The FDIC Deposit Insurance Fund (the “Fund”) is supported by assessments levied by the FDIC on individual banks. After experiencing above normal outflows from the Fund due to the recent spate of bank failures, the FDIC recently required banks to prepay three years’ worth of premiums in order to restore its financial strength.  While the Fund has been running a negative balance on an actuarial basis for several quarters, the FDIC projected that the Fund would have a positive balance by the end of the second quarter.

At the end of the first quarter (the last date for which information is currently available), the Fund’s liquid assets, cash and marketable securities, totaled $45.5 billion. In addition, the FDIC has a $100 billion committed line of credit from the US Treasury as a backstop. We do not anticipate that the FDIC will have any problems meeting its obligations to cover any covered losses in insured deposit accounts.

The FDIC is an independent agency of the United States government.  Both the FDIC and the Fund are paid for by the banking industry, and not from the U.S. taxpayers. A default by the U.S. government on its obligations will have no impact on the FDIC or the FDIC Deposit Insurance Fund. Since 1933, no depositor has ever lost a single penny of FDIC-insured funds.

In the months since the FDIC issued its final rule, we have observed some confusion in the banking industry as to exactly what kinds of accounts will be considered to be “noninterest-bearing transaction accounts.” It is not the case, as some seem to have believed, that the definition covers only accounts offered to businesses. Consumer accounts can qualify for the unlimited deposit insurance, if properly structured. For some banks, this may mean a change to their existing deposit agreement terms.

FDIC regulation now defines “noninterest-bearing transaction account” as any deposit or account maintained at an FDIC insured bank or other depository institution with respect to which all three of the following are true:

(i) no interest may be paid or accrued on the account;

(ii) the depositor must be able to make withdrawals by using a negotiable or transferable payment instrument, payment order of withdrawal, telephone or other electronic media, or other similar items for the purpose of making payments or transfers to third parties; and

(iii) The depository institution may not reserve the right to require advance notice of intended withdrawal.

The FDIC has stated that the account may be held by a business, an individual, or other type of depositor. If your bank wants to offer accounts that meet this definition, here are the things to remember:

A. Noninterest-Bearing. Whether an account is noninterest-bearing depends on the terms of the account and not by the fact that the rate on the account at any point in time, or for certain balances for example, might be zero percent. The account will be treated as “interest-bearing” for all time (and thus not eligible for this program) if it could ever earn interest.

B. Demand Deposit. The account must allow for an unlimited number of deposits and withdrawals at any time. Money market demand accounts would not qualify, for example, due to the 6-withdrawals per month limitation imposed by Regulation D.

C. No Requirements for Advance Notice of Withdrawals. The final requirement is that the bank cannot reserve the right to require advance notice of withdrawals. Banks often reserve the right in deposit agreements to require not less than 7-days’ prior notice of any intended withdrawal. Banks typically do this to ensure that the account is not a “transaction account” for purposes of the Regulation D requirements. However, if you reserve this right for the account, then the account will not qualify for the unlimited FDIC insurance.

Some banks uniformly reserve this 7-day advance notice requirement for most or all of their deposit accounts simply as a matter of course. If you want to offer accounts that qualify for the unlimited insurance, you will need to ensure that your deposit agreements are modified to eliminate this requirement if doing so is otherwise consistent with your goals. However, if your bank eliminates this requirement, you also should confirm that the bank is properly reserving for the account under Regulation D.

We also should note that NOW accounts (negotiable order of withdrawal accounts), regardless of the interest paid, will not qualify for the unlimited FDIC insurance. Banks typically structure accounts as NOW accounts so that they could pay interest on the accounts without violating Regulation Q. However, because Regulation Q (and the underlying statute) will be repealed effective July 21, 2011, the NOW account structure will no longer be needed for Regulation Q purposes. This may allow your bank more flexibility in structuring accounts to qualify for the unlimited deposit insurance.

Finally, if your bank offers prepaid cards to consumers, those accounts can qualify for the unlimited FDIC insurance if the account terms are consistent with the three requirements – payable on demand, noninterest-bearing, and no requirement for the cardholder to provide the bank with advance notice of an intended withdrawal. Most prepaid cards issued by banks already satisfy these requirements, with the possible exception that banks have sometimes reserved the right to require 7-days advance notice of withdrawals.

