October 23, 2008
Authored by: Robert Klingler
- FDIC Press Release
- FDIC Financial Institution Letter
- Temporary Liquidity Guarantee Program – Interim Rule – PDF
The rule is immediately effective, although comments will be taken for a 15-day period.
The FDIC strongly encourages banks to remain in the program.
Opt Out Information. Any institution desiring to opt out must do so by 11:59 p.m. on November 12, 2008. An institution may opt out of the FDIC’s guarantee of either or both the newly-issued senior unsecured debt or noninterest-bearing transaction deposit accounts. The FDIC will post on its website a list of those entities that have opted out of either component, and each eligible entity must make clear to relevant parties whether it has chosen to participate in the program.
All insured depository institutions must post a prominent notice in the lobby of its main office, and each branch must clearly indicate whether the institution is participating in the transaction account guarantee program. If it is, the notice must state that funds held in noninterest-bearing transaction accounts are insured in full by the FDIC. If the institution uses sweep arrangements, the institution must disclose those actions to the affected customers and clearly advise them, in writing, that such actions will void the FDIC’s guarantee. (However, note the exception below for sweeps to noninterest-bearing savings accounts.)
Newly Issued Senior Unsecured Debt Guarantee Information. Senior unsecured debt generally includes federal funds purchased, promissory notes, commercial paper, and unsubordinated unsecured notes. Senior unsecured 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, or negotiable certificates of deposit.
The FDIC will guarantee newly issued unsubordinated debt in a total amount up to 125 percent of the par or face value of the senior unsecured debt outstanding, excluding debt extended to affiliates, as of September 30, 2008, that was scheduled to mature before June 30, 2009. The maximum amount guaranteed is calculated for each individual participating entity in a holding company structure and cannot be transferred between a bank and its holding company or between banks in a multi-bank holding company structure. All entities will be required to provide the amount of outstanding senior unsecured debt as of September 30, 2008 to the FDIC via FDIConnect.
The FDIC has retained the right on a case-by-case basis, after consultation with the primary federal banking regulator, to allow participating institutions to exceed the 125 percent limitation, or to permit participating institutions to issue guaranteed debt of some amount in the event that an institution had no senior unsecured debt outstanding at September 30, 2008.
Debt will not be guaranteed by the FDIC if the proceeds are used to prepay debt that is not FDIC-guaranteed.
Participating entities are prohibited from issuing guaranteed debt in excess of the maximum amount for that institution. If this threshold is exceeded and debt is identified as “guaranteed by the FDIC,” the assessment rate will be increased to 150 basis points on all outstanding guaranteed debt, and the participating entity will be subject to enforcement actions.
Participating entities are also prohibited from issuing non-guaranteed debt until the maximum allowable amount of guaranteed debt has been issued. After exhausting its maximum, the participating entity can then issue non-guaranteed debt in any amount.
Transaction Account Guarantee Program. The FDIC has provided a temporary full guarantee for funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts above the existing deposit insurance limit. A “non-interest bearing transaction account” is defined as a transaction account in which interest is neither accrued nor paid and on which the institution does not reserve the right to require advance notice of an intended withdrawal. In addition to traditional DDA accounts, this would also encompass official checks issued by the depository institution.
Generally, funds in sweep accounts will be treated in accordance with the usual rules and procedures for determining sweep balances at a failed institution, so that funds swept will be treated as being in the account to which the funds were transferred, and therefore not eligible for the FDIC guarantee. However, the FDIC has provided an exception for funds swept from a noninterest-bearing transaction account to a noninterest-bearing savings accounts; such funds will be treated as remaining in the noninterest-bearing transaction account and will be fully guaranteed by the FDIC.