Over the last several weeks, we have had further conversations with clients and the FDIC regarding the details of the Debt Guarantee Program under the FDIC’s Temporary Liquidity Guarantee Program. In the course of these conversations, we have noticed a misunderstanding of several key components of the program.
- Lines of Credit are not Senior Unsecured Debt. Under the regulations, senior unsecured debt must have “a specified and fixed principal amount.” (12 CFR 370.2(e)(1).) As a result, lines of credit are not eligible for an FDIC guarantee, and should not be included in calculating the amount of senior unsecured debt outstanding at September 30, 2008.
- 2% of Liabilities Test is Only Available for Depository Institutions. If a bank holding company had no “senior unsecured debt” outstanding at September 30, 2008 (and remember that lines of credit are not included), then its maximum amount of guaranteed debt that can be issued is zero. Only depository institutions themselves (and not their parent entities) can take advantage of the alternative cap of 2% of the total liabilities outstanding as of September 30, 2008.
- Approvals to Establish or Increase a Debt Guarantee Cap will be “Very Rare.” The regulations provide a process for entities to establish or increase a debt guarantee cap. However, we understand that all applications go to the highest levels of the FDIC in Washington DC, and there face high levels of scrutiny. No timeframe has been provided, but given the level of scrutiny and DC review, bottlenecks are virtually guaranteed to develop. We understand that the FDIC has lots of applications currently in the system, but the FDIC believes that approvals will be “very rare.”