On June 22, 2010, the FDIC Board of Directors adopted a final rule extending the Transaction Account Guarantee (TAG) component of the Temporary Liquidity Guarantee Program (TLGP) through December 31, 2010, for insured depository institutions (IDIs) currently participating in the program. The TAG program guarantees all funds held at participating IDIs in qualifying noninterest-bearing transaction accounts beyond the recently increased $250,000 deposit insurance limit. This final rule preserves the interim rule’s assessment fee structure and 25 basis-point interest rate limit for NOW accounts guaranteed by the program.

The final rule also provides that, without additional rulemaking, the Board may further extend the program for a period not more than a year (until and including December 31, 2011) if it finds that economic conditions and circumstances that led to the establishment of the program are likely to continue beyond December 31, 2010, and that extending the program for an additional period of time will help mitigate or resolve those conditions and circumstances. The FDIC must publish notice of any such further extension by October 29, 2010. This further extension language is the minor and only departure from the interim TAG rule issued on April 13, 2010. The interim rule provided that the FDIC could extend the program on the same grounds and without additional rulemaking “for an additional year.”

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On April 13, 2010, the FDIC extended the Transaction Account Guarantee (TAG) portion of the Temporary Liquidity Guarantee Program for another six months, through December 31, 2010, and preserved the flexibility to further extend the Transaction Account Guarantee through December 31, 2011 without further rule making.  In addition to extending the expiration date of the TAG program, the FDIC’s final rule (1) maintains the current assessment fees for participation, except that the calculation will now be based on an average daily balance rather than quarter-end balances; (2) reduces the maximum interest rate limit for NOW accounts guaranteed under the program from 50 basis points to 25 basis points; and (3) provides an opportunity for participating institutions to opt out of the program as of July 1, 2010.

All currently participating institutions have until April 30, 2010 to determine whether to continue in the program or opt out of the program.  Attorneys in Bryan Cave’s financial institutions practice can discuss the advantages and disadvantages of opting out for particular financial institutions.

Six-Month Extension (and Right to Extend Further)

Funds held in non-interest bearing demand deposit accounts (as well as NOW accounts that are obligated to pay less than 25 basis points and IOLTA accounts) will be fully guaranteed by the FDIC for participating entities through December 31, 2010.

If the FDIC finds a continuing need for the TAG program, the FDIC Board may, at its discretion, elect to further extend the TAG program through December 31, 2011.  The FDIC will announce such an extension, if warranted, no later than October 29, 2010.  In the event the TAG program is further extended, participating institutions will be obligated to remain in the program during that extension.  (In other words, no additional opportunities to opt out after April 30, 2010 are contemplated.)

Currently, nearly 6,400 insured depository institutions, representing approximately 80% of all insured depository institutions, continue to participate in the TAG program, holding almost $340 billion in deposits in accounts currently subject to the FDIC’s guarantee.  Of those deposits, $266 billion represented amounts above the standard insurance limit and are thus only guaranteed through the TAG program.

As a reminder, the FDIC has extended the Transaction Account Guarantee portion of the Temporary Liquidity Guarantee Program until June 30, 2010.  Institutions that have not previously opted-out of the program will automatically continue in the program (at increased costs) unless they pro-actively opt-out of the extension.

Starting January 1, 2009, the FDIC assessment for its full guarantee of funds held in non-interest bearing demand deposit accounts will rise to an annualized rate of 15 to 25 basis points, depending on the Risk Category rating of the institution.

The deadline to affirmatively opt out of the Transaction Account Guarantee program is November 2, 2009. We have previously posted information about how to opt out.

Update: On April 13, 2010, the FDIC granted a further extension until December 31, 2010.

On August 26, 2009, the FDIC extended the Transaction Account Guarantee (TAG) portion of the Temporary Liquidity Guarantee Program for six months, through June 30, 2010.  In addition to extending the expiration date of the TAG program, the FDIC’s final rule (1) increases the assessment fee for participation; and (2) provides an opportunity for participating institutions to opt out of the program as of January 1, 2010 (and thereby avoid the additional assessments).

