Earlier this year the FDIC published its Final Rule on Processing Deposit Accounts in the Event of an Insured Depository Institution Failure. One of the requirements of the Rule is that financial institutions are required to provide sweep account customers with information about what would happen to the customer’s funds in the event the institution failed. As a byproduct of the attention being paid to the new sweep account disclosure rules, the FDIC has also focused on the terms of the Master Repurchase Agreement used in certain sweep arrangements where the institution serves as the customer’s custodial agent for securities held at another financial intermediary.
The standard industry Repurchase Agreement contains a provision which allows the financial institution to substitute the originally purchased securities with different securities of the same type. The FDIC has recently taken the position that the right of substitution renders a Repurchase Agreement used in connection with such a sweep account defective based on the fact that the institution retains excessive control over the securities. The result of this is that the customer’s funds will be treated as if they never left the deposit account from which they originated. This could be devastating to a customer in the event of the failure of the institution.
In addition to the risk which a customer runs of having significant uninsured deposits, the financial institution runs the risk that the funds should have been reported on a Call or Thrift Financial Report as deposits for purposes of reserves and assessments. This then in turn raises issues of whether the financial institution has been in violation of Reg Q which prohibits the payment of interest on demand deposits.
On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment and authorizing the FDIC to impose additional special assessments of 5 basis points, if necessary. The initial special assessment and any additional special assessment will be based on an institution’s assets minus Tier 1 capital as of June 30, 2009. This final rule differs significantly from the interim rule that FDIC issued on March 2, 2009.
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.”
On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896). Among other things, the Act:
- 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.
On December 11, 2008, the Federal Financial Institutions Examination Council issued revised instructions for Call and Thrift Financial Reports applicable to participants in the TLGP Transaction Account Guarantee.
Participating institutions will be required to report the amount and number of its noninterest-bearing transaction accounts (including IOLTA accounts and certain NOW accounts) with balances in excess of $250,000. In calculating the figures, the bank or thrift is permitted, but not required, to exclude accounts or amounts that are otherwise insured under the FDIC’s pass-through insurance rules. The FDIC will use the reported amounts to calculate the 10 basis point assessment for participation in the Transaction Account Guarantee. As a result, it will likely be in the interest of reporting institutions to determine the amount in the accounts that is otherwise insured. The instructions note that the amounts must be fully supported in the institution’s workpapers.
The FFIEC also noted that the Call and Thrift Financial Reports have otherwise not been modified to reflect the temporary increase in deposit insurance to $250,000. As a result, institutions should continue to report the amount and number of deposit accounts (other than retirement accounts) of (a) $100,000 or less and (b) more than $100,000. In addition, when reporting estimated uninsured deposits, institutions should continue to calculate the amount of uninsured deposits based on the deposit insurance limits of $250,000 for retirement deposit accounts and $100,000 for all other accounts.
On November 21, 2008, the FDIC approved the final rule regarding the Temporary Liquidity Guarantee Program. The FDIC also held a teleconference on the final rule (with 2,100 participants) summarizing the changes, which will be available on the FDIC’s website.
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.
On November 3, 2008, the FDIC extended the deadline for opting out of either component of the Temporary Liquidity Guarantee Program from November 12, 2008 until December 5, 2008. Failure to opt out by December 5, 2008 will constitute a decision to continue to participate in both the debt guarantee and transaction account guarantee programs. (Based on conversations with representatives of the FDIC on Monday, the FDIC does not expect any institution to opt out of the non-interest bearing transaction account guarantee program.)
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.
- FDIC Press Release
- FDIC Financial Institution Letter
- Temporary Liquidity Guarantee Program – Interim Rule – PDF
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.