The FDIC approved an interim rule (the “Rule”) to govern the Temporary Liquidity Guarantee Program (“TLGP”). See the October 14, 2008 Alert for previous coverage of the TLGP. The TLGP has two components: (a) the Debt Guarantee Program, which guarantees newly issued senior unsecured debt of participating banking organizations issued between October 14, 2008 and June 30, 2009 (“Guaranteed Debt”); and (b) the Transaction Account Guarantee Program which provides full deposit insurance coverage for non-interest bearing transaction accounts (“Guaranteed Accounts”), regardless of dollar amount. All eligible institutions are automatically enrolled in the TLGP for the first 30 days at no cost. Banking organizations that do not wish to participate in the TLGP must opt out by 11:59 p.m. on November 12, 2008. All eligible financial institutions within a U.S. bank holding company or U.S. savings and loan holding company must make the same determination to opt out of each component of the TLGP. As reported in the October 14, 2008 Alert, fees will be imposed on participants in the TLGP (i.e., those who do not opt out) after November 12, 2008. For those who do not opt out, the FDIC’s guarantee of the Guaranteed Debt will remain in force until June 30, 2012, even if the maturity date of the Guaranteed Debt extends beyond June 30, 2012. The guarantee of the Guaranteed Accounts will remain in effect until December 31, 2009.
Banking organizations eligible for participation in the TLGP include (a) any FDIC-insured depository institution, (b) any U.S. bank holding company, including financial holding companies, (c) U.S. savings and loan holding companies that engage only in activities that are permissible for financial holding companies under section 4(k) of the Bank Holding Company Act (the “BHCA”) or which have at least one insured depository institution subsidiary which is the subject of an application pursuant to 4(c)(8) of the BHCA pending as of October 13, 2008, and (d) other affiliates of FDIC-insured depository institutions designated by the FDIC in consultation with the appropriate Federal banking agency. The Rule includes a provision that allows certain otherwise ineligible holding companies or affiliates that issue debt for the benefit of an insured institution or eligible holding company to apply for inclusion in the program on a case-by-case basis.
The Debt Guarantee Program
The Rule requires that Guaranteed Debt must (a) be evidenced by a written agreement, (b) have a specified and fixed principal amount to be paid in full on demand or on a date certain, (c) be non-contingent, and (d) not be subordinated by its terms to any other liability. Guaranteed Debt generally includes 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. Guaranteed Debt does not include, among other instruments, obligations from guarantees or other contingent liabilities, derivatives, 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 funds swept from individual, partnership or corporate accounts held at insured depository institutions.
The FDIC will guarantee payment of unpaid principal and interest on the Guaranteed Debt accrued to the date of the bankruptcy or failure of the issuing banking organization. In the case of delays in payment of claims by holders of Guaranteed Debt, the FDIC will pay interest at the 90-day T-Bill rate. As reported in the October 14, 2008 Alert, the maximum amount of debt which may be guaranteed by the FDIC under the TLGP is 125% of the par value of the participating banking organization’s debt outstanding as of September 30, 2008 and scheduled to mature on or before June 30, 2009, excluding any debt extended to affiliates. This limit may be adjusted for certain participating entities if the FDIC, in consultation with any appropriate Federal banking agency, determines that it is necessary. If an eligible entity had no senior unsecured debt prior to September 30, 2008, the FDIC will consider the circumstances of the eligible entity and may determine an alternate threshold calculation. The maximum amount of guaranteed debt will be calculated separately for each individual participating entity within a holding company structure.
A participating banking organization may elect to issue certain non-guaranteed senior unsecured debt on or before November 12, 2008 before issuing the maximum amount of Guaranteed Debt. Election of this option would require a participating banking organization to pay a nonrefundable fee in exchange for which it will be able to issue, at any time and without regard to the cap, non-guaranteed senior unsecured debt with a maturity date after June 30, 2012. This fee would be applied to the par or face value of senior unsecured debt, excluding debt extended to affiliates, outstanding as of September 30, 2008, that is scheduled to mature by June 30, 2009. The fee would equal an annualized 75 basis points that would be charged for the six month period for which the Debt Guarantee program will be available.
The Transaction Account Guarantee Program
Guaranteed Accounts are defined by the Rule as a transaction account on which the insured depository institution pays no interest and does not reserve the right to require advance notice of intended withdrawals. This definition encompasses traditional checking accounts that allow for an unlimited number of deposits and withdrawals at any time. This definition does not, however, encompass negotiable order of withdrawal (“NOW”) accounts and money market deposit accounts. If the funds in an account are at any point swept into an interest-bearing account, that account does not qualify for a guarantee under the TLGP. In addition, funds swept into non-transaction accounts such as savings accounts are not covered. The Rule makes an exception to this treatment of sweep accounts where funds are swept from a non-interest bearing transaction account to a non-interest bearing savings account. In that case, the swept funds will be fully guaranteed under the TLGP. Otherwise, funds swept into an interest-bearing account will be insured under the FDIC’s general deposit insurance regulations.
The FDIC will maintain and post on its website a list of those banking organizations that have opted out of either or both components of the TLGP so that possible lenders and transaction account depositors can tell when an entity has opted out of the TLGP. All participating banking organizations must clearly identify, in writing and in a commercially reasonable manner, whether newly issued debt is guaranteed under the TLGP. Participating banking organizations must also post notices which indicate its participation, and if participating in the Transaction Account Guarantee Program, that all funds held in Guaranteed Accounts are insured in full by the FDIC.
Request for CommentThe Rule was effective as of October 23, 2008, however, comments will be taken for a 15-day period. The FDIC is specifically seeking comments on ways the claims process may be modified to speed payment without putting the FDIC at undue risk. The FDIC also invites comments on whether the disclosure obligations are too burdensome and whether is should fully guarantee NOW accounts held by sole proprietorships, non-profit organizations or governmental units particularly if the interest paid on such accounts is de minimis.