The Federal Deposit Insurance Corporation (“FDIC”) has adopted an Interim Rule (“Interim Rule“) extending the period during which participating entities may issue FDIC-guaranteed senior unsecured debt under the agency’s Temporary Liquidity Guarantee Program (“TLGP”) and imposes surcharges on certain guaranteed debt issued under the program after April 1, 2009. The Interim Rule does not change a participating entity’s debt guarantee limit or affect any conditions placed by the FDIC on the issuance of guaranteed debt by a particular entity.
The debt guarantee portion of the TLGP originally provided that participating entities could issue guaranteed debt until June 30, 2009 and the debt would be guaranteed until the earlier of the maturity of the debt or June 30, 2012. The FDIC, citing its belief that the debt guarantee program has been effective in improving short-term and intermediate public funding for banking organizations, has extended until October 31, 2009 the date by which depository institution participants in the program may issue guaranteed senior unsecured debt. For debt issued after April 1, 2009 under the TLGP, the guarantee has been extended until the earlier of maturity or December 31, 2012.
The extension, however, does not automatically apply to bank and savings and loan holding companies and other affiliates that participate in the program unless they have issued guaranteed debt under the program before April 1, 2009. In order to participate in the extension of the program, entities that are not automatically qualified are required to apply to the FDIC by June 30, 2009 and receive prior approval. The FDIC indicated that the application process is a risk mitigation measure because the FDIC has no reason to be familiar with the condition and characteristics of non-depository program participants that have not issued guaranteed debt by April 1, 2009.
The Interim Rule also imposes surcharges on FDIC-guaranteed debt with maturities of at least one year issued on or after April 1, 2009. The annualized surcharge will be 10 basis points for depository institutions and 20 basis points for other participating entities, if the debt is issued up to and including June 30, 2009 and matures on or before June 30, 2012. Those surcharges will increase to 25 basis points and 50 basis points, respectively, for guaranteed debt with a maturity of one year or more issued during the extension period, i.e., after June 30, 2009 or issued after April 1, 2009 with a maturity after June 30, 2012. Unlike the general assessments for the TLGP which are collected for possible losses under the program, the surcharges will be deposited in the Deposit Insurance Fund and may enable the FDIC to reduce the 20 basis point special deposit assessment adopted in February.
The Interim Rule indicates a belief that certain aspects of credit markets have improved and the Interim Rule is a step to begin the orderly phase out of the TLGP. The extension is intended to provide for a transition period during which participating entities return to non-FDIC-guaranteed funding and to reduce potential market disruption when the debt guarantee program ends. The surcharge is intended to facilitate the transition by incenting program participants to seek funding sources that do not involve FDIC guarantees.