On October 23, 2008, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) adopted an interim final rule to implement its previously announced Temporary Liquidity Guarantee Program (“Program”). The Program, which is the subject of Kilpatrick Stockton Legal Alerts dated October 14, 2008 and October 21, 2008 , involves (i) an FDIC guarantee of certain newly issued senior unsecured debt issued by institutions or their holding companies on or after October 14, 2008 and before June 30, 2009 and (ii) unlimited deposit insurance coverage for non-interest bearing transaction accounts through December 31, 2009. All FDIC-insured institutions and most holding companies are covered by both aspects of the Program as of October 14, 2008, at no charge, subject to the ability to opt out by November 12, 2008 at 11:59 p.m, Eastern time. Fees for both aspects of the Program will take effect if an eligible entity has not opted out by then.
Important issues addressed by the interim final rule include the definition of “senior unsecured debt” for purposes of the guarantee. The term means unsecured borrowings that are evidenced by a written agreement, have a specified and fixed principal amount to be paid in full on demand or on a date certain, are noncontingent and are not, by their terms, subordinated to any other liabilities. Examples include federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, certificates of deposit standing to the credit of a bank, bank deposits in an international banking facility of an insured depository institution and Eurodollar deposits standing to the credit of a bank. “Senior unsecured debt” is defined to exclude, among other instruments, obligations from guarantees or other contingent liabilities, derivatives or derivative-linked products, debt paired with any other security, convertible debt, capital notes, the unsecured portion of otherwise secured debt, negotiable certificates of deposit and deposits in foreign currency and Eurodollar deposits that represent swept funds from individual, partnership or corporate accounts held at insured depository institutions. Loans to affiliates and institution-affiliated parties are also excluded.
For purposes of the maximum debt guarantee of 125% of the par or face value of unsecured debt on September 30, 2008, each individual participating entity within a holding company structure will be calculated separately. On a case by case basis, the FDIC may raise or lower the 125% limit.
Eligible debt must be issued on or after October 14, 2008 and on or before June 30, 2009. For eligible debt issued, the FDIC will provide guarantee coverage until the earlier of the maturity date of the debt or June 30, 2012. The guarantee will expire at 11:59 p.m. Eastern time, on June 30, 2012, regardless of whether the liability has matured. If an eligible entity chooses to opt out of the debt guarantee, the FDIC’s debt guarantee will terminate on the earlier of 11:59 p.m., Eastern time, on November 12, 2008, or the time that the eligible entity’s opt-out decision is submitted to the FDIC.
The rule provides notification procedures and reporting requirements for entities that issue guaranteed debt under the Program. If an entity does not opt out, all eligible debt issued up to the guarantee limit will be subject to the guarantee. However, entities that continue in the Program may notify the FDIC that they have elected to issue non-guaranteed debt with maturities beyond June 30, 2012, subject to the payment of a nonrefundable fee to the FDIC and appropriate disclosures to lenders and creditors. An eligible entity that has not opted out of the debt guarantee must clearly identify to any interested lender or creditor, in writing and in a commercially reasonable manner, whether or not the debt it is offering is guaranteed by the FDIC.
The term “non-interest bearing transaction account” generally includes traditional checking accounts that allow for unlimited numbers of deposits and withdrawals at any time and do not pay interest. The unlimited coverage for such accounts under the Program is in addition to and separate from the general existing FDIC coverage.
Contrary to earlier indications, the interim final rule requires that every eligible entity in a holding company system make the same decision regarding participation in each aspect of the program. It does not appear, for example, that a holding company could stay in the debt guarantee aspect of the Program while a subsidiary bank opts out. The interim final rule says that the FDIC will provide procedures for opting out using FDICconnect.
An important clarification in the interim rule is that an eligible entity’s decision to opt out of the rule will be public. The FDIC intends to maintain a list on its website of all organizations that have opted out of either aspect, or both aspects, of the Program. Each eligible entity must post a notice in the lobby of its main office and all branches as to whether it is participating in non-interest bearing transaction account guarantee aspect of the Program, and, if so, the notice must state that non-interest bearing transaction accounts are insured in full by the FDIC. Entities that use sweeps to transfer funds or reclassify funds into an interest bearing account or nontransaction account must disclose such actions to affected customers and clearly advise them, in writing, that such actions void the unlimited coverage. As previously noted, the rule also establishes disclosure requirements related to the debt guarantee.
The final interim rule notes that participating entities are subject to the FDIC’s oversight regarding compliance with the Program’s terms and conditions. Violation of terms and conditions may result in termination of eligibility and/or formal enforcement action.
This Alert summarizes some highlights of the interim 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 or not to opt out.
The interim final rule was effective on October 23, 2008, while the Program itself commenced on October 14, 2008. However, the FDIC has established a 15 day comment period on the rule (from the date of publication in the Federal Register) and may amend the rule according to comments received.