As previously announced on Tuesday, October 14, 2008, the Secretary of the Treasury, in consultation with the President and upon the recommendation of the Boards of the FDIC and the Federal Reserve, has invoked the systemic risk exception of the FDIC Improvement Act of 1991 allowing the FDIC to provide a 100 percent guarantee for: 1) newly-issued senior unsecured debt and 2) non-interest bearing transaction deposit accounts at FDIC insured institutions. The Program is designed to unlock inter-bank credit markets, restore rationality to credit spreads and free up funding for banks to make loans to creditworthy businesses and consumers. The Treasury estimates that $1.4 trillion of senior unsecured debt would be eligible for the guarantee and between $400 - $500 billion of non-interest bearing transaction accounts would be guaranteed under the Program. (Total domestic deposit accounts are approximately $7.0 trillion.) The Treasury and FDIC expect that guaranteed debt will receive a low risk weighting for purposes of the risk weighted capital requirements, which should encourage bank purchasers of the debt. The Program, which is voluntary, has two key features:
- The first feature guarantees new, senior unsecured debt issued by any bank, thrift or holding company. This guarantee will allow banks and their holding companies to roll maturing senior debt into new issues fully backed by the FDIC. However, guaranteed maturities cannot extend beyond three years. The ability to tap into this program expires at the end of June 2009.
- The second feature of the new program gives unlimited insurance coverage for non-interest bearing deposit transaction accounts. These are mainly payment processing accounts, such as payroll accounts used by businesses, that frequently exceed the current maximum insurance limit of $250,000. This feature of the Program was deemed necessary as many smaller, healthy banks have been losing these accounts to their much larger competitors because of uncertainties in the financial system.
The specifics of the Program are outlined below:
Under the Program, those institutions that would be eligible to participate would include: 1) FDIC-insured depository institutions, 2) U.S. bank holding companies, 3) U.S. financial holding companies, and 4) U.S. savings and loan holding companies that engage only in activities that are permissible for financial holding companies to conduct under section 4(k) of the Bank Holding Company Act (“Eligible Entities”). Under these terms, the FDIC insured, U.S. depository institutions owned by foreign entities would qualify as an Eligible Entity.
Scope of Liabilities
The FDIC’s guarantee would apply only to the following liabilities:
- All newly issued senior unsecured debt issued by Eligible Entities on or before June 30, 2009, including promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. The amount of debt covered by the guarantee may not exceed 125 percent of debt that was outstanding as of September 30, 2008, that was scheduled to mature before June 30, 2009. For eligible debt issued on or before June 30, 2009, coverage would only be provided for three years beyond that date (June 30, 2012), even if the liability has not matured; and
- Funds in non-interest-bearing transaction deposit accounts held by FDICinsured banks until December 31, 2009.
The FDIC will impose fees for coverage under this Program. The fees for coverage would be waived for the first 30 days. After the first 30 days, a fee would be imposed as follows:
- For all newly issued senior unsecured debt, an annualized fee equal to 75 basis points multiplied by the amount of debt issued under this program. These fees would be placed in the Bank Insurance Fund. Any shortfall in the fees (i.e., losses exceed the fees) would result in a special assessment against all insured banks based on relative outstanding nondeposit liabilities.
- For non-interest-bearing transaction deposit accounts, a 10 basis point surcharge would be applied to non-interestbearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. This surcharge will be added to the participating bank’s existing risk-based deposit insurance premium paid on those deposits.
Duration and Opt Out Requirement:
The ability of Eligible Entities to issue guaranteed debt under this program would expire on June 30, 2009. Initially, all Eligible Entities will be covered under this program for a period of 30 days. Prior to the end of this period, Eligible Entities must inform the FDIC whether they will opt-out of the guarantee program. If an Eligible Entity opts out of the program, the guarantee on newly issued senior unsecured debt and non-interest- bearing transaction deposit accounts will expire at the end of the 30-day period, regardless of the term of the instrument. Eligible Entities availing themselves of the guarantee program will be subject to enhanced supervisory oversight to prevent rapid growth or excessive risk-taking. The Treasury and FDIC, however, have not defined what would be deemed “excessive risk taking”. Insured institutions should note that if they do not opt out of the Program within the initial 30-day period, they will automatically continue to be covered for the full three years and be subject to the fees and enhanced supervisory oversight. The FDIC will maintain control over eligibility in consultation with the Eligible Entity’s primary Federal regulator.