Should you have any questions on this Dodd-Frank unlimited deposit insurance program, please contact:

John ReVeal
Bryan Cave LLP
1155 F Street NW
Washington, DC 20004
(202) 508-6395
john.reveal@bryancave.com

Recognizing that the interest paid on IOLTAs were used by States to support legal aid for low-income individuals, Congress passed (on December 22, 2010), and the President signed (on December 29, 2010), H.R. 6398, which amended the Federal Deposit Insurance Act to define noninterest-bearing transaction accounts to include IOLTAs.  The FDIC noted the potential for this Congressional action in its final rules adopted November 9, 2011, implementing the unlimited insurance coverage for noninterest-bearing transaction accounts, and provided that it would act quickly to notify depository institutions on how to react to the change.

Prior to year-end, the FDIC notified depository institutions that they were not required to send individual notices to IOLTA customers that such funds would not longer be provided with unlimited insurance, and that any institutions that had previously provided such notice were encouraged, but not required to, provide a revised notice advising that IOLTAs will receive unlimited insurance coverage as noninterest-bearing transaction accounts for two years ending December 31, 2012.

The FDIC’s revised final rule also provided new language for the posted notice required by 12 CFR Part 330.16.  Accordingly, all depository institutions that offer noninterest-bearing transaction accounts are required, no later than February 28, 2011,  to post prominently the following notice in the lobby of its main office, each domestic branch and, if it offers internet-based deposit services, on its website, the following notice:

All funds in a “noninterest-bearing transaction account” are insured in full by the Federal Deposit Insurance Corporation from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules.

The term “noninterest-bearing transaction account” includes a traditional checking account or demand deposit account on which the insured depository institution pays no interest. It also includes Interest on Lawyers Trust Accounts (“IOLTAs”). It does not include other accounts, such as traditional checking or demand deposit accounts that may earn interest, NOW accounts, and money-market deposit accounts.

For more information about temporary FDIC insurance coverage of  transaction accounts, visit www.fdic.gov.

Banks participating in the pilot program must offer electronic deposit accounts having the core features identified in the “Model Safe Accounts Template.” The pilot program is expected to last one year, during which participating banks would report to the FDIC on the viability of the accounts, focusing on the volume, use, success and profitability of the accounts.

In its announcement for the pilot program, the FDIC emphasizes the numbers of unbanked and underbanked consumers in the United States and the FDIC’s commitment to ensuring that all U.S. households have access to safe and affordable banking services. Unless banks participating in the pilot report significant and serious losses, there seems to be a real possibility that all banks will be coerced in one way or another to offer these accounts after the program. This post discusses the proposed features of the accounts and the possible difficulties.

Electronic, Checkless Accounts

Under the pilot program, the accounts would be “largely” electronic, purportedly for the purpose of limiting acquisition and maintenance costs. The transactional accounts also would be checkless, allowing withdrawals only through electronic means.

Because the accounts would be checkless, institutions will have somewhat more ability to prevent losses from overdrafts than they otherwise would have. On the other hand, all banks know that it is impossible to block every electronic transaction that results in an overdraft. Moreover, under at least the pilot program, banks would be expected not to impose any overdraft or insufficient funds fees. With consumers having absolutely no economic incentive to avoid overdrafts, it can be expected that banks will incur losses.

Very Low Fees

Monthly maintenance fees for the transactional accounts under the pilot program would be limited to $3, and the bank would not be able to charge any monthly fees for the savings accounts. The minimum monthly balance requirement for the account would be only $1, and it seems safe to assume that the target consumer market for these accounts is unlikely to maintain any significant average daily balances.

The FDIC states the goal of developing “sustainable product offerings” through the pilot program. It is hard to see how a transactional account with these minimal monthly fees, no overdraft fees, and no real expectation of any significant balances could ever be sustainable except by passing the costs on to mainstream consumers.

Stricter Requirements for Paper Statements

There will be no meaningful difference from the consumer’s perspective between the proposed transaction accounts and prepaid cards. In both cases, the account is checkless, withdrawals can be made only electronically, and funds can be spent only after being deposited to the issuer of the account.

However, for the transaction accounts under the pilot program, a bank would be required to provide paper statements unless the consumer consents to electronic statements. These rules for transaction accounts are consistent with existing Electronic Fund Transfer Act regulations applicable to traditional deposit accounts. In contrast, general purpose prepaid cards are not subject to the Electronic Fund Transfer Act and, for those “payroll cards” that are subject to the Act, the issuer is required to provide a paper account history only upon the consumer’s specific request.

