Alert November 25, 2008

FDIC Issues Final Rule Adopting and Modifying its Temporary Liquidity Guarantee Program

The FDIC issued a final rule (the “Final Rule”) adopting and modifying its Temporary Liquidity Guarantee Program (the “TLGP”).  On October 13, 2008 (and as described in the October 14, 2008 Alert), the FDIC adopted and requested public comment on an Interim Rule establishing the TLGP.  The FDIC said that it established the TLGP “to decrease the cost of bank funding so that bank lending to consumers and businesses will normalize.”  The TLGP has two components: (i) a guarantee of newly issued senior unsecured debt of any FDIC-insured depository institution and certain bank and savings and loan holding companies engaged only in financial activities (the “Debt Guarantee Program”); and (ii) full deposit insurance coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount (the “Transaction Account Guarantee Program”)  The TLGP is funded through fees charged to participating financial institutions rather than through taxpayer funds or through the FDIC’s Deposit Insurance Fund.

The key changes made in the Final Rule from the TLGP’s Interim Rule are:

  • Debt Guarantee Program
    • To add value to the guarantee and help banks obtain lower cost funding, the debt guarantee will be triggered by payment default rather than by bankruptcy or receivership.
    • A banking organization’s senior unsecured debt of less than 30 days’ maturity will not be guaranteed under the TGLP.
    • The FDIC confirmed that guarantees under the TLGP, just as FDIC coverage for deposits, will be backed by the full faith and credit of the U.S. Government.
    • The 75 basis point flat fee for the debt guarantee is replaced with a sliding scale fee structure: 50 basis points for debt with maturities of 180 days or less; 75 basis points for debt with maturities of 181 days to 364 days; 100 basis points for debt with maturities of 365 days or longer.  Also a 10 basis point surcharge for holding companies whose insured depository institutions represent less than 50% of their total assets.
    • A bank that had no outstanding unsecured debt on September 30, 2008 may participate with new debt equal to up to 2% of its total liabilities.
    • A banking institution can opt-out of the TLGP until December 5, 2008.
  • Transaction Account Guarantee Program
    • NOW accounts with interest rates of 0.5% or less and IOLTAs (lawyers’ trust accounts established for moneys of the lawyers’ clients) whose interest does not accrue to the account owner have been added as types of account that will be covered by this program.
    • Banking organizations will not have to aggregate accounts in determining coverage.  Only balances over $250,000 in transaction accounts will be covered and assessed, regardless of the account ownership.

For the Transaction Account Guarantee Program, the annual fee of 10 basis points and the expiration of coverage on December 31, 2009 were unchanged from the Interim Rule.