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FDIC finalizes Temporary Liquidity Guarantee rules

The Federal Deposit Insurance Corporation has approved a final rule to strengthen the agency's Temporary Liquidity Guarantee Program (TLGP).

There are two aspects to the Program: one guarantees newly issued senior unsecured debt of banks, thrifts, and certain holding companies. The other guarantees amounts in excess of $250,000 in non-interest bearing transaction accounts.

The Temporary Liquidity Guarantee Program was inititally established on Oct. 13 following major disruptions in credit markets, particularly the interbank lending market, which reduced banks' liquidity and impaired their ability to lend.

The goal of the TLGP is to decrease the cost of bank funding so that bank lending to consumers and businesses will normalize. The program is funded by the banking industry that participates in it, and does not rely on the taxpayer or the deposit insurance fund to achieve its goals.

"We are confident that the changes our Board approved ... will create significant investor demand, and dramatically reduce funding costs for eligible banks and bank holding companies," said FDIC Chairman Sheila C. Bair. "I expect that the industry will take full advantage of this guarantee. I'm confident that the program—working in complement with the Treasury's Troubled Assets Relief Program and the Federal Reserve's Commercial Paper Funding Facility – will achieve its intended purpose to help insured banks increase lending—in a responsible way – to consumers and businesses."

The final rule that was published Friday, Nov. 21, makes some changes to the original proposal, including one that clarifies the debt guarantee will be triggered by payment default rather than bankruptcy or receivership.

This change should add value to the guarantee and help entities obtain lower cost funding, according to the FDIC.

Another change is that short-term debt issued for one month or less will not be included in the TLGP. This new rule is consistent with the FDIC's objective of facilitating longer term lending.

Finally, fees to participate in the debt guarantee component of the TLGP have been changed. Originally the FDIC was going to charge eligible entities 75 basis points on an annualized basis for guaranteed debt. After reviewing the comments, the FDIC decided to impose a fee structure based on a sliding scale, depending on length of maturity.

Shorter-term debt will have a lower fee structure and longer-term debt will have a higher fee. The range will be 50 basis points on debt of 180 days or less, and a maximum of 100 basis points for debt with maturities of one year or longer, on an annualized basis.

Any debt issued on or before June 30, 2009, will be fully protected through the earlier of the maturity of the debt instrument or June 30, 2012.

Under the transaction account guarantee program, a participating institution will be able to provide customers full coverage on non-interest bearing transaction accounts for an annual fee of 10 basis points. The coverage will be in effect for participating institutions until the end of 2009. After that date, these accounts will be subject to the basic insurance amount.

The FDIC Board voted to include NOW accounts with interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts) in the transaction account program.

Eligible entities will have until Dec. 5, 2008, to opt out of the TLGP. Once a decision is made to participate in the Program, a bank may not later change its mind and withdraw. Similarly, banks that opt out of the program will not be able to come in at a later date.

"We will implement this Program without relying on the taxpayer or the deposit insurance fund. Fees paid by participating entities should cover any losses associated with the guarantees," Chairman Bair said.

Click here to read the new rule.

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