All currently participating institutions have until November 2, 2009 to determine whether to continue in the program (at increased cost) or opt out of the program.  Attorneys in Bryan Cave’s financial institutions practice can discuss the advantages and disadvantages of opting out for particular financial institutions.

Six-Month Extension

Funds held in non-interest bearing demand deposit accounts (as well as NOW accounts that are obligated to pay less than 50 basis points and IOLTA accounts) will be fully guaranteed by the FDIC for participating entities through June 30, 2010.

The FDIC received comments supporting no extension, as well as supporting extensions for up to three years.  The FDIC determined a six-month extension of the TAG program “will provide the optimum balance between continuing to provide support to those institutions most affected by the recent financial and economic turmoil and phasing out the program in an orderly manner.”

Increased Assessment

Beginning January 1, 2010, participants in the TAG program will be subject to increased quarterly fees.  The amount of the assessment will depend on the institution’s Risk Category rating assigned with respect to regular FDIC assessments.  The fee will continue to be assessed only on the amount of deposits that exceed the existing deposit insurance limits.

Institutions in Risk Category I (generally well-capitalized institutions with composite CAMELS 1 or 2 ratings) will pay an annualized assessment rate of 15 basis points.  Institutions in Risk Category II (generally adequately capitalized institutions with composite CAMELS 3 or better) will pay an annualized assessment rate of 20 basis points.  Institutions in Risk Category III or IV (generally under capitalized or composite CAMELS 4 or 5) will pay an annualized assessment rate of 25 basis points.  (Through December 31, 2009, the fee will remain an annualized 10 basis point assessment for all participating institutions.)

Over the last several weeks, we have had further conversations with clients and the FDIC regarding the details of the Debt Guarantee Program under the FDIC’s Temporary Liquidity Guarantee Program.  In the course of these conversations, we have noticed a misunderstanding of several key components of the program.

• Lines of Credit are not Senior Unsecured Debt. Under the regulations, senior unsecured debt must have “a specified and fixed principal amount.”  (12 CFR 370.2(e)(1).)  As a result, lines of credit are not eligible for an FDIC guarantee, and should not be included in calculating the amount of senior unsecured debt outstanding at September 30, 2008.
• 2% of Liabilities Test is Only Available for Depository Institutions. If a bank holding company had no “senior unsecured debt” outstanding at September 30, 2008 (and remember that lines of credit are not included), then its maximum amount of guaranteed debt that can be issued is zero.  Only depository institutions themselves (and not their parent entities) can take advantage of the alternative cap of 2% of the total liabilities outstanding as of September 30, 2008.
• Approvals to Establish or Increase a Debt Guarantee Cap will be “Very Rare.” The regulations provide a process for entities to establish or increase a debt guarantee cap.  However, we understand that all applications go to the highest levels of the FDIC in Washington DC, and there face high levels of scrutiny.  No timeframe has been provided, but given the level of scrutiny and DC review, bottlenecks are virtually guaranteed to develop.  We understand that the FDIC has lots of applications currently in the system, but the FDIC believes that approvals will be “very rare.”

We have previously posted on the possibility of bank holding companies using the TLGP Debt Guarantee to provide capital to subsidiary banks.  In that post, we commented on the odds of success and noted that the FDIC had not taken a formal position.  Today, the FDIC updated its TLGP FAQ and confirmed that the odds of success are in fact very low.

The FDIC’s revised answer states:

Can guaranteed debt issued by the parent company be put in a subsidiary bank as capital?

The FDIC envisions few if any circumstances under which it would approve holding company applications to establish a cap or to increase a cap where the proceeds from the resulting guaranteed debt issuance would be injected as capital into a subsidiary bank.  The Temporary Liquidity Guarantee Program was not intended to be a capital enhancement program.  The Treasury Department’s TARP program has been set up for that purpose.  The purpose of the Temporary Liquidity Guarantee Program is to restore liquidity to the intermediate term debt market.

