Temporary Liquidity Guarantee Program
By: Stanley V. Ragalevsky, Sean P. Mahoney
Federal Deposit Insurance Corporation (“FDIC”)-insured depository institutions, bank holding companies, financial holding companies and certain thrift holding companies have until December 5, 2008 to decide whether to participate in the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”). FDIC established the TLGP as of October 14, 2008 after determining that rapid and substantial outflows of uninsured deposits from banks threatened the stability of our financial system. The purpose of the TLGP is to preserve public confidence and encourage liquidity in the banking system. Participation by FDIC-insured institutions is voluntary.
The TLGP has two components: an FDIC guaranty of certain senior unsecured debt ("Debt Guarantee Program") and unlimited FDIC deposit insurance coverage for non-interest bearing transaction accounts through 2009 ("Transaction Account Guarantee Program"). Under the Debt Guarantee Program, covered debt in an amount up to 125 percent of the senior unsecured debt of a participating institution outstanding on September 30, 2008 that matures no later than June 30, 2009 will be guaranteed by FDIC, for an annual fee of seventy-five basis points of the covered amount. Covered senior unsecured debt includes commercial paper and unsecured borrowings from Federal Reserve Banks but excludes derivatives, deposits in foreign currency, and convertible debt. If investors in an institution's unsecured debt do not insist upon the FDIC guaranty, the cost of the Debt Guarantee Program may not be a worthwhile expense.
The Transaction Account Guarantee Program supplements existing FDIC insurance with temporary, unlimited deposit insurance coverage on non-interest bearing transaction accounts such as demand deposit accounts, payroll and other processing accounts, certain custodial accounts for loan servicing or similar activities and non-interest bearing savings accounts into which funds from transaction accounts are swept. Institutions that participate in the Transaction Account Guarantee Program will be assessed an annual premium in an amount equal to 0.10 percent of covered transaction account balances in excess of standard FDIC coverages.
Although it is theoretically voluntary, participation in the Transaction Account Guarantee Program may effectively be mandatory for most banks that depend upon commercial demand deposit accounts for funding. The market may simply demand this coverage. This may not be the case for institutions with specialized balance sheets or business models.
Institutions have until 11:59 p.m. (EST) on December 5, 2008 to opt out of participation in the Debt Guarantee Program or Transaction Account Guarantee Program. For institutions that do not opt out, the TLGP is scheduled to expire on December 31, 2009, although senior unsecured debt guaranteed under the TLGP will remain guaranteed until the later of maturity or June 30, 2012. Each institution will be required to disclose whether or not it is participating in the Transaction Account Guarantee Program. If an institution participates in the Debt Guarantee Program, it will have to disclose to investors in a commercially reasonable manner whether or not the debt instrument being offered is guaranteed under the TLGP.
