FDIC Bank Debt Guarantee Program

On Friday, November 21, The Board of Directors of the FDIC approved a final rule to strengthen the agency’s Temporary Liquidity Guarantee Program.  The rules are designed to further ease the rigid and apprehensive credit markets.  The program is part of the larger bailout program already in place and only effects bank to bank borrowing on loans in excess of 30 days.  The Federal Deposit Insurance Corporation has now put some details in place on their bank debt guarantee program. 

It was on October 23, 2008 that the board of the FDIC announced the Temporary Liquidity Guarantee Program.  Per the FDIC, this program was originally produced to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount.

At the time of the establishment of the program the credit market conditions had significantly impaired the ability of creditworthy companies to issue commercial paper and longer term debt.  The program was created along with the corresponding actions by the Congress, Treasury and Federal Reserve.  The strategy of the various government programs was to unlock the credit markets with the main intent of the Temporary Liquidity Guarantee Program to thaw the inter-bank credit markets.  Disruptions in the credit market, particularly the interbank lending market, reduced banks’ liquidity and impaired their ability to lend. 

The goal of the Temporary Liquidity Guarantee Program is to decrease the cost of bank funding so that bank lending to consumers and businesses will normalize.  The industry funded program does not rely on the taxpayer or the deposit insurance fund to achieve its goals.

Chief among the changes is that the debt guarantee will be triggered by payment default rather than bankruptcy or receivership. This change will add value to the guarantee and help entities obtain lower cost funding.

Another change is that short-term debt issued for one month or less will not be included in the TLGP, consistent with the objective of the program to facilitate longer term lending.

Finally, the fees to participate in the debt guarantee component of the Temporary Liquidity Guarantee Program have been changed.  Originally the FDIC was going to charge eligible entities 75 basis points on an annualized basis for guaranteed debt. After reviewing the comments, the FDIC decided to impose a fee structure based on a sliding scale, depending on length of maturity. Shorter-term debt will have a lower fee structure and longer-term debt will have a higher fee. The range will be 50 basis points on debt of 180 days or less, and a maximum of 100 basis points for debt with maturities of one year or longer, on an annualized basis.

Eligible entities will have until December 5, 2008, to opt out of the Temporary Liquidity Guarantee Program. Once in the Program, an entity is in for the duration.  Those that choose to opt out will not be able to participate at a later date. Any debt issued on or before June 30, 2009, will be fully protected through the earlier of the maturity of the debt instrument or June 30, 2012.

This entry was posted on Sunday, November 23rd, 2008 at 2:15 am and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.