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.”
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.
- 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.