Financial Institutions Consider Participation in the Temporary Liquidity Guarantee Program
By: KAREN L. GRANDSTRAND & KARLA L. REYERSON
November 21, 2008
The FDIC recently initiated the Temporary Liquidity Guarantee Program (TLG Program), a program designed to preserve confidence and encourage liquidity in the banking system. The program consists of two components—the Debt Guarantee Program, which guarantees certain senior, unsecured debt issued by participating banks (Debt Program), and the Transaction Account Guarantee Program, which fully insures all noninterest-bearing transaction accounts of participating depository institutions (TAG Program). The following sets forth the main elements of the TLG Program and insights into what banks should consider when determining whether to participate in the components of the program.
The Basics of the TLG Program
- The TLG Program is generally available to FDIC-insured depository institutions and U.S. bank holding companies.
- The program began on October 14, 2008. All institutions are automatically included in the Debt Program and TAG Program for the first 30 days without charge.
- Institutions that opt out prior to December 5, 2008 will not be assessed fees under the TLG Program. Institutions that do not opt out by December 5, 2008 will be assessed fees to remain in the these programs and may not opt out at a later date. (See Fees below for more information.)
The Debt Guarantee Program
- The FDIC will insure the senior, unsecured debt participants issue between October 14, 2008 and June 30, 2009.
- Senior, unsecured debt includes federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, certificates of deposit standing to the credit of the bank, deposits in an international banking facility of an insured depository institution standing to the credit of a bank, and Eurodollar deposits standing to the credit of a bank.
- All debt issued under the program must:
- Be noncontingent
- Be evidenced by a written agreement
- Contain specified, fixed principal to be paid in full on demand or on a certain date
- Not be subordinated to another liability
Duration of Coverage:
- For those banks that opt out, coverage ends the earlier of the date of opt out or December 5, 2008 (11:59 p.m. EST).
- For those banks that participate, coverage ends the earlier of the maturity date for the debt issued or June 30, 2012.
- The FDIC will guarantee up to 125% of the par or face value of senior, unsecured debt outstanding as of September 30, 2008, excluding debt extended to affiliates, that is scheduled to mature on or before June 30, 2009. This maximum guaranteed amount will be calculated for each individual participating entity within a holding company structure.
- Participants are required to calculate their own limits and submit them to the FDIC on or before December 5, 2008 using the Election Form. (See Making the Election below.)
- The FDIC will consider adjusting the limit for those institutions that had no qualifying debt outstanding as of September 30, 2008, or who otherwise request an adjustment, on a case-by-case basis.
- Participants will be charged an annualized assessment equal to 75 basis points multiplied by the amount of debt issued, and calculated for the term of that debt or through June 30, 2012, whichever is earlier.
- Participants will be charged for coverage on all senior, unsecured debt issued as follows:
- Beginning on November 13, 2008, on all senior, unsecured debt, other than overnight debt instruments, issued by the entity on or after October 14, 2008, that is still outstanding on November 13, 2008;
- Beginning on November 13, 2008, on all senior, unsecured debt, other than overnight debt instruments, issued by the entity on or after November 13, 2008, and before December 6, 2008; and
- Beginning on December 6, 2008, on all senior, unsecured debt issued by the entity on or after December 6, 2008.
- Participants will be required to report newly issued guaranteed debt via FDICconnect.
- Participants will not receive a refund for retiring the debt prior to maturity.
Option to Issue Certain Nonguaranteed Debt:
- Generally, participants may not issue nonguaranteed senior, unsecured debt before either (i) they have issued the maximum amount of guaranteed debt allowed for the institution; or (ii) the program expires on June 30, 2009.
- Participants may elect to pay a nonrefundable fee that will allow them to issue nonguaranteed senior, unsecured debt with a maturity date after June 30, 2012 prior to the program’s expiration and regardless of whether they have already issued the maximum amount of guaranteed debt.
- The nonrefundable fee, payable in six equal monthly installments, would equal 37.5 basis points of the par or face value of senior, unsecured debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 (not including debt extended to affiliates or institution affiliated parties).
- Institutions choosing this option will be billed as they issue guaranteed debt under the Debt Program. The amounts paid as part of the nonrefundable fee will offset these bills until the fee is exhausted, after which the institution will pay additional assessments on any additional guaranteed debt it issues.
- Beginning December 19, 2008, participants must disclose to interested lenders and creditors, in writing and in a commercially reasonable manner, what debt it is offering and whether the debt is guaranteed under the Debt Program. Prior to December 19, 2008, participants should provide adequate disclosures in a commercially reasonable manner.
- All guaranteed debt must be clearly identified as “guaranteed by the FDIC” and must be properly disclosed to creditors.
