On December 11, 2008, the FDIC updated its Frequently Asked Questions (FAQ) on the Temporary Liquidity Guarantee Program. The updated questions address both the Transaction Account and Debt Guarantee portions of the TLGP, but this post focuses on the Transaction Account Guarantee. Bank action is likely required to assure that NOW accounts are covered by the TLGP’s Transaction Account Guarantee.
The updated FAQ addresses four questions related to the guarantee of NOW accounts under the Transaction Account Guarantee. NOW accounts with interest rates no higher than 0.50 percent are treated as noninterest-bearing transaction accounts and eligible for the guarantee “if the insured depository institution at which the account is held has committed to maintain the interest rate at or below 0.50 percent.”
The “Commitment” Process
The TLGP regulations do not provide a procedure for making this commitment or for reducing interest rates. The FAQ clarifies that the Board of Directors or other authorized officials can make the commitment in accordance with the institution’s usual procedures for making decisions. The commitment should be clear, in writing, and maintained in the institution’s books and records to avoid any confusion as to the nature of the commitment.
Tiered-Rate or Floating NOW Accounts
If it is possible for the interest rate paid on the NOW account to exceed 50 bps, then the account is not eligible for the guarantee, even if the interest rate remains below 50 bps. If a NOW account (i) has a tiered-rate structure in which an interest rate above 0.50 percent is paid if the account balance is sufficiently large, or (ii) floats with an industry interest rate, then the NOW account will not be covered under the Transaction Account Guarantee “because the possibility exists that the interest rate will rise above 0.50 percent.”
As noted in the FDIC’s latest Frequently Asked Questions on the TLGP, the FDIC will fully guarantee public funds deposits in NOW accounts so long as the interest rate does not exceed 0.5 percent and the institution has committed to maintain the interest rate at or below 0.5 percent (assuming the institution has not opted out of the Transaction Account Guarantee). The amount of collateral required for such guaranteed public funds, if any, is imposed by state law and not by the FDIC’s regulation. As noted by the FDIC, the amount of collateral will depend upon the wording and meaning of each state’s laws.
As noted below, the Georgia statutes are not 100% clear, but we believe that Georgia depository institutions should not be required to provide collateral for public funds that are fully guaranteed by the FDIC under the Transaction Account Guarantee portion of the TLGP. We believe the statutes should be read as treating the FDIC guarantee in the same manner as FDIC insurance. Although the FDIC has generally been careful to use the term “guarantee” rather than “insurance” for the Transaction Account Guarantee portion of TLGP, in their December 4th press release, the FDIC stated that such funds will be “fully insured by the FDIC.”
We also understand that the going rate for public funds in Georgia is currently in excess of the 50 basis points permitted for NOW accounts to be treated as noninterest-bearing transactional accounts under TLGP. However, given moving rates and the possibility of fully guaranteed FDIC funds, we could see enterprising bankers using this provision to their advantage.
Moreover, all banks with public fund deposits should re-examine their calculations for the amount of securities that must be pledged to confirm that they have taken into effect the increase in FDIC deposit insurance from $100,000 to $250,000.
In connection with the TLGP Transaction Account Guarantee Program, all depository institutions that offer noninterest-bearing transaction accounts will have new disclosures that must be made in the lobby of its main office and each domestic branch office, and, if the institution offers “Internet deposit services,” on its website. The disclosures must be in place by December 19, 2008, and must have made adequate disclosures in a commercially reasonable manner before that time.
Standard Disclosures. The FDIC regulations provide 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.
While the FDIC’s Temporary Liquidity Guarantee Program (TLGP) remains an “opt-out” program, institutions must take affirmative action if they do not opt-out of the Debt Guarantee portion of the TLGP. Moreover, the FDIC’s Election Form Instructions state that all eligible entities must file the Election Form no later than 11:59 p.m., Eastern Standard Time, on December 5, 2008.
Failure to opt-out by 11:59 p.m., Eastern Standard Time, on December 5, 2008 constitutes an irrevocable decision to remain in both components of the TLGP, as described in the following paragraph. However, it is unclear whether institutions will be able to actually participate in the Debt Guarantee portion of the TLGP unless they have affirmatively opted-in.
About the TLGP
On October 14, 2008, the FDIC announced the TLGP to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt (the “Debt Guarantee”) and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured institutions (the “Transaction Account Guarantee”). The FDIC has provided a TLGP website and Frequently Asked Questions. In addition, all posts on BankPogo.com regarding the TLGP can be accessed here.
The TLGP Election Form
The TLGP Election Form must be submitted for all eligible entities using FDICconnect. The FDIC has also provided PDF versions of a Sample Election Form and the Election Form Instructions, which should be reviewed before completing the Election Form on FDICconnect.
On December 2, 2008, the FDIC added several questions and answers to its TLGP FAQ. We have highlighted some of these clarifications below.
- Credit unions are not eligible to participate in any aspect of the TLGP.
- Fed funds purchased can be covered under the Debt Guarantee Program, so long as the term of the debt exceeds 30 days.
- CDs owed to an insured depository instutiton through the CDARS network are not considered senior unsecured debt, and therefore not eligible to be guaranteed. Under the Debt Guarantee Program, certificates of deposit owed to an insured depository instituion are considered senior unsecured debt (and eligible for an FDIC guarantee) only if they are owed to the institution solely in that bank’s own capacity and not as an agent.
- Negotiable (or transferable) CDs are excluded from the definition of senior unsecured debt for purposes of the Debt Guarantee Program.
- The FDIC will calculate the 2 percent of liabilities debt guarantee limit using Call Report Schedule RC, Item 21 (total liabilities).
- Interbank CDs will not be assessed under the Debt Guarantee Program to the extent the CDs are otherwise insured on the date the CD is issued. Whether a CD is otherwise insured will be determined by first applying deposit insurance to all existing deposits owed to the holder of the CD in the same right and capacity. Institutions will be required to provide the FDIC with a good faith estimate of the amount of interbank CDs that are uninsured.
- The Fee for the Debt Guarantee Program is based on the amount and type of debt issued. If a participating entity opts into the program, but never issues senior unsecured debt, no fee will be assessed.
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.