For these reasons, it may be more advantageous for a bank to offer prepaid accounts rather than the transaction accounts as proposed by the FDIC, at least for now. But it should be noted that Congress and the bank regulators are busily adding or proposing new regulation of prepaid cards. The regulatory distinctions between prepaid cards issued by banks and traditional deposit accounts offered by banks may be rapidly disappearing.

Expectations After The Pilot Program

As we have seen time and time again, when a regulator issues guidance or best practices suggestions, the guidance soon becomes de facto law. For a recent example, banks throughout the country are currently embroiled in class actions that essentially are based on claims that the banks’ overdraft practices are unfair and deceptive to the extent those practices are inconsistent with regulatory guidance or best practice suggestions.

The FDIC’s announced aim under the program is for banks to develop a “sustainable” product. If the product is adopted by any number of banks after the pilot, those who conclude that they cannot afford to do so may find themselves subject to accusations of deposit-account “redlining” or other impermissible discrimination.

At the very least it seems likely that bank regulators will come to expect banks to offer the product after the FDIC concludes that it is sustainable. And the FDIC is almost certain to reach that conclusion. Because participation in the pilot is voluntary, many of the banks that sign-up might have already concluded that the product could work for them given their overhead, location, and prospective customer base. When those self-selecting banks report success, bank regulators could extrapolate from those few to the industry and conclude that what is good for one bank is good for all.

Assessments for 4th Quarter 2009 and all of 2010-2012 Due December 30, 2009

The proposed rule would require insured institutions to prepay on December 30, 2009, an estimated quarterly risk-based assessments for the 4th quarter of 2009 and for all 2010, 2011, and 2012. If the proposed rule is adopted, an institution’s assessment will be calculated by taking the institution’s actual September 30, 2009 assessment and adjusting it quarterly by an estimated 5 percent annual growth rate through the end of 2012. Further, the FDIC will incorporate the uniform 3 basis point increase effective January 1, 2011.

The FDIC will continue to provide quarterly statements showing the actual amount of assessment owed and reflecting a reduction of the amount of prepayment “credit” applied to the amount due. If the FDIC has underestimated the amount of the prepaid assessment when compared to the actual assessment due, or factors change that would increase the assessment during the period in which the prepayment is applied, the institution will be required to pay quarterly assessments as usual once the prepaid assessment is exhausted. If, however, the FDIC has overestimated the amount of assessment due, or factors change that would decrease the assessment due during the period in which the prepayment is applied, the institution will be entitled to a refund of any overpayment not exhausted by December 30, 2014.

Accounting for the Prepaid Assessments

The FDIC has indicated that each institution would record the entire amount of its prepaid assessment as a prepaid expense, an asset on its balance sheet, as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, each institution would record an expense, or a charge to earnings, for its quarterly assessment invoiced on its quarterly statement and an offsetting credit to the prepaid assessment until the asset is exhausted. The federal banking agencies’ risk-based capital rules permit an institution to apply a zero percent risk weight to all claims on U.S. Government agencies, and the FDIC has indicated that the prepayment will qualify for such treatment.

Exemptions to Institutions that would Face Financial Hardship

The proposed rule allows an exemption for institutions where prepayment would adversely affect the safety and soundness of such institutions. Upon consultation with the institution’s primary federal regulator, the FDIC would have the ultimate authority to authorize exemption. Institutions, however, may apply to the FDIC for exemption if such prepayment would significantly impair its liquidity or would otherwise create significant hardship. The FDIC will review such applications on a case-by-case basis. The FDIC has indicated that they will keep exemption status confidential. At this time, however, there has been no guidance regarding SEC disclosure obligations for reporting institutions.

Other Details for Proposed Prepaid Assessments

The prepaid assessments, as proposed, will only be used to offset regular quarterly risk-based deposit insurance assessments. Under the proposed rule, prepaid assessments could not be used to offset other payments to the FDIC, such as FICO assessments or TLGP assessments.

An institution would be permitted to transfer any portion of its prepaid assessment to another insured depository institution, provided it complied with certain notification requirements. As a result, in the event an institution merged with, or consolidated into, another institution, the surviving institution would be entitled to use any unused portion of the disappearing institution’s prepaid assessment not otherwise transferred.

