Summary of the FDIC’s Guaranteed Secured Debt Program
The FDIC is expanding its Temporary Liquidity Guarantee Program (TLGP) by adding a third component – guarantee of long-term secured debt. The other two components of the TLGP are the guarantee of unsecured debt and unlimited deposit guarantees for non-interest bearing transaction accounts. Here are the details of the program as ABA understands them: (1) This program provides an FDIC guarantee of secured debt with maturities up to 10 years. It is similar to a covered bond issuance where securities issued are backed by a specific pool of assets; FDIC guarantees performance; the pool is over-collateralized and is “dynamic,” meaning that the collateral can be replaced with other assets over the life of the security. (2) It is a new program under the TLGP program (joining the unsecured debt program and the non-interest bearing transaction guarantees). As it is an extension of this program, the FDIC determined that it did not have to make a separate systemic risk exception for it. (3) The FDIC Board will issue an Interim Final Rule for this at its meeting on January 27, 2009. There will be short comment period on it and ABA will be commenting. FDIC can issue guarantees under the interim rule as presented, even if changes are made based on public comment. (4) Institutions interested in issuing this debt must apply to the FDIC for approval. The program is for healthy, viable banks. (5) The FDIC believes that they have very little credit risk. There is no set over-collateral requirement, but the expectation is that there would be enough over-collateral to give FDIC super-senior AAA protection. (6) The deadline for issuance is the same as for the unsecured guaranteed debt – June 30, 2009. The cap of 125 percent of existing/qualifying debt remains, i.e., the aggregate of debt under both the unsecured and secured guarantee program cannot exceed 125 percent of debt as of September 30, 2008. (7) FDIC expects to price this guarantee at 25 – 50 basis points (perhaps higher), depending on the evaluation of credit risk. (8) There are no specifics on what collateral will be pledged. There may be a requirement that new loans made over some time period be included in order to stimulate lending.