As a reminder, the TLGP’s alternative guarantee cap of 2% of liabilities only applies to depository institutions.  Bank holding companies are not entitled to use the 2% of liabilities test and are only eligible to issue 125% of the amount of senior unsecured debt that was outstanding as of September 30, 2008.  As a result of the pre-insolvency advice, we believe most community bank holding companies will be required to seek FDIC approval to establish a cap or to increase a cap in order to issue FDIC guaranteed debt.  Based on the FDIC’s updated analysis, this approval seems highly unlikely.

We are having discussions with clients regarding the possibility of issuing FDIC-guaranteed debt under the TLGP’s Debt Guarantee Program at the holding company level and using the proceeds of that debt to increase the capital of the bank subsidiary.  This is particularly attractive for banks that are eligible to report their risk-based capital positions on a bank-only basis.  (The Federal Reserve’s risk-based capital measures are generally applied on a bank-only basis for bank holding companies with consolidated assets of less than $500 million.)

Permissible Use for BHC FDIC-Guaranteed Debt

The FDIC’s Frequently Asked Questions (FAQ) explicitly permits a bank holding company to use the proceeds from a guaranteed debt issuance to purchase additional shares of bank stock.

Need to Apply to FDIC for Approval

In our experience, however, most bank holding companies for community banks had no, or very limited amounts of, senior unsecured debt outstanding as of September 30, 2008.  As a result, the bank holding company will have to file a letter application with the FDIC and, if different, the federal banking regulator for its largest subsidiary bank to establish an FDIC-guaranteed debt limit.  The letter application must describe the details of the request, provide a summary of the applicant’s strategic operating plan, and describe the proposed use of the debt proceeds.

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.”

On December 8, 2008, the FDIC published a Financial Institution Letter that clarifies the reporting requirements for newly issued guaranteed senior unsecured debt.

Beginning on December 6, 2008, all newly issued guaranteed debt must be reported to the FDIC via FDICconnect within five (5) calendar days of the date of issuance.  Guaranteed debt that was issued between October 14, 2008 through December 5, 2008 and was still outstanding on December 5, 2008 must be reported to the FDIC via FDICconnect by December 19, 2008.

The FDIC will generate the first TLGP assessment invoices for guaranteed debt on December 17, 2008, with settlement of the invoices on December 19, 2008.  Thereafter, new invoices will run each Wednesday for debt issuances reported the prior week, with settlement each Friday.

These reporting requirements are in addition to the monthly reports to the FDIC of aggregated guaranteed debt outstanding pursuant to the Master Agreement.  The FDIC promises to issue information on these ongoing reporting requirements shortly.

The Master Agreement, which the FDIC has created for use with the Debt Guarantee portion of the Temporary Liquidity Guarantee Program, provides an outline for how the guarantee program operates if the FDIC is called upon to honor the Guarantee.  The operative provisions are found in Articles II, III, IV and V.

Article II describes how payments would be made in the event the Guarantee is called upon.  The Section also contains language typically found in a letter of credit reimbursement agreement whereby the Issuer agrees to reimburse the FDIC immediately for any payments made by the FDIC.  The “Reimbursement Payment” will bear interest, if not paid immediately, at a rate equal to the non-default rate of interest on the Senior Unsecured Debt plus 1%.   As a practical matter, this is advantageous for the Issuer since a failure to reimburse would normally trigger a higher rate of interest in similar reimbursement agreements.

Article II also provides that the Issuer waives any defenses to the enforcement of the Senior Unsecured Debt once the FDIC has paid out under its guarantee.  The FDIC is subrogated to the rights of the holder of the Senior Unsecured Debt and does not want the Issuer to raise lender liability defenses to the enforcement of the Debt which might likewise provide a defense to collection of the Reimbursement Payment.  One of the documents found in the Annex to the Agreement is an Assignment by which the lender seeking payment from the FDIC assigns the promissory note or other evidence of indebtedness to the FDIC.