No Additional Special Assessments

The final rule adopted on May 22, 2009 imposed a special assessment on each institution’s assets minus Tier 1 capital to be collected on September 30, 2009. (see http://www.bankbryancave.com/fdic-adopts-a-final-rule-regarding-special-assessments/). That final rule also allowed the FDIC to make additional special assessments of up to 5 basis points of an institution’s assets minus Tier 1 capital. The FDIC has indicated that the prepayment option proposed is an alternative to making further special assessments under the May 22 final rule. Consequently, the FDIC has confirmed that there is no need for further accruals for special assessments after payment of the special assessment due September 30, 2009. (See http://www.fdic.gov/news/board/Sept29no3.pdf).

The proposed rule is currently open for comment until October 28, 2009. For more information please see http://www.fdic.gov/regulations/laws/federal/propose.html.

The interim rule contemplated a 20 basis point special assessment, based on an institution’s deposits, which is the assessment base used for the regular quarterly risk-based assessments.  The interim rule also contemplated imposing additional special assessments of up to 10 basis points at the end of each remaining calendar quarter of 2009.

The final rule lowered the initial special assessment from 20 to 5 basis points, and any additional special assessment from 10 to 5 basis points, but changed the assessment base from deposits to assets minus Tier 1 capital.  The memorandum from the FDIC’s director of the insurance and research division indicates that the “departure from the regular risk-based assessment base is appropriate in the current circumstances because it better balances the burden of the special assessment.”

As to the industry as a whole, the FDIC estimated that a 5 basis point special assessment on assets minus Tier 1 capital would result in an amount approximately equal to a 7 basis point assessment on deposits.  In effect, many larger institutions will face a significantly higher special assessment then they would have under the regular risk-based assessment base, but this increase is limited by capping the special assessment at the amount that would be 10 basis points of the institution’s deposits.  Similarly, any additional special assessment would be capped at the amount that would be 10 basis points of the institution’s deposits for the relevant reporting period.

Although the FDIC has the authority to impose two additional special assessments, by vote of the board, before its authority expires on January 1, 2010, Chairman Sheila Bair indicated during the FDIC board meeting that she expected to impose only one additional assessment.  She further provided that she believed if two additional special assessments were required, then the FDIC would seek public comment again.

The FDIC felt comfortable lowering the total amount of the initial special assessment because on May 20, 2009, Congress increased the FDIC’s authority to borrow from the Treasury from $30 billion to $100 billion under the Helping Families Save Their Homes Act of 2009, which we discuss here.  This Act also temporarily allows, until December 31, 2010, the FDIC to borrow up to $500 billion from the Treasury with the concurrence of the FDIC’s board, the Federal Reserve board, and the Secretary of the Treasury, in consultation with the President.

The final rule was adopted by a vote of 4 to 1.  Comptroller of the Currency, John C. Dugan, was the sole dissenting board member, and his comments from the board meeting can be found here.

• extended the $250,000 deposit insurance limit through December 31, 2013;
• extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
• increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
• increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
• removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments.  The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.

This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee.  The Transaction  Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.

The FDIC has not revised the official FDIC Insurance sign, which still speaks of insurance limits of up to $100,000.  However, if a financial institution has previously posted a notice of the increase to $250,000 through December 31, 2009, it should update that notice.  As stated by the FDIC, a financial institution may post the following statement next to the official FDIC sign:

The standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor.

There are important changes from the FDIC’s interim rule, including: (i) the exclusion of short term borrowings (30 days or less) and an alternative minimum cap for guaranteed debt under the Senior Unsecured Debt Guarantee portion of the Program; and (ii) the inclusion of IOLTA and NOW accounts in the Transaction Account Guarantee portion of the Program.

We continue to expect that all banks will decide to remain in the Transaction Account Guarantee portion of the Program, but, with the revised terms, we believe community banks will need to closely examine whether to participate in the the Senior Unsecured Debt Guarantee portion of the Program.

Senior Unsecured Debt Guarantee

No Short Term Borrowings. The FDIC has revised the definition of guaranteed senior unsecured debt to exclude debt with a stated maturity of third days or less.  As a result, fed funds (and other short term borrowings) are excluded from eligibility for the FDIC’s debt guarantee (but not from the calculation of senior unsecured debt at September 30, 2008 for purposes of determining the debt guarantee cap).

