantee program. For example, if a participating bank wanted to issue any of the following on an unguaranteed basis, it would have to specifically arrange for the issuance through the FDIC and pay a fee (despite the fact that the debt would not be guaranteed): 1. A two-year CD to another bank over the insured deposit limit 2. Three-year medium term notes (MTNs) 3. Other types of senior unsecured debt which normally would be covered under the program
Issuing Unguaranteed Debt
Going forward, institutions who participate in the debt guarantee program will want to avoid paying the guarantee fee except when issuing guaranteed debt that can be done at attractive rates, including consideration of all issuance costs including the guarantee fee. While not all banks will have the same flexibility, it is important to remember that there are numerous borrowing / funding options which are not subject to the debt guarantee fee, including (1) FHLB advances, repos, and other secured borrowings and (2) negotiable brokered CDs (most brokered CDs including all which are issued in DTC form are negotiable).
Issuing Guaranteed Debt
Many community banks have looked at the debt guarantee program and asked: How could it make sense for our bank to issue guaranteed debt? While community banks have generally not been able to issue MTNs or other unsecured debt covered under the debt guarantee program at reasonable costs, it is possible that the TLGP debt guarantee program could facilitate such issuance. Today, other options including brokered CDs and FHLB advances are noticeably cheaper for banks to issue than TLGP guaranteed MTNs. The issues which have been brought to market so far have been from very large bank holding companies (such as Goldman, Morgan Stanley, Bank of America, JP Morgan, and others). Holding companies do not have access to the same funding sources that banks can tap including those less-expensive brokered deposits and FHLB advances. Those issuers, unlike most community banks, have unsecured debt at the holding company level and had room within their 125% limit set under the TLGP program.
Note that if, as of September 30, 2008, a holding company had no qualifying unsecured debt at the holding company with maturities between September 30, 2008 and June 30, 2009, it would not have an ability to issue guaranteed debt at the holding company level unless it obtained a specific exception from the FDIC. While the guaranteed debt options are not currently price-competitive with other options at the bank level, that could change in the coming months, possibly allowing institutions to borrow unsecured, three-year debt at attractive levels. Within the issuance limits, options that banks and bank holding companies might be able to utilize include the following: 1. Direct MTN issuance – probably only an option for those issuing $10-20mm or more. 2. Pooled MTN issuance – a viable option which could work for issues as small as $25mm. 3. MTN or promissory note issuance to institutional investors known by the institution such as companies in the community, public funds, and other buyers of debt who are known directly by the issuing institution. For more information on issuance options, contact your account representative.
TLGP vs. TARP CPP
Some banks asked whether TLGP guaranteed debt issuance might be an alternative to the TARP Capital Purchase Program. The general answer is NO as the TLGP debt is a source of funds while the TARP CPP is a source of capital. It is possible for a small bank holding company (defined loosely as those with total consolidated holding company assets under $500 million) to take on debt, downstream the proceeds to the bank as paid-in capital, and, as a result, generate capital for the bank at a tax-deductible, attractive rate. In addition to some regulatory restrictions, there are several reasons why this scenario may not present an option for banks to boost capital using TLGP debt instead of TARP capital: 1. Issuing guaranteed debt at the holding company level requires that the holding company have such authority under the program. Note that if, as of September 30, 2008, a holding company had no qualifying unsecured debt at the holding company with maturities between September 30, 2008 and June 30, 2009, it would not have an ability to issue guaranteed debt at the holding company level unless it obtained a specific exception from the FDIC. 2. There are fairly restrictive limits on banks paying dividends to the holding company. In general, those dividends are the way that the holding company would pay interest and the principal on the debt taken on at the holding company. 3. While some might assume that the debt that comes due in three years at the holding company could be replaced with other debt or stock issuance in a, presumably, more
favorable market, it is risky to have such a firm deadline set just a few years from now when the holding company would have to borrow or recapitalize in order to avoid defaulting.
For more information: Contact Will Taylor wtaylor@viningsparks.com William M J Taylor Director Portfolio Management Group Vining Sparks 0ffice 800-786-1282 Cell 901-832-7898 530 Oak Court Drive Suite 245 Memphis, TN 38117
Additional details are available from the FDIC’s Temporary Liquidity Guarantee Program website which contains a number of documents including the text of the final rule and a comprehensive FAQ page.
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