Today, as part of continuing joint efforts to stabilize domestic financial markets by the U.S. Treasury Department, the Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”), the FDIC announced a Temporary Liquidity Guarantee Program (“Program”). According to FDIC Chairman Bair, the Program is designed to “unlock interbank credit markets and restore rationality to credit spread.”

The Program is voluntary. Eligible institutions include FDIC-insured banks and thrifts, U.S. bank and financial holding companies and U.S. savings and loan holding companies that are only engaged in activities permitted for financial holding companies. The FDIC indicated that it will maintain control over eligibility in consultation with the institution’s primary federal regulator.

The Program contains two key features. The first involves an FDIC guarantee of newly issued senior unsecured debt issued by any eligible institution, including promissory notes, commercial paper, interbank funding and the unsecured portion of any secured debt. The guarantee will allow eligible institutions to roll maturing senior debt into new issues backed by the FDIC. The amount of debt covered by the guarantee may not exceed 125% of debt that was outstanding as of September 30, 2008 that was scheduled to mature before June 30, 2009. Guaranteed maturities cannot extend beyond three years, even if the debt has a longer maturity, and the ability to issue debt under the Program expires June 30, 2009.

The second feature gives unlimited insurance coverage for non-interest bearing transaction accounts. Such accounts are typically used by businesses for payroll accounts and often exceed the existing $250,000 maximum insurance limit. According to the FDIC, smaller banks have been losing such accounts to larger competitors due to uncertainties in the financial system and this feature is designed to stabilize those accounts and prevent closure of otherwise viable banks due to deposit withdrawals. The non-interest bearing transaction account guarantee runs until the end of 2009.

Coverage for both parts of the program will be automatic for eligible institutions for thirty (30) days without charge. After that, institutions will be assessed for the coverage unless they opt out. For all newly issued senior unsecured debt, an annualized fee of seventy-five (75) basis points multiplied by the amount of the debt issued under the Program will be charged. With respect to the non-interest bearing transaction account guarantee, a ten (10) basis point surcharge would be applied for amounts not otherwise covered by the existing deposit insurance limit of $250,000. If an institution opts out, the guarantees are only good for the first thirty (30) days.

Institutions that avail themselves of the Program will be subject to enhanced supervisory oversight to prevent rapid growth or excessive risk-taking.