Revised Assessment Rates. The FDIC has also revised the assessment rate for guaranteed debt.  For debt with a maturity of more than 30 days and less than 180 days, the annualized assessment rate will be 50 basis points.  For debt with a maturity of 181 to 364 days, the annualized assessment rate will be 75 basis points.  For debt with a maturity of 365 days or greater, the annualized assessment rate will be 100 basis points.  (There is also a 10 basis point surcharge for bank holding companies in which the consolidated assets of insured depository institutions constitutes less than 50 percent of the holding company’s total consolidated assets.)

Revised Maximum Debt Guarantee Cap. If a depository institution had senior unsecured debt as of the close of business on September 30, 2008 that was scheduled to mature on or before June 30, 2009, then the maximum amount that can be guaranteed remains 125% of that amount.  However, if an insured depository institution had, as of September 30, 2008, no senior unsecured debt or only had fed funds purchased, then the depository institution (but not its holding company) is entitled to a debt guarantee of up to 2% of its consolidated total liabilities as of September 30, 2008.

Limits on Uses and Recipients of Guaranteed Debt. Guaranteed debt cannot be: (i) used to prepay debt that is not FDIC-guaranteed; or (ii) issued to an affiliate, an insider of the participating entity, or an insider of an affiliate.

Procedures for Participating Entity to Issue Non-Guaranteed Debt.  If an institution does not opt out of the program and is eligible to issue FDIC-guaranteed debt (either because they had such debt outstanding at September 30, 2008 or because of the 2% alternative cap), then the institution generally may not issue long-term non-guaranteed senior unsecured debt until they have issued their full amount of guaranteed debt.  In order to be able to issue long-term non-guaranteed senior unsecured debt, an institution must (a) notify the FDIC of such intent prior to 11:59 pm EST on December 5, 2008, and (b) pay a nonrefundable fee equal to 37.5 basis points times the institutions cap on issuing guaranteed senior unsecured debt (although such fees will offset any future issuances of guaranteed debt).

Requesting Exemptions. The final rules do not provide significant details on the process that will be used for exceptions, but they do provide that requests to establish or increase a debt guarantee limit must be made in writing to the FDIC and the appropriate federal banking authority.  The letter application should describe the details of the request, provide a summary of the applicant’s strategic operating plan, and describe the proposed use of debt proceeds.  The factors to be considered by the FDIC in evaluating applications include the financial condition and supervisory history of the applicant.  No exemption request is needed to rely on the 2% alternative cap by a depository institution so long as the institution had no senior unsecured debt (other than fed funds purchased) at September 30, 2008.

Master Agreement. The final rule requires participating entities to execute and file a “Master Agreement” with the FDIC as part of its notification of participation in the Debt Guarantee Program.  Under this document, the participating entity: (1) acknowledges and agrees to the establishment of a debt owed to the FDIC for any payment made in satisfaction of the FDIC’s guarantee of a debt issuance by the participating entity and agrees to honor immediately the FDIC’s demand for payment on that debt; (2) arranges for the assignment to the FDIC by the holder of any guaranteed debt issued by the participating entity of all rights and interests in respect of that debt upon payment to the holder by the FDIC under the guarantee and for the debtholders to release the FDIC of any further liability under the Debt Guarantee Program with respect to the particular issuance of debt; and (3) provides for the issuer to elect to designate an authorized representative of the bondholders for purposes of making a claim on the guarantee.  A copy of the Master Agreement is available on the FDIC’s website.

Guarantee Triggered by Payment Default. Under the final rules, the FDIC’s debt guarantee will be triggered by any payment default rather than bankruptcy or receivership.

Risk Weighting of Bank Debt. On the conference call, the FDIC confirmed that they would not be modifying the risk weighting for bank debt, whether guaranteed or not.

Transaction Account Guarantee

Inclusion of IOLTA and NOW Accounts. Noninterest-bearing transaction accounts have been expanded to include: (i) all IOLTA accounts; and (ii) NOW accounts with interest rates no higher than 50 basis points (and a commitment not to pay more than 50 basis points through December 31, 2009).  (Lawyers appear to have better lobbyists than general NOW account holders, as there is no limit on the interest rate to be paid on IOLTA accounts that qualify for the unlimited insurance guarantee.)  Any NOW accounts that pay more than 50 basis points, may be included so long as the rate is reduced to 50 basis points or less on or before January 1, 2009.

