On December 11, 2008, the FDIC updated its Frequently Asked Questions (FAQ) on the Temporary Liquidity Guarantee Program.  The updated questions address both the Transaction Account and Debt Guarantee portions of the TLGP, but this post focuses on the Transaction Account Guarantee.  Bank action is likely required to assure that NOW accounts are covered by the TLGP’s Transaction Account Guarantee.

The updated FAQ addresses four questions related to the guarantee of NOW accounts under the Transaction Account Guarantee.  NOW accounts with interest rates no higher than 0.50 percent are treated as noninterest-bearing transaction accounts and eligible for the guarantee “if the insured depository institution at which the account is held has committed to maintain the interest rate at or below 0.50 percent.”

The “Commitment” Process

The TLGP regulations do not provide a procedure for making this commitment or for reducing interest rates.  The FAQ clarifies that the Board of Directors or other authorized officials can make the commitment in accordance with the institution’s usual procedures for making decisions.  The commitment should be clear, in writing, and maintained in the institution’s books and records to avoid any confusion as to the nature of the commitment.

Tiered-Rate or Floating NOW Accounts

If it is possible for the interest rate paid on the NOW account to exceed 50 bps, then the account is not eligible for the guarantee, even if the interest rate remains below 50 bps.  If a NOW account (i) has a tiered-rate structure in which an interest rate above 0.50 percent is paid if the account balance is sufficiently large, or (ii) floats with an industry interest rate, then the NOW account will not be covered under the Transaction Account Guarantee “because the possibility exists that the interest rate will rise above 0.50 percent.”

In order for NOW accounts to be guaranteed, the provisions of the contract must provide that the interest rate cannot exceed 0.50 percent through December 31, 2009.  Presumably a NOW account that pays a variable interest rate set at the discretion of the bank will be guaranteed, so long as the Board of Directors or other authorized officials provide in the bank’s books and records an express commitment not to set rates on such NOW accounts over 0.50 percent through December 31, 2009.

Reducing Interest Rates on NOW Accounts

The TLGP regulations do not set forth a procedure for reducing interest rates.  Instead, the FDIC contemplates that banks participating in the program will proceed in accordance with the terms of its deposit contracts and applicable law, including Regulation DD.  Regulation DD requires 30 days advance notice for (i) any change in interest rates for fixed-rate accounts; and (ii) any change in how the interest rate is determined or in limitations on the amount the interest rate may change.  Again, for NOW accounts that pay a variable interest rate set at the discretion of the bank, no notice under Regulation DD should be required, other than the normal periodic statement disclosures.

On the other hand, if the bank needs to modify the terms of its NOW accounts that have either a tiered-rate structure or that float with an industry interest rate, then the bank may need to create a new NOW account product that is structured to assure that the interest rate will not rise above 50 bps through December 31, 2009.  The institution can then offer the new NOW Account product to its existing NOW account depositors, and the depositors can decide whether to shift their funds into the fully guaranteed NOW account product.  This process allows the institution to avoid the 30-day advance notice requirement for changes under Regulation DD, and also permits the individuals to agree to any reduction in interest rates following December 31, 2008 without affecting the ability of the funds to be fully guaranteed under the TLGP Transaction Account Guarantee.

NOW Account Disclosures

Finally, the FDIC’s Frequently Asked Questions require lobby/website disclosure if the bank offers a NOW account product that does not qualify as a noninterest-bearing transaction account.  The FDIC seeks to avoid confusion in situations where some NOW accounts may not qualify for the guarantee, while other NOW accounts qualify.  The FDIC suggests that an explanatory sentence or two should be added to the sample notice provided by the FDIC to properly notify the consumers.  The FDIC emphasizes that such disclosures should be in simple, readily understandable text, but does not provide samples.

The FDIC has offered the following sample language for participating institutions:

“[Institution Name] is participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.”

Presumably the easiest way for banks to avoid customer confusion is to explicitly name the bank’s NOW account products that are fully guaranteed by the FDIC, as well as the bank’s NOW account products that are not fully guaranteed by the FDIC (but that remain subject to the general FDIC insurance limitations).