On October 14, on the same day that the Treasury Department announced its Capital Purchase Plan, as reported in an October 15 Katten Client Advisory, the Federal Deposit Insurance Corporation (FDIC) announced its own new program—the Temporary Liquidity Guarantee Program. The Program is intended to further strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount.
Under the plan, certain senior unsecured debt, issued on or before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails or its holding company files for bankruptcy. This includes promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. Coverage would be limited to June 30, 2012, even if the maturity extends beyond that date.
In addition, any participating depository institution will be able to provide full deposit insurance coverage for non-interest bearing deposit transaction accounts, regardless of dollar amount. These are mainly payment-processing accounts, such as payroll accounts used by businesses. Frequently, these exceed the current maximum limit of $250,000. This temporary guarantee expires on December 31, 2009.
Participating banks will be charged a 75 basis point fee to protect their new debt issues, and a 10 basis point surcharge will be added to a participating institution's current insurance assessment in order to fully cover the non-interest bearing deposit transaction accounts. All FDIC-insured institutions will be covered under the program for the first 30 days without incurring any costs. After that initial period, however, institutions no longer wishing to participate must opt out or be assessed for future participation. If an institution opts out, the guarantees are valid only for the first 30 days.