Changes in FDIC’s Temporary Liquidity Guarantee Program – Nov. 21, 2008
On Nov. 21, the FDIC finalized rules for the Temporary Liquidity Guarantee Program, which will fully insure noninterest-bearing deposit transaction accounts and guarantee newly issued senior unsecured debt for participating institutions. The rule’s two components, a Transaction Account Guarantee Program and a Debt Guarantee Program, were instituted on an interim basis on Oct. 14. Institutions must decide by Dec. 5, 2008 whether or not to opt out of either of the two components. Opt out forms are now available on FDICconnect. More than 750 comments on the Interim Rule demonstrate the active interest in the programs. The FDIC took just eight days to consider all of these comments and come up with final revisions. In its letter, ABA suggested that, considering the due haste needed to put the programs in place so quickly, the FDIC should be flexible and make adjustments to improve the program and quickly correct any problems that arise. Some key changes to the final version of the rule include:
Transaction Account Guarantee Program
Coverage expanded to NOW Accounts The full guarantee on noninterest-bearing transaction accounts was expanded to include NOW accounts paying interest up to ½ percent and Interest on Lawyers’ Trust Accounts (IOLTAs). No Aggregation of Accounts Required Banks will not have to aggregate accounts to determine coverage under the program. Only balances over $250,000 in transaction accounts will be covered and assessed, regardless of the account ownership. ABA had urged such a treatment, given the difficulty in aggregating accounts, particularly on such short notice. Public Notice of Participation or Not The rule provides model language for display in bank and branch lobbies and websites to make it clear whether a bank is participating in the program or not. ABA had requested that non-participants not be required to publicize this election. Further, counter to ABA’s recommendation, the FDIC website will list all participants and non-participants in both programs.
Debt Guarantee Program
FDIC to Guarantee Timely Payment of Interest and Principal FDIC will assure timely payment if a participating issuer defaults in making payments (“triggered by an uncured payment default”). Concern had been raised as to whether the FDIC would only pay if the issuer is in bankruptcy and ABA raised questions about comparability. Fed Funds Less than 30 Days Excluded Senior unsecured debt of up to 30 days maturity, including federal funds, will not be included in the guarantee program – nor will they be assessed. ABA had suggested this change. . Tiered Pricing for Guaranteed Debt Adopted As ABA suggested, a general 75 b.p. guarantee fee was replaced with tiered pricing: 50 basis points for debt with a maturity of up to 180 days, 75 b.p. for 181 to 364 days, and 100 b.p. for longer maturities.
Higher Fees for Holding Companies Not Principally in Banking The FDIC will “impose modestly higher fees [an extra 10 b.p.] on all non-insured depository institutions within a holding company structure where the insured depository institutions present less than 50 percent of consolidated assets.” Expanded Limits on Amount Guaranteed The rule provides that a participating institution can issue guaranteed debt up to 125 percent of its total senior unsecured debt (excluding debt to affiliates) outstanding as of Sept. 30, 2008 and scheduled to mature by June 30, 2009. For banks (but not holding companies) that had no qualifying debt at the end of September, “an alternate debt guarantee limit of two percent of total liabilities” was provided. ABA requested this change. Use of the Holding Company Limit The amended rule permits a bank “to combine its debt guarantee limit with that of its parent holding company/companies” ABA requested this change to allow greater flexibility for use of the guarantee within a holding company. Standard Disclosures “The Final Rule prescribes uniform disclosures that participating entities must include in written materials underlying senior unsecured debt issued after Dec. 19, 2008, through June 30, 2009, which clearly indicate whether the debt is or is not guaranteed under the debt guarantee program.” ABA had requested a “commercially reasonable” standard for disclosures. Capital Risk-Weight not Reduced to Reflect Guarantee Contrary to ABA’s recommendation, the FDIC elected not to propose for consideration by all the regulators that the risk weight for guaranteed debt got to zero percent in risk-based capital calculation. Subsidiary Decisions Cannot be Different for Entities Within a Holding Company ABA requested that banks within a holding company be allowed to make different elections with respect to opting out of either program. The FDIC decided not to make this change. Banks Cannot Choose Whether to Issue Guaranteed or Non-Guaranteed Debt ABA recommended that a participating institution be allowed to issue either guaranteed or nonguaranteed debt. “The FDDIC has decided, for several reasons, not to alter the rules governing an entity’s authority to issue non-guaranteed senior unsecured debt.” If a bank does not opt out of the Debt Guarantee Program, then by Dec. 5 it must notify the FDIC via FDICconnect of the aggregate balance of the senior unsecured debt outstanding as of Sept. 30, 2008 that was scheduled to mature before July 2009. Also if a bank does not opt out of the Debt Guarantee Program but intends to retain the ability to issue senior unsecured debt that is not covered by, or assessed on, the Program, it must notify the FDIC of this selection before Nov. 13. (Note, a fee will be assessed for this selection.) For more information, contact the ABA’s Rob Strand, rstrand@aba.com, 202.663.5350.