While the FDIC’s Temporary Liquidity Guarantee Program (TLGP) remains an “opt-out” program, institutions must take affirmative action if they do not opt-out of the Debt Guarantee portion of the TLGP. Moreover, the FDIC’s Election Form Instructions state that all eligible entities must file the Election Form no later than 11:59 p.m., Eastern Standard Time, on December 5, 2008.
Failure to opt-out by 11:59 p.m., Eastern Standard Time, on December 5, 2008 constitutes an irrevocable decision to remain in both components of the TLGP, as described in the following paragraph. However, it is unclear whether institutions will be able to actually participate in the Debt Guarantee portion of the TLGP unless they have affirmatively opted-in.
About the TLGP
On October 14, 2008, the FDIC announced the TLGP to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt (the “Debt Guarantee”) and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured institutions (the “Transaction Account Guarantee”). The FDIC has provided a TLGP website and Frequently Asked Questions. In addition, all posts on BankPogo.com regarding the TLGP can be accessed here.
The TLGP Election Form
The TLGP Election Form must be submitted for all eligible entities using FDICconnect. The FDIC has also provided PDF versions of a Sample Election Form and the Election Form Instructions, which should be reviewed before completing the Election Form on FDICconnect.
All eligible entities within a bank holding company structure (or thrift holding company structure) must make the same decision regarding continued participation in each component of the TLGP. If any one member of the group opts out, all entities within the same structure are also deemed to have opted out. Eligible entities that are not FDIC insured depository institutions (i.e., bank holding companies) will select and use any affiliated subsidiary depository institution to submit their election form and to make any assessment payments required under TLGP. While not present on the Sample Election Form, we understand that the FDICconnect Election Form gives an opportunity to “Complete an Election Form for an affiliated eligible entity.”
In making the holding company’s election, you will need to enter the RSSD ID number for the holding company. The RSSD ID number can be obtained from the National Information Center.
Depository institutions will generally be presented with three elections to be made, while holding companies will be presented with two elections. Each entity will also be required, if they opt-in to the Debt Guarantee Program, to provide the total amount of senior unsecured debt outstanding at September 30, 2008. Each of these elections are discussed in more detail below.
The Transaction Account Guarantee Program Election
This election is only available for insured depository institutions. We expect (and understand the FDIC expects) that virtually all depository institutions will elect to participate in the Transaction Account Guarantee portion of TLGP. Fees are 10 basis points (annualized) on the excess funds in “noninterest bearing transaction accounts” exceeding the $250,000 insured limit.
The Debt Guarantee Program Election
All eligible entities have the election to participate in the Debt Guarantee portion of TLGP. We expect most depository institutions will elect to participate in the Debt Guarantee portion of TLGP, as there is no cost unless and only to the extent that the institution ultimately issues guaranteed debt.
Amount of Outstanding Unsecured Debt
An entity participating in the Debt Guarantee Program must state the total amount of outstanding senior unsecured debt as of September 30, 2008 that was scheduled to mature on or before June 30, 2009. However, if an FDIC-insured depository institution had no outstanding senior unsecured debt other than Federal funds purchased as of September 30, 2008, the institution should report zero (0) in response to this question (and the FDIC will use the institution’s 9/30 Call or Thrift Financial Report to calculate the maximum guaranteed amount of two percent of total liabilities).
Note 1: Although short-term obligations (30 days or less) are now excluded from the debt guarantee, participating entities will still include such amounts for purposes of determining the maximum guarantee amount under this program.
Note 2: When calculating senior unsecured debt, the following instruments should not be included as they do not meet the definition of senior unsecured debt: FHLB borrowings (secured), Fed Discount Window borrowings (secured), Trust Preferred Securities (subordinated), Subordinated Debentures (subordinated), or a bank holding company loan or line of credit secured by bank stock (secured).
Note 3: Calculate the amount of senior unsecured debt separately for each eligible entity. While holding companies can “downstream” guaranteed debt maximums to subsidiary institutions, they otherwise are unique to each entity.
Note 4: Fully insured interbank CDs are excluded from the definition of senior unsecured debt. If an institution’s interbank CDs outstanding are all fully insured, and they have no other senior unsecured debt, then the insured depository institution’s cap would be the alternative 2 percent of total liabilities.
- A bank had no senior unsecured debt at September 30, 2008 – 0 (and the maximum guaranteed amount will be 2% of total liabilities)
- A bank had $3 million in fed funds purchased at September 30, 2008 – 0 (and the maximum guaranteed amount will be 2% of total liabilities)
- A bank had a $2 million senior unsecured borrowing and $3 million in fed funds purchased at September 30, 2008 – $5,000,000 (and the maximum guaranteed amount will be 125% of that cumulative figure, or $6,250,000)
- A bank holding company had no senior unsecured debt at September 30, 2008 – 0 (and the maximum guaranteed amount will also be 0)
Non-Guaranteed Senior Unsecured Debt Option
An entity participating in the Debt Guarantee Program will then be given the choice of whether to have “the option of issuing certain non-guaranteed senior unsecured debt before issuing the maximum amount of guaranteed debt.” We expect most depository institutions will decline this option. (Each eligible entity in the same holding company group is permitted to make different elections under this option.)
By participating in the Debt Guarantee Program, an eligible entity generally may not issue any non-guaranteed senior unsecured debt until and unless the entity has issued its maximum guaranteed senior unsecured debt. In order to preserve the option of issuing non-guaranteed senior unsecured debt, the entity must elect to preserve this option and pay a nonrefundable fee equal to 37.5 basis points multiplied by the entity’s maximum guaranteed amount of debt. The fee is nonrefundable, but does offset against future fees associated with the issuance of guaranteed debt.
From a business perspective, the only reason we see that an institution would prefer to issue non-guaranteed debt would be if the institution can obtain better pricing for non-guaranteed debt when compared to the “all-in” price for guaranteed debt (interest rate + FDIC assessment). Assuming that such pricing was available (which seems questionable at this time), the entity may determine to either “secure” the debt (and thus make it ineligible for the guarantee) or move the debt to the holding company (which frequently will have a zero maximum guaranteed amount).
The Master Agreement
All entities participating in the Debt Guarantee Program, by submitting the Election Form, also agree to be bound by and comply with the terms of the “Master Agreement” and to execute and submit it to the FDIC within five business days from the date of their Election Form. A copy of the Master Agreement is available on the FDIC website.
The Master Agreement should be signed as of the date of the election of each participating entity, and the executed and dated copy of the signature page should be returned to the FDIC within five business days. (The cover page instructions to the Master Agreement indicate that the deadline is ten business days, but the Master Agreement itself and the Election Form both specify a five business day deadline.) Email to MasterAgreement@fdic.gov is the FDIC’s preferred method of delivery. Alternatively, the executed signature page to the Master Agreement can be sent via overnight courier to Senior Counsel, Special Issues Unit, E7056, Attention: Master Agreement, 3501 Fairfax Drive, Arlington, Virginia, 22226.
Although many holding companies will have a maximum guaranteed debt amount of zero, a Master Agreement will also need to be completed by the holding company to preserve the eligibility of its subsidiary depository institutions to participate in the Debt Guarantee program.