On October 23, 2008, the Federal Deposit Insurance Corporation (FDIC) issued an interim rule and request for comments (the “Interim Rule”)1 to implement its two-pronged Temporary Liquidity Guarantee Program (the “Program”), established on October 14, 2008, under the systemic risk provision of the Federal Deposit Insurance Act (the “FDI Act”).2 Comments are due by November 13, 2008.
The Program is voluntary and includes a temporary guarantee for newly issued senior unsecured debt (the “Debt Guarantee Program”) and temporary unlimited deposit insurance coverage for noninterest- bearing transaction accounts (the “Transaction Account Guarantee Program”). The purpose of the Program is to “preserve confidence and encourage liquidity in the banking system in order to ease lending to creditworthy businesses and consumers.”
The Interim Rule was issued following a series of hour-long telephonic technical briefings,3 and has been supplemented by the issuance of Frequently Asked Questions.4 In addition, on November 3, 2008, the FDIC extended certain Program deadlines (including the opt-out deadline), and issued Guidance for Election Options and Reporting Requirements, as well as an Election Form and Reporting Instructions.5 The FDIC is seeking comment on all aspects of the Interim Rule. With respect to the Debt Guarantee Program, the FDIC is particularly interested in (1) ways in which the claims process may be modified to speed payment to eligible claimants without risking funds administered by the FDIC, and (2) whether the burden of the disclosures required by the Interim Rule outweighs the certainty of payment provided thereby. With respect to the Transaction Account Guarantee Program, the FDIC has asked whether the unlimited insurance coverage also should extend to NOW accounts held by sole proprietorships and non-profit religious, philanthropic and charitable organizations. The coverage of IOLTA accounts also is being considered.
Program Opt-Out Requirement
Participation in both the Debt Guarantee Program and the Transaction Account Guarantee Program is voluntary. The Program is an opt-out program. Each eligible entity is covered for the first 30 days of the Program—October 14, 2008, through November 12, 2008—and must notify the FDIC of its intent to opt out no later than 11:59 p.m. Eastern Standard Time on December 5, 2008.6 An eligible entity may opt out of either or both components of the Program; however, once made, the decision is irrevocable for the duration of the Program. In addition, all eligible entities within the same organization must make the same decision with respect to participation in the Program.
Emergency Systemic Risk Assessment
The Program will be funded through special fees or assessments, rather than by U.S. taxpayers as further detailed below. If the assessments fall short of actual Program costs, the industry will be assessed an emergency systemic risk assessment to cover the shortfall. If the assessments exceed actual Program costs, any excess will remain in the Deposit Insurance Fund (DIF). However, the DIF is not available to fund shortfalls in the Program.
Supervision & Enforcement
Eligible entities that do not opt out will be subject to supervision by the FDIC to ensure compliance with the Program, and to monitor rapid growth and undue risk taking. Violations of the terms of the Program, including the issuance of debt labeled “guaranteed” beyond the entity’s guaranteed debt limit, will subject the entity to enforcement action under Section 8 of the FDI Act.7
Debt Guarantee Program
The Debt Guarantee Program was specifically designed to “provide liquidity to the interbank lending market and to promote stability in the unsecured funding market for banks.” The guarantee became effective for eligible debt on October 14, 2008, and will last until the debt matures or June 30, 2012, whichever is earlier.
There are generally three types of eligible entities—insured depository institutions (“IDIs”), U.S. bank holding companies, and certain savings and loan holding companies. In order to prevent the guarantee from extending to debt issued by commercial firms, only those savings and loan holding companies solely engaging in activities permissible for financial holding companies are eligible to participate in the Debt Guarantee Program. In addition, affiliates of IDIs may be designated as eligible by the FDIC, on a case-by-case basis, after consultation with the IDI’s primary federal regulator.
This determination would most likely occur in circumstances where the affiliate borrows on behalf of or otherwise provides support to the IDI. FDIC-insured industrial banks are eligible entities, but their holding companies are not.
The Debt Guarantee Program only applies to newly issued senior unsecured debt. “Newly issued” debt is debt that is issued on or after October 14, 2008, and on or before June 30, 2009. “Senior unsecured debt” is unsecured debt that (i) is evidenced by a written agreement, (ii) has a specified and fixed principal amount to be paid in full or on demand or on a date certain, (iii) is noncontingent and (iv) is not, by its terms, subordinated to any other liability. Facilities included within the definition of senior unsecured debt are promissory notes, commercial paper, federal funds purchased and unsubordinated unsecured notes, among others. Senior unsecured debt may be denominated in foreign currency. Excluded from the definition of senior unsecured debt are, among other obligations, obligations from guarantees or other contingent liabilities, derivatives or derivative-linked products, the unsecured portion of otherwise secured debt and negotiable CDs. The purchaser of the debt is irrelevant for the determination of debt eligibility.
The maximum amount of debt that can be issued under the guarantee is 125 percent of the par value of the eligible entity’s senior unsecured debt (not including any debt extended to affiliates or institution-affiliated parties) outstanding as of September 30, 2008, that was scheduled to mature on or before June 30, 2009. For those eligible entities without debt outstanding at September 30, 2009, determinations will be made by the FDIC, in consultation with the entity’s primary federal regulator, on a case-by-case basis.
An eligible entity that has not opted out of the Debt Guarantee Program may issue non-guaranteed senior unsecured debt under one of two scenarios. First, the entity may issue non-guaranteed senior unsecured debt after it has reached its 125 percent limit, and then only if it is clearly disclosed that the debt is not guaranteed. Second, the entity may elect to issue non-guaranteed senior unsecured debt via the FDIC’s FDICconnect before December 5, 2008. An election under this second scenario will require the payment of a nonrefundable fee, but will permit the entity to issue non-guaranteed senior unsecured debt, with a maturity after June 30, 2012, at any time without regard to the maximum guaranteed debt limit.
Use of Debt Proceeds
While the Debt Guarantee Program is intended to ease credit, the Interim Rule does not require that the debt proceeds be used to extend credit. The debt proceeds may be used to roll over debt that matures between October 14, 2008, and June 30, 2009. The proceeds may not be used to prepay debt that matures any time after June 30, 2009.
Eligible entities that have not opted out of the Debt Guarantee Program must disclose to any interested lender, in writing and in a “commercially reasonable manner,” whether or not the debt issuance is guaranteed. In addition, the FDIC will post on its website a list of eligible entities that have chosen to opt out of the Debt Guarantee Program.
The FDIC will make a payment under a guarantee pursuant to the Debt Guarantee Program upon the failure of the eligible entity (if an IDI) or the filing of a bankruptcy petition with respect to any other eligible entity. Payment will be made for unpaid principal and contract interest accrued through the date of the failure or bankruptcy.
No fees will be assessed during the first 30 days of the Debt Guarantee Program. An eligible entity that opts out by the December 5, 2008, deadline will not pay any assessment. Each participating eligible entity will be assessed, retroactive to November 13, 2008, an amount equal to the amount of guaranteed debt multiplied by the term of the debt, multiplied by an annualized 75 basis points. June 30, 2012, is used as the maturity date for all debt maturing after June 30, 2012. A 75 basis point penalty will be assessed to all eligible entities that issue debt in excess of guarantee limits with FDIC guarantee representations.
Transaction Account Guarantee Program
The Transaction Account Guarantee Program provides temporary full insurance coverage for funds held in all non-interest-bearing transaction accounts maintained at an IDI participating in the program. The FDIC expects that the majority of such accounts will be payroll and other business transaction accounts with balances that typically exceed the $250,000 standard maximum deposit insurance amount.8 The purpose of the Transaction Account Guarantee Program, therefore, is to stabilize the shifting of these accounts between IDIs.
Full insurance coverage became effective for non-interest-bearing transaction accounts held at all IDIs on October 14, 2008, and will continue through December 31, 2009, for non-interest-bearing transaction accounts held at IDIs that do not opt out of the Transaction Account Guarantee Program by the December 5, 2008, deadline.
The Transaction Account Guarantee Program provides full insurance coverage for all non-interestbearing transaction accounts. These are defined under the Interim Rule as deposit accounts on which interest is neither accrued nor paid, and on which the IDI does not reserve the right to require advance notice of withdrawal. These are typically traditional demand deposit accounts, including consumer demand deposit accounts.
The FDIC’s normal procedures for determining account balances in connection with a failure will be used to determine which account balances are covered. With respect to sweep accounts, any funds swept to an account that is not a non-interest-bearing transaction account will not be insured under the Transaction Account Guarantee Program. However, the FDIC has made an exception for funds swept to a non-interest-bearing savings account as part of a reserve sweep program.
Each IDI must post a notice in the lobby of its main office and all branch offices stating whether it has opted in or out of the Transaction Account Guarantee Program. If the IDI has opted in, it must provide a statement that funds held in non-interest-bearing transaction accounts are fully insured by the FDIC. To the extent the IDI offers a sweep program (other than a reserve sweep program) in which funds are swept to an interest-bearing account or nontransaction account, the IDI must provide a statement that such funds are not guaranteed under the Transaction Account Guarantee Program. The FDIC will post on its website a list of the IDIs that have opted out of the Transaction Account Guarantee Program.
IDIs participating in the Transaction Account Guarantee Program will be assessed a fee for the continuing additional coverage retroactive to November 13, 2008. The fee will be an annualized 10 basis point fee, assessed quarterly, on balances in non-interest-bearing transaction accounts exceeding the $250,000 standard maximum deposit insurance amount.