- Any institution that issues debt that it identifies as “guaranteed by the FDIC” in excess of the institution’s coverage limit will have its assessment increased to 150 basis points on all outstanding guaranteed debt. The institution will also be subject to enforcement actions, including civil money penalties.
The Transaction Account Guarantee Program
- The guarantee covers noninterest-bearing transaction accounts, such as traditional demand deposit checking accounts with unlimited deposits and withdrawals, as well as official checks issued by insured depository institutions.
- NOW and MMDA accounts are not covered.
- The treatment of sweep arrangements may differ based on the type of sweep and the types of accounts involved. Institutions should review § 370.4 of the FDIC’s interim rules located at http://www.fdic.gov/news/board/TLGPreg.pdf for more information.
- Fee waivers and fee-reducing credit features do not disqualify accounts.
Duration of Coverage:
- For those institutions that opt out of the TAG Program on or before December 5, 2008 (11:59 p.m. EST), coverage ends on the date of opt out.
- For those institutions that do not opt out by the December 5, 2008 deadline, coverage ends December 31, 2009.
Coverage and Fees:
- Eligible accounts will be guaranteed in full.
- Participating institutions will be assessed on a quarterly basis an annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000. This will be collected along with the other quarterly assessments institutions pay.
- Although institutions have until December 5, 2008 to opt out of the program, those that do not opt out will be charged on balances in noninterest-bearing transaction accounts beginning on November 13, 2008.
Notice Requirements: ACTION REQUIRED
- Beginning December 19, 2008, EVERY depository institution must post a prominent notice in the lobby of its main office and each branch clearly indicating whether the institution is participating or not participating in the TAG Program. The notice must be provided in simple, readily understandable text.
- Participating institutions must state in their notice that the funds held in noninterest-bearing transaction accounts are insured in full by the FDIC.
- Participants using sweep arrangements or taking other actions that result in funds being transferred or reclassified to an interest-bearing account or nontransaction account must disclose those actions to the affected customers and clearly advise them, in writing, that such actions will void the FDIC’s guarantee.
- Prior to December 19, 2008, participants must provide adequate disclosures to their customers in a commercially reasonable manner.
Other Considerations for Participation in the TLG Program
- After weighing the costs of participation, institutions need to determine whether participating in each component of the TLG Program makes sense.
- The FDIC has the power to terminate an institution’s participation in the program after consultation with the institution’s federal regulator.
- Participating institutions will be subject to FDIC reviews and may be subject to additional reporting requirements.
- Participating in the TLG Program could signal that the institution needed the government’s help. Conversely, not participating could signal that the institution was not healthy enough to qualify. Also, lenders and depositors may seek out institutions that offer the additional protections provided under the TLG Program.
Making the Election ACTION REQUIRED
- On or before December 5, 2008, all institutions should analyze the benefits and costs of the TLG Program and determine whether to continue to participate in the Debt Program and the TAG Program or to opt out of one or both of these programs. Any institution that does not opt out on or before December 5, 2008, via submission of an Election Form on FDICconnect, will be considered a participant in both programs and will be assessed fees accordingly.
- The Election Form will be used to make opt out elections and, for those participating in the Debt Program, to disclose the total amount of outstanding senior, unsecured debt as of September 30, 2008 that is scheduled to mature on or before June 30, 2009.
- Every institution must file an Election Form because those not using it to opt out of one or both programs will use it to disclose the amount of qualifying debt outstanding as of September 30, 2008.
- The FDIC will post the Election Form and instructions on FDICconnect at http://www.fdic.gov/regulations/resources/TLGP/index.html after issuance of the Final Rule implementing the TLG Program. To see a sample Election Form and instructions, go to http://www.fdic.gov/news/news/financial/2008/fil08125.html.
- The Chief Financial Officer (or equivalent) must attest to the institution’s election.
- Eligible institutions that are not insured depository institutions, such as bank holding companies, must have an insured depository institution submit their Election Form for them via FDICconnect. The FDIC will not accept paper submissions.
- After submitting the Election Form via FDICconnect, the institution will receive a confirmation page that the submission has been received. The election is not effective until the institution receives the confirmation page via FDICconnect.
- Institutions that opt out of one or both programs may not later enroll.
- All institutions within a holding company must make the same determination. If one bank in a multi-bank holding company opts out of a program, all of the institutions in that holding company will be deemed to have opted out of that program.
- The FDIC will maintain a list on its public website of those institutions that have opted out of one or both programs.
The deadline for financial institutions to determine whether to participate in the debt guarantee and deposit coverage components of the TLG Program is December 5, 2008. Institutions are encouraged to weigh the benefits and costs of participation and to coordinate with other institutions within their holding company structure. The deadline is not far off, and institutions that miss it will be excluded from the TLG Program and will not be given a second chance to participate.