• FDIC Adopts Rules for its Debt Guarantee Program and its Transaction Account Guarantee Program
  • November 19, 2008 | Authors: Timothy M. Sullivan; Michael D. Morehead
  • Law Firms: Hinshaw & Culbertson LLP - Chicago Office; Hinshaw & Culbertson LLP - Springfield Office
  • On October 14, 2008, the Federal Deposit Insurance Corporation (FDIC) announced that it was establishing the Temporary Liquidity Guarantee Program (TLGP). The program has two primary components:

    • The Debt Guarantee Program (DGP), pursuant to which the FDIC will temporarily guarantee the payment of newly-issued senior unsecured debt; and
    • The Transaction Account Guarantee Program (TAGP), pursuant to which the FDIC will temporarily guarantee noninterest-bearing transaction accounts.

    On October 23, 2008, the FDIC adopted interim rules to implement TLGP. Some of the highlights of the rules are set forth below:

    • The TLGP became effective on October 14, 2008. For the first 30 days of the program, all Eligible Entities (as defined below) are covered, and the guarantees are provided at no cost to Eligible Entities.
    • Eligible Entities must inform the FDIC on or before November 12, 2008 whether they elect to opt-out of the DGP, the TAGP or both.
    • If an Eligible Entity opts out of the TLGP, the FDIC’s guarantee of its newly issued senior unsecured debt and noninterest-bearing transaction deposit accounts will expire at the earlier of 11:59 p.m. EST on November, 12, 2008, or at the time of the FDIC’s receipt of the Eligible Entity’s opt-out decision.
    • An Eligible Entity’s decision to opt out of either component of the TLGP will be made public. The FDIC will post on its website a list of those entities that have opted out of either or both components of the TLGP.
    • The FDIC may impose an emