On November 21, 2008, the Federal Deposit Insurance Corporation issued its Final Rule on the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP is comprised of the Debt Guarantee Program (“DGP”), pursuant to which the FDIC will guarantee the newly issued senior unsecured debt of banks, thrifts and their holding companies, and the Transaction Account Guarantee Program, pursuant to which the FDIC will insure non-interest bearing transaction accounts at insured depository institutions. The FDIC had previously issued its Interim Rule with request for comments on October 23, 2008 and later amended that rule on November 4, 2008. The comment period ended on November 13, 2008, and over 700 comments were received.
Under the Interim Rule, the FDIC would guarantee the newly issued senior unsecured debt of eligible participating institutions. “Newly issued” is defined to include only the debt issued on or after October 13, 2008 through June 30, 2009. “Senior unsecured debt” may be a fixed or floating rate instrument and includes federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, including zero-coupon bonds, U.S. dollar denominated certificates of deposit owed to an insured depository institution or a foreign bank, U.S. dollar denominated deposits in an international banking facility of an insured depository institution owed to an insured depository institution or a foreign bank, and U.S. dollar denominated deposits on the books and records of foreign branches of U.S. insured depository institutions that are owed to an insured depository institution or a foreign bank. Eligible participants include only insured depository institutions, bank holding companies and savings and loan holding companies that engage only in those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act. Under the Interim Rule, the FDIC would guarantee an amount of newly issued senior unsecured debt up to 125 percent of the par value of the participating entity’s senior unsecured debt outstanding as of September 30, 2008 and scheduled to mature on or before June 30, 2009. The FDIC’s guarantee would extend until the earlier of the maturity of the debt or June 30, 2012. The FDIC maintained the opt-out deadline of December 5, 2008 under the Final Rule.
The Final Rule amends the Interim Rule with respect to the DGP by:
- Revising the definition of senior unsecured debt;
- Expanding the definition of eligible entity;
- Providing an alternative means for establishing a guarantee cap for insured depository institutions that either had no senior unsecured debt outstanding or only had federal funds purchased as of September 30, 2008;
- Combining debt guarantee limits of a participating insured depository institution and its parent holding company;
- Guaranteeing the timely payment of principal and interest following payment default;
- Revising the fee structure for the DGP; and
- Clarifying the risk weighting for capital purposes.
Excluded Senior Unsecured Debt
Under the Final Rule, the term senior unsecured debt does not include any debt with a maturity of 30 days or less. Many commenters stated that imposing a fee of 75 basis points on short term funding would make such debt too expensive and would result in many institutions opting out of the DGP. Others stated that the FDIC’s guarantee was not necessary for short term funds. The FDIC agreed with these comments and amended the DGP by excluding debt with a maturity of 30 days or less.
The FDIC clarified in the Final Rule that an eligible entity includes the insured depository institution and qualifying holding company and may include any affiliate of an insured depository institution that the FDIC, in its sole discretion and on a case-by-case basis, after written request and positive recommendation by the appropriate Federal banking agency, designates as an eligible entity. In this regard then, diverse and complex holding companies may apply to the FDIC to have non-banking affiliates become a participating entity in the DGP. This is critical in that it clarifies that only (1) those entities deemed participating entities by the FDIC may issue guaranteed debt, and (2) the senior unsecured debt of participating entities is aggregated for purposes of calculating the 125 percent limit on the amount of guaranteed debt that may be issued by such entities. Holding companies with financing subsidiaries, therefore, may want to apply to have such subsidiaries deemed an eligible entity in order to maximize the amount of guaranteed debt that can be issued. Interestingly, it appears then that by not applying to become an eligible entity, or by issuing debt secured by some nominal amount, an affiliate may issue non-guaranteed debt that competes with the guaranteed debt issued by a participating entity. This result, however, would seem contrary to the FDIC’s desire that a participant issue all of its guaranteed debt first before nonguaranteed debt is issued.
In addition, the Final Rule specifies that an entity that becomes an eligible entity after December 5, 2008, may apply to the FDIC to participate in the DGP. In reviewing applications, the FDIC will review the extent of the financial activity of the entities within the holding company structure; the strength, from a ratings perspective of the issuer of the obligations that will be guaranteed; and the size and extent of the activities of the organization. The FDIC may consider any other relevant factors and may impose any conditions it deems appropriate in granting approval of applications for exceptions. This exception is important in that it will permit a company that does not currently own a bank to acquire a bank and, assuming approval by the FDIC, issue guaranteed debt by the holding company prior to June 30, 2009. This is in contrast to the Treasury’s Troubled Asset Relief Program (“TARP”) that has a December 8, 2008, deadline for companies to acquire a bank and qualify for funds under the Capital Purchase Program.
Alternative Cap Calculations
For those banks that had no senior unsecured debt outstanding as of September 30, 2008, or that had only federal funds purchased at that date, the Final Rule states that its debt guarantee limit is 2 percent of the participating entity’s consolidated liabilities. The Final Rule retains the original provision that permits the FDIC to grant waivers to those entities that had no senior unsecured debt outstanding as of September 30, 2008. With respect to such entities seeking to have some amount of debt covered by the DGP, the FDIC, after consultation with the appropriate Federal banking agency, will decide, on a case-by-case basis, whether such a request will be granted and, if granted, what the entity’s debt guarantee limit will be. In addition, the FDIC may make exceptions to a participating entity’s guarantee limits, by increasing or decreasing the amount of the guarantee, in the FDIC’s discretion and on a case-by-case basis.
Combined Debt Guarantee Limits
The Final Rule permits a participating insured depository institution to issue guaranteed debt in an amount equal to the institution’s limit plus its holding company’s limit, so long as the total guaranteed debt issued by the insured depository institution and its holding company does not exceed their combined debt guarantee limits. The holding company’s debt guarantee limit will be reduced to the extent that its subsidiary insured depository institution increases its limit. Thus, if a bank and its holding company had the ability to each issue $50 million in guaranteed debt, the bank could issue $100 million of guaranteed debt, so long as the holding company issued no guaranteed debt. Commenters to the Final Rule believed that debt issued by the bank will be more attractive than debt issued by the holding company.
Guaranteeing the Timely Payment of Principal and Interest
Several commenters stated that the debt guarantee as provided in the Interim Rule could put U.S. banks at a competitive disadvantage compared to the guarantee provided by foreign countries to their banks. The commenters noted that the guarantee, as set forth in the original, did not state specifically that it was backed by the full faith and credit of the U.S. In addition, commenters noted that under the original rule, the FDIC’s obligation to pay arose upon the bankruptcy of the holding company or the placing in receivership of the bank, which may result in a lengthy delay in payment. The FDIC agreed with these comments and clarified that the guarantee of the FDIC is backed by the full faith and credit of the U.S. and that the FDIC’s obligation to make a payment will arise upon the uncured failure of the issuer to make a timely payment of principal or interest.
Revised Fee Structure
The Interim Rule imposed a flat 75 basis point annualized assessment on all guaranteed debt. The Final Rule amends the fee structure by adopting assessments based on maturity of the debt. The Final Rule assesses 50 basis points, on an annualized basis, for debt with a maturity of 180 days or less (excluding overnight debt), 75 basis points for debt with a maturity of 181 to 364 days, and 100 basis points for debt with a maturity of 365 days or greater. In addition, for participating non-bank entities, the amount of the assessment will be increased by 10 basis points if the combined assets of all depository institutions affiliated with the non-bank entity are less than 50 percent of the consolidated holding company assets.
Risk Weighting for Capital Purposes
While several commenters stated that the FDIC guaranteed debt should carry a zero percent risk weight, the FDIC determined to give the debt the same risk weighting as FDIC insured deposits, 20 percent.