On October 23, 2008, the Federal Deposit Insurance Corporation issued interim final rules setting forth the specifics for implementing its Temporary Liquidity Guarantee Program (TLG). Under the TLG, the FDIC will fully guarantee newly-issued “senior unsecured debt” of eligible institutions (the Debt Guarantee Program) and provide unlimited deposit insurance for specified non-interest bearing transaction accounts (the Transaction Account Guarantee Program). 1 The rule is effective immediately, and the comment period ends 15 days after publication of the rule in the Federal Register.

Eligible entities under the TLG are: 

  • FDIC-insured depositary institutions;
  • U.S. bank holding companies (including financial holding companies); and 
  • U.S. savings and loan holding companies that (i) engage only in activities permissible for U.S. financial holding companies under Section 4(k) of the Banking Holding Company Act (BHC Act); or (ii) have at least one insured depository institution subsidiary that is the subject of a pending application under section 4(c)(8) of the BHC Act, as of October 13, 2008.

As a reminder from the original announcement of the TLG, all eligible entities are covered through November 12, 2008 at no cost. After November 12, 2008, eligible entities will automatically be included in the TLG unless they have affirmatively opted out of either or both components of the TLG. Entities must inform the FDIC of the opt out decision prior to November 12, 2008. The decision to remain in the program or opt out is irrevocable. Also, the FDIC may terminate an entity’s participation in the TLG.

Eligible entities must make clear to appropriate counter-parties whether or not they have chosen to participate in either component of the TLG, following guidelines delineated by the FDIC. Also, the FDIC will post on its website a list of entities that have opted out of either or both components of the TLG.

All eligible entities within a U.S. Banking Holding Company or a U.S. Savings and Loan Holding Company structure must make the same opt out or in decision with regard to each component of the TLG. An opt out by one entity within a consolidated organization will constitute an opt out for the entire organization.

The Debt Guarantee Program: The Debt Guarantee Program temporarily guarantees all newlyissued outstanding senior unsecured debt that is issued between and including October 14, 2008 and June 30, 2009. In general, the maximum amount the FDIC will guarantee for each eligible institution is 125 percent of the par or face value of senior unsecured debt of the entity (excluding debt to affiliates), outstanding as of September 30, 2008, that was scheduled to mature on or before June 30, 2009 (the Aggregate Guarantee Limit). The FDIC may adjust the Aggregate Guarantee Limit for individual institutions on a case-by-case basis. The FDIC will require each participating entity to calculate and report to the FDIC its outstanding senior unsecured debt as of September 30, 2008, even if that amount is zero, via the FDICconnect system. If a participating institution had no senior unsecured debt on September 30, 2008, the FDIC will decide on a caseby- case basis whether to cover some debt under the Debt Guarantee Program. Guaranteed debt is covered until the earlier of the maturity date of the debt or June 30, 2012. Any eligible institution must clearly identify whether or not a newly issued debt instrument is guaranteed by the FDIC or not.

Under the interim rule, senior unsecured debt is “unsecured borrowing that (a) is evidenced by a written agreement; (b) has a specified and fixed principal amount to be paid in full on demand or on a date certain; (c) is noncontingent; and (d) is not, by its terms, subordinated to any other liability.” 2 This definition includes federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, and certificates of deposit and Eurodollar deposits standing to the credit of a bank, but excludes contingent liabilities, derivates, derivative-linked products, convertible debt, debt paired with any other security, as well as loans to affiliates and institution affiliated parties.

Beginning November 12, 2008, participating entities which do not opt out of the Debt Guarantee Program will be charged an annualized 75 basis points fee based on the amount of the covered debt and using a maturity date of the earlier of the actual debt maturity date or June 30, 2012. The first 30 days of the program will be excluded in calculating the fee. The assessment rate of any participating entity that issues debt represented as guarantied by the FDIC that exceeds the Aggregate Guarantee Maximum will double to 150 basis points on all outstanding guarantied debt, and such institution will be subject to enforcement action for exceeding its Aggregate Guarantee Maximum. Entities participating in the program may not issue non-guaranteed debt until they have issued the maximum allowable guaranteed debt, unless the entity elects to issue long term nonguarantied debt with maturities beyond June 30, 2012. That election must be made on or before November 12, 2008, and carries a non-refundable fee of 37.5 basis points of the par or face value of senior unsecured debt of the entity (excluding debt extended to affiliates), outstanding as of September 30, 2008, that was scheduled to mature on or before June 30, 2009.

The Transaction Account Guarantee Program: The Transaction Account Guarantee Program provides that the FDIC will fully insure funds held at FDIC-insured depositary institutions in noninterest-bearing transaction accounts from October 14, 2008 through December 31, 2009. This program covers all qualifying transaction account balances in addition to and separate from the standard deposit insurance amount of $250,000.

The FDIC defines a “noninterest-bearing transaction account” as a transaction account which neither accrues nor pays interest and on which the institution does not reserve the right to require advance notice of an intended withdrawal, encompassing demand deposit checking accounts and official checks issued by insured depositary institutions, but not negotiable of withdrawal (NOW) accounts or money market deposit accounts (MMDAs). Funds in sweep accounts transferred to other types of deposit or nondeposit accounts are not covered, except for funds that are swept from noninterest-bearing transaction accounts into noninterest-bearing savings accounts. Some institutions use such programs to manage transaction account reserve requirements.

Participants in the Transaction Account Guarantee Program will be charged a fee of an annualized 10 basis points, assessed on a quarterly basis. This fee will be assessed on all noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000.

Processing Claims and Winding Up of Program

The FDIC will process guarantee requests through the receivership claims process upon the failure of a participating insured depository institution. In the case of holding companies, the FDIC will make payment to debt holders when a holding company files for bankruptcy. The FDIC will pay interest at the 90-day T-bill rate if payment on guarantied debt of a holding company is not paid after one business day following the filing of a bankruptcy petition until a full payment is made on the eligible debt. To receive payments under the Debt Guarantee Program, holders of unsecured debt must assign their rights in their unsecured debt to the FDIC.

All fees received under the program will be sequestered from the Deposit Insurance Fund (“DIF”) and available to pay defaults under this program. To the extent that the assessments paid in by participants in the programs are insufficient to cover any losses or expenses arising from the program, the FDIC will be required to impose an emergency special assessment on all FDIC-insured depository institutions, even institutions that opted out. Any surplus existing upon the close of the program will be contributed into the DIF.

Conclusion

As eligible institutions weigh their options on participation in the TLG program, most will focus their on costs of participation as well as market expectations. Institutions that have little in the way of transaction account balances above the current general $250,000 FDIC insurance limit and little interest in issuing senior unsecured debt may at first think that they should not participate in the programs, but such institutions may still want to participate given they would incur little to no assessment fees under the program. Institutions that hold large amounts of transaction accounts above the $250,000 limit or intend on issuing senior unsecured debt may not want to incur additional costs, but may find they are at a competitive disadvantage both in raising deposits and in the debt markets if their customers and other counterparties expect participation.