The FDIC has adopted a final rule implementing its Temporary Liquidity Guarantee Program (“TLGP”). The TLGP has two components: a Debt Guarantee program (“Debt Guarantee”), by which the FDIC will guarantee the payment of certain newly-issued senior unsecured debt, and a Transaction Account Guarantee program (“Transaction Account Guarantee”), under which the FDIC will guarantee certain noninterest-bearing transaction accounts. The Final rule amends an interim final rule on the TLGP that the FDIC adopted on October 23, 2008 and with respect to which the FDIC received over 700 comments. The FDIC’s TLGP interim rule was the subject of prior Kilpatrick Stockton Legal Alerts dated October 27, 2008 and November 5, 2008.

As noted in prior Alerts, any eligible entities that do not want to participate in either the Debt Guarantee or Transaction Account, or both, must opt out no later than 11:59 p.m. on December 5, 2008 through a form to be available on FDICconnect. All members of a holding company group must make the same election with respect to each aspect of the TLGP.

Highlights of changes that the final rule made in the interim final rule, largely due to comments received, are as follows:

  • Under the Debt Guarantee, the FDIC’s guarantee will be triggered by default in payment of principal or interest rather than by a receivership or bankruptcy proceeding. That change was made in order to enhance the timeliness of payment under the guarantee and facilitate the acceptance of guaranteed instruments in the financial markets. The FDIC has also indicated that the Debt Guarantee is backed by the full faith and credit of the United States.
  • Participating entities in the Debt Guarantee must now execute and file a “Master Agreement” governing the guarantee.
  • The definition of “senior unsecured debt” subject to the Debt Guarantee has been amended to exclude any obligation with a stated maturity of 30 days or less. That change was made in response to comments arguing that the FDIC’s fee for the Debt Guarantee was too high for short-term instruments.
  • Any eligible entity with no senior unsecured debt (as defined in the rule) as of September 30, 2008, or only federal funds purchased as of that date, may participate in the Debt Guarantee subject to a cap of 2% of total liabilities on September 30, 2008.
  • The individual limits for the FDIC guarantee for a parent holding company and its insured depository institution subsidiary may be combined in one entity with written notice to the FDIC. The fees for the Debt Guarantee have been changed from a 75 basis point annualized fee to a sliding scale. The annualized fee will be 50 basis points for debt with a maturity of less than 180 days, 75 basis points for debt with a maturity of 181-364 days and 100 basis points for debt with a maturity of 365 days or more. Holding companies whose combined depository institution subsidiaries constitute less than 50% of total holding company consolidated assets are subject to a 10 basis point surcharge.
  • NOW accounts with an interest rate of .5% or less and Lawyers Trust Accounts (IOLA accounts) will be included as non-interest bearing transaction accounts for purposes of the Transaction Account Guarantee. The FDIC concluded that both of these types of accounts are sufficiently similar to noninterest-bearing transaction accounts to be covered by the guarantee.
  • The Final Rule sets out specific disclosures that are to be used in connection with the Debt Guarantee and with respect to participation or non-participation in the Transaction Account Guarantee.

This Alert sets out highlights of the final rule. All institutions are strongly encouraged to obtain and carefully read the rule in its entirety so that a fully informed decision can be made on whether to opt out.