FDIC Temporary Liquidity Guarantee Program: Recent Developments
On Oct. 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program, or the Program, which is one of several recent government initiatives designed to improve the strength of financial institutions and enhance market liquidity. The Program consists of two parts: one part involves federal guarantees of certain issuances of senior, unsecured debt by eligible institutions, or the Debt Guarantee, and the other part involves increased FDIC deposit insurance for non-interest bearing transaction accounts, or the Transaction Account Guarantee.
We summarized the highlights of the Program in an advisory bulletin in October.1 Since we distributed that advisory, the FDIC has issued guidance on the Program in the form of interim final rules, which have already been amended by the FDIC (as amended, the Interim Rules).2 The FDIC has also promulgated a few election forms and related instructions. This advisory briefly will summarize the recent developments with respect to the Program.
Delay of November opt out deadline; debt reporting deadline
As initially proposed by the FDIC, each “eligible institution” had until Nov. 12, 2008, to opt out of either or both parts of the Program. However, the 15-day public comment period for the Interim Rule does not expire until the next day, November 13. In light of the obvious dilemma this presented to eligible institutions, on November 3, the FDIC delayed the opt out deadline until Dec. 5, 2008. The waiver of all fees under the Program has also been extended until December 5. The termination date of the Program has not changed. The FDIC also has provided sample opt out election forms, instructions and limited reporting guidance.3
In addition, the FDIC established a deadline for eligible entities that elect to participate in the Debt Guarantee Program to report the amount of their senior unsecured outstanding as of Sept. 30, 2008, that is scheduled to mature on or before the end of the second quarter of 2009. This information should be reported, even if the amount of such debt outstanding was zero, by Dec. 5, 2008, through the FDIConnect portal.4
The FDIC provided more information about required customer disclosures. Starting on Dec. 19, 2008, each eligible entity that is a deposit taking institution “must post a prominent notice in the lobby of its main office and each branch clearly indicating whether the entity is participating in the transaction account guarantee program, i.e., whether it has opted out.” If the entity does participate in the Program, then “the notice must also state that funds held in noninterest-bearing transaction accounts at the entity are insured in full by the FDIC.”
The disclosures must be provided in simple, easy to understand text. In addition, if the entity uses sweep arrangements that move funds from non-interest bearing transaction accounts (i.e., accounts that are covered by the Transaction Account Guarantee) to interest bearing accounts or to non-transaction accounts (i.e., accounts that are not covered by the Transaction Account Guarantee), then the entity must disclose those actions to its affected customers and “clearly advise them, in writing, that such actions will void the FDIC guarantee.”5
Entities that participate in the Debt Guarantee Program must also clearly identify to prospective lenders or creditors “in writing and in a commercially reasonable manner” whether debt being offered is guaranteed or not.6
While these disclosure requirements are not effective until Dec. 19, 2008, the Interim Rule requires that prior to that date all eligible entities should provide “adequate disclosures” of the substance of the requirements described above in a “commercially reasonable manner.”7 In other words, all FDIC insured depository institutions currently should be providing customer disclosure concerning the Transaction Account Guarantee and should inform potential creditors as to whether debt being offered is guaranteed under the Debt Guarantee.
Since the FDIC has not yet provided sample or form disclosure language, it may be prudent for eligible institutions to consult with their FDIC examiners to ensure compliance with the disclosure requirements.
Long Term Non-Guaranteed Debt Option
As originally described by the FDIC, debt issued under the Debt Guarantee Program would be covered by the guarantee in order of issuance until such time as the issuer's individual limit was met. This limits the flexibility of issuers to control which of its debts would benefit from the guarantee. Through the Interim Rules, the FDIC created an option that allows participating issuers to issue non-guaranteed senior unsecured debt before issuing the maximum amount of guaranteed debt under the Program. The FDIC refers to this as the Long Term Non-Guaranteed Debt Option.
An eligible entity must affirmatively opt in to the Long Term Non-Guaranteed Debt Option (unlike participation in the Program more generally, which is automatic unless the eligible entity opts out). The price of participating in the Long Term Non-Guaranteed Debt Option is that the issuer must pay to the FDIC a non-refundable fee equal to 37.5 basis points multiplied by the amount of senior unsecured debt outstanding as of Sept. 30, 2008, and due on or before June 30, 2009 (the same amount required to be reported to the FDIC by December 5).8 The fee must be paid in six equal monthly installments and this fee will be applied to offset the 75 basis point fee charged with respect to the issuance of guaranteed debt.9
Contrary to initial FDIC staff statements during technical briefing conference calls, senior unsecured debt subject to the Debt Guarantee cannot include the unsecured portion of otherwise secured debts (for example, a repurchase facility that is not fully collateralized).10
All eligible entities within bank holding company and savings and loan holding company groups must make the same opt out elections with respect to participation in the Program; failure to do so is deemed to be an opt out by all members of the group.11
As stated above, the 15-day comment period for the Interim Rules ends on November 13. Comments can be sent by e-mail to email@example.com. As of November 6, more than 60 comments had been submitted; comments can be viewed on the FDIC's Web site.
Each eligible institution must decide on or before to Dec. 5, 2008, whether to affirmatively opt out of either portion of the Program. In addition, each eligible institution that elects to participate in the Debt Guarantee Program must also decide by December 5 whether to opt in to the Long Term Non-Guaranteed Debt Option.
Deposit taking entities are already required to disclose their participation (or lack of participation) in the Transaction Account Guarantee Program, and debt issuers should disclose to potential creditors whether particular debts are guaranteed under the Debt Guarantee Program.
Many details about the Program remain unsettled and we expect additional amendments to the Interim Rules (presumably shortly after the end of the comment period on November 13). We also expect the FDIC to provide additional guidance from time to time through Financial Institution Letters and the FAQ for the Program.12
2 The Interim Rules were published in the Federal Register on October 29, 2008, and were generally effective as of the date of their adoption on Oct. 23, 2008. See 73 Fed. Reg. 210 at 64179 et seq . The October 29 publication is also available on the FDIC Web page at www.fdic.gov/news/board/TLGPreg.pdf. On Nov. 3, 2008, the FDIC amended the original Interim Rules to extend the Nov. 12, 2008 deadlines. The amendment is available on the FDIC Web page at www.fdic.gov/regulations/laws/federal/2008/08TLGPamendment.pdf. The Interim Rules will be codified in 12 C.F.R. Part 370.
3 Links to the forms, instructions and guidance can be found at www.fdic.gov/news/news/financial/2008/fil08125.html.
4 12 C.F.R. § 370.3(b). The deadline was originally November 12, but was delayed by the amendment to the Interim Rule.
5 12 C.F.R. 370.5(h).
8 12 C.F.R. § 370.6(f).
10 12 C.F.R. § 370.2(e).
11 12 C.F.R. § 370.5(e).