Fees. Participation in the noninterest-bearing transaction account program will require quarterly fees of an annualized 10 basis point assessment on total amounts over $250,000 in transaction accounts, as reported on quarterly Call Reports.  Changes to the Call Reports are coming to explicitly report the aggregate account balance over $250,000 (as of quarter-end).

Inclusion of Public Funds Accounts. On the conference call, the FDIC clarified that public funds held in NOW accounts, even if otherwise secured, would be included in the assessments (assuming the NOW account paid no more than 50 basis points).   Institutions may wish to consider paying in excess of 50 basis points as of January 1, 2009 to exclude such accounts from the Transaction Account Guarantee.

Opt-Out and Opt-In Options and Disclosure

Affirmative action is needed to opt-out of either part of the FDIC’s Temporary Liquidity Guarantee Program.  Each eligible entity must inform the FDIC if it desires to opt out of the debt guarantee program or the transaction account guarantee program, or both by 11:59 pm EST on December 5, 2008.  Failure to opt-out by that deadline constitutes a decision to continue in the program after that date.  The FDIC’s website provides the revised Election Form, which will also be available on FDICconnect starting on November 24, 2008.

The FDIC will publish on its website a list of all eligible entities that have opted out of either portion of the Temporary Liquidity Guarantee Program.  Guaranteed debt must contain the following statement:

This debt is guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program and is backed by the full faith and credit of the United States.  The details of the FDIC guarantee are provided in the FDIC’s regulations, 12 CFR Part 370, and at the FDIC’s website, www.fdic.gov/tlgp.  The expiration date of the FDIC’s guarantee is the earlier of the maturity date of the debt or June 30, 2012.

Non-guaranteed debt must contain the following statement:

This debt is not guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.

Each insured depository institution that offers noninterest-bearing transaction accounts must post a prominent notice in the lobby of its main office, each domestic branch office, and if it offers Internet deposit services, on its website clearly indicating whether the institution is participating in the transaction account guarantee.  The FDIC provided the following sample disclosures:

For Participating Institutions

[Institution Name] is participating in the FDIC’s Transaction Account Guarantee Program.  Under that program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account.  Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.

For Non-Participating Institutions

[Institution Name] has chosen not to participate in the FDIC’s Transaction Account Guarantee Program.  Customers of [Institution Name] with noninterest-bearing transaction accounts will continue to be insured through December 31, 2009 for up to $250,000 under the FDIC’s general deposit insurance rules.

No fees will be collected under either part of the Temporary Liquidity Guarantee Program for the period from October 14, 2008 through November 12, 2008, and any entity that opts out on or prior to December 5, 2008 will not pay any assessments.

Decisions to opt out or remain in are irrevocable, and will be made via the FDIConnect system.  Election forms will be available starting November 12, 2008, and will require certification by the institution’s Chief Financial Officer.

All eligible entities within the same holding company structure, including the holding company itself, must make the same decision regarding continued participation in either or both programs.  Eligible entities that do not opt out of the debt guarantee program must report the amount of outstanding senior, unsecured debt as of September 30, 2008, that is scheduled to mature on or before June 30, 2009.

The FDIC has also published a Sample Election Form, Election Form Instructions and Guidance for Election Options and Reporting Requirements.

Only the first 30 days of each program continue to be without charge.  However, those institutions that opt out by December 5, 2008 will not be required to pay assessments.  Institutions that do not opt out will be required to pay assessments for covered debt and transaction accounts starting on November 13, 2008, with a limited exception for overnight debt instruments issued between November 13, 2008 and December 6, 2008, for which no assessments will be collected.

Institutions participating in the debt guarantee program must report the par value of their outstanding senior unsecured debt as of September 30, 2008, that is scheduled to mature on or before June 30, 2009.   The term “senior unsecured debt” means unsecured borrowing that: (a) is evidenced by a written agreement; (b) has a specified and fixed principal amount to be paid in full on demand or on a date certain; (c) is non-contingent; and (d) is, not by its terms, subordinated to any other liability.  Senior unsecured debt includes, for example, federal funds purchased, promissory notes, commercial paper, and unsubordinated unsecured notes.  Convertible debt, capital notes, and debt payable to affiliates are excluded.

The FDIC has not provided any additional guidance on the process for requesting a waiver to issue guaranteed debt in the event that the institution did not have any senior unsecured debt outstanding as of September 30, 2008.  The interim rule provides that the FDIC, after consultation with the appropriate federal banking agency will make a case-by-case decision as to whether, and to what extent, such an institution may issue guaranteed debt.  In extending the deadline, the FDIC has specifically sought comments on whether to establish an alternative guarantee cap, e.g., a percentage of total liabilities, or an average of outstanding senior unsecured debt over some period of time, for those eligible entities that had no or de minimis amounts of senior unsecured debt outstanding on September 30, 2008.

The FDIC is also specifically seeking comments on whether to charge different premium rates for Fed Funds and other short-term borrowings versus longer term borrowings.

The rule is immediately effective, although comments will be taken for a 15-day period.

The FDIC strongly encourages banks to remain in the program.

Opt Out Information. Any institution desiring to opt out must do so by 11:59 p.m. on November 12, 2008.  An institution may opt out of the FDIC’s guarantee of either or both the newly-issued senior unsecured debt or noninterest-bearing transaction deposit accounts.  The FDIC will post on its website a list of those entities that have opted out of either component, and each eligible entity must make clear to relevant parties whether it has chosen to participate in the program.

All insured depository institutions must post a prominent notice in the lobby of its main office, and each branch must clearly indicate whether the institution is participating in the transaction account guarantee program.  If it is, the notice must state that funds held in noninterest-bearing transaction accounts are insured in full by the FDIC.  If the institution uses sweep arrangements, the institution must disclose those actions to the affected customers and clearly advise them, in writing, that such actions will void the FDIC’s guarantee.  (However, note the exception below for sweeps to noninterest-bearing savings accounts.)

Newly Issued Senior Unsecured Debt Guarantee Information. Senior unsecured debt generally includes federal funds purchased, promissory notes, commercial paper, and unsubordinated unsecured notes.  Senior unsecured debt does not include, among other instruments, obligations from guarantees or other contingent liabilities, derivatives, derivative-linked products, debt paired with any other security, convertible debt, capital notes, the unsecured portion of otherwise secured debt, or negotiable certificates of deposit.

The FDIC will guarantee newly issued unsubordinated debt in a total amount up to 125 percent of the par or face value of the senior unsecured debt outstanding, excluding debt extended to affiliates, as of September 30, 2008, that was scheduled to mature before June 30, 2009.  The maximum amount guaranteed is calculated for each individual participating entity in a holding company structure and cannot be transferred between a bank and its holding company or between banks in a multi-bank holding company structure.  All entities will be required to provide the amount of outstanding senior unsecured debt as of September 30, 2008 to the FDIC via FDIConnect.

The FDIC has retained the right on a case-by-case basis, after consultation with the primary federal banking regulator, to allow participating institutions to exceed the 125 percent limitation, or to permit participating institutions to issue guaranteed debt of some amount in the event that an institution had no senior unsecured debt outstanding at September 30, 2008.

Debt will not be guaranteed by the FDIC if the proceeds are used to prepay debt that is not FDIC-guaranteed.

Participating entities are prohibited from issuing guaranteed debt in excess of the maximum amount for that institution.  If this threshold is exceeded and debt is identified as “guaranteed by the FDIC,” the assessment rate will be increased to 150 basis points on all outstanding guaranteed debt, and the participating entity will be subject to enforcement actions.

Participating entities are also prohibited from issuing non-guaranteed debt until the maximum allowable amount of guaranteed debt has been issued.  After exhausting its maximum, the participating entity can then issue non-guaranteed debt in any amount.

Transaction Account Guarantee Program. The FDIC has provided a temporary full guarantee for funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts above the existing deposit insurance limit.  A “non-interest bearing transaction account” is defined as a transaction account in which interest is neither accrued nor paid and on which the institution does not reserve the right to require advance notice of an intended withdrawal.  In addition to traditional DDA accounts, this would also encompass official checks issued by the depository institution.

Generally, funds in sweep accounts will be treated in accordance with the usual rules and procedures for determining sweep balances at a failed institution, so that funds swept will be treated as being in the account to which the funds were transferred, and therefore not eligible for the FDIC guarantee.  However, the FDIC has provided an exception for funds swept from a noninterest-bearing transaction account to a noninterest-bearing savings accounts; such funds will be treated as remaining in the noninterest-bearing transaction account and will be fully guaranteed by the FDIC.