On Tuesday, Oct. 14, 2008, Treasury and the various federal banking agencies released information pertaining to several important bank stimulus initiatives.

Each is designed to enhance confidence in the United States financial system, to increase ready access to capital, to enhance liquidity, and to provide a stimulus for breaking the institutional deadlock that has arisen in the recent international credit “crisis.”

And each will require careful analysis by institutions that are considering participation in the programs based on the individual circumstances and strategic plans of the institution.

The following are highlights of the various initiatives.

FDIC Initiatives: Enhanced FDIC Debt and Deposit Guarantees

While the Emergency Economic Stabilization Act of 2008 (the “EESA”) already provides for a temporary increase of deposit coverage from $100k to $250k for most deposit accounts, the FDIC has announced a plan to enhance bank liquidity through a program that will (1) temporarily (until June 30, 2012) guarantee newly-issued senior unsecured debt for banks, thrifts, and certain holding companies issued before June 30, 2009, and (2) will provide unlimited coverage of non-interest bearing deposit transaction accounts (typically business payment processing accounts such as payroll accounts). This program will not rely on taxpayer funding, but rather fees and special assessments for participating institutions.

Treasury Initiatives: Voluntary Capital Purchase Program

Treasury has announced that it will deploy up to $250 billion of the funds authorized by the EESA to purchase bank, thrift, and/or holding company capital in the form of senior nonvoting preferred shares. Participation in this program requires institutions to comply with restrictive executive compensation and “golden parachute” rules that impact executives of the participating institution, and the impact on existing shareholders is unclear at the present and varies between institutions. Participation also involves providing Treasury with warrants to purchase common shares in participating institutions equal to 15 percent of the preferred investment.

Participating institutions have until Nov. 14, 2008, to elect to participate.

Minimum subscriptions will be 1% of riskweighted assets, up to the lesser of $25 billion or 3% of risk-weighted assets. The preferred shares will pay a cumulative dividend of 5 percent for the first five years, will reset to 9 percent thereafter with a three-year call, and may be redeemed during the call period. The preferred shares will be freely transferable by Treasury, which may result in some concerns for participants.

Federal Reserve Initiatives: Commercial Paper Funding

Commencing on Oct. 27, 2008, the Federal Reserve has agreed to fund purchases of three-month commercial paper from high-quality issuers to enhance liquidity opportunities in the market.


The impact of each of these initiatives remains to be seen. Potential participants will need to carefully review the benefits and potential burdens of each program based on their own individual circumstances and strategic plans.