Eligible Institutions Required to Opt-out After Initial 30-day Coverage but Remain Subject to Potential FDIC Assessments for Insurance Fund Deficiencies
On October 14, 2008, the Federal Deposit Insurance Corporation announced a program that would provide eligible institutions with a 100 percent guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts. This temporary liquidity guarantee program, together with a program by the U.S. Treasury to make investments in senior preferred stock and common stock warrants in qualifying financial institutions and the Federal Reserve’s previously announced commercial paper funding facility, is part of a three-pronged effort by the government to free up credit markets and provide banks with additional assurances to resume normal lending.
Under the new FDIC temporary liquidity institutions the following are “Eligible Entities” that can participate in the new FDIC guarantee program:
- FDIC-insured depository institutions;
- U.S. bank holding companies;
- U.S. financial holding companies; and
- U.S. savings and loan holding companies that engage only in activities permissible for U.S. financial holding companies under Section 4(k) of the Bank Holding Company Act.
The FDIC will issue temporary guarantees of the following liabilities:
- Newly issued senior unsecured debt issued on or before June 30, 2009 in an amount not exceeding 125 percent of debt outstanding on September 30, 2008 that was scheduled to mature on or before June 30, 2009.
- Funds in non-interest-bearing transaction deposit accounts held by FDIC-insured banks.
Senior unsecured debt eligible for the FDIC guarantee includes promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt (e.g., if there was a collateral deficiency on a repurchase transaction).
The guarantee program extends:
- Until June 30, 2012 for eligible debt issued on or before June 30, 2009, even if the liability had not matured as of that date; and
- Until December 31, 2009 for non-interest-bearing transaction deposit accounts held by FDIC-insured banks.
All eligible institutions will be covered automatically, without charge for the first 30 days of the program. After the first 30 days, Eligible Institutions would be required to opt-out of the program. Unless an institution has opted out, fees would be assessed as follows:
- For newly-issued senior unsecured debt, an annualized fee equal to 75 basis points.
- For non-interest-bearing transaction deposit accounts, a 10 basis point surcharge for accounts not otherwise covered by the existing deposit insurance limit of $250,000.
All FDIC-insured institutions would be subject to special assessment for any deficiency in the program after its expiration, whether or not they had opted-out of the temporary liquidity guarantee program, in accordance with the FDIC Improvement Act of 1991.1
Eligible institutions availing themselves of the guarantee program will be subject to enhanced supervisory oversight “to prevent rapid growth or excessive risk taking.” The FDIC will make eligibility determinations in consultation with the primary Federal regulator (if not the FDIC).
Senior FDIC staff held technical briefings on October 14, 2008 to answer preliminary questions about this program.2 The staff provided preliminary answers regarding interpretive questions arising under the temporary liquidity guarantee program, including the following:
- An institution with no senior unsecured debt outstanding on September 30, 2008 is not automatically eligible for the guarantee program. Such an institution may request an exception from the FDIC and the institution’s primary Federal regulator (if not the FDIC).
- There is a mandatory opt-out. Any institution that does not opt-out is automatically subject to the program.
- All fees received under the program will be sequestered from the Deposit Insurance Fund (“DIF”) and available to pay defaults under this program, with any deficiency specially assessable against all FDIC-insured banks, and any profit contributed into the DIF.
- The program is intentionally skewed to larger banks in that availability is based on all bank liabilities, not merely deposits.
- Subordinated debt is not eligible for the FDIC guarantee.
- One of the primary applications of the temporary guarantee program is expected to be in inter-bank funding arrangements.
- Banks participating in the program will remain subject to limitations on related party transactions, including inter-company funding arrangements, pursuant to Sections 23A and 23B of the Federal Reserve Act.
- The FDIC is still evaluating the implications this program to U.S. branches of foreign banks.
- In the case of institutions that issued debt after the effective date of the program in excess of the 125 percent guarantee limit, the institution should work closely with the FDIC and its primary federal regulator (if not the FDIC) to determine how the guarantee would be apportioned. 3
- When funds are swept into interest-bearing deposits, there would be no additional coverage under this program.
- Contingent and conditional liabilities are not insured.
- Interest bearing deposits, including large CDs and NOW accounts, are not considered to be liabilities eligible for this program, but would still be subject to the previously announced expanded $250,000 deposit insurance limit.
Eligible institutions are encouraged to consult with the FDIC and their primary federal regulator (if not the FDIC) for specific interpretive guidance. We expect that the FDIC will clarify the foregoing and other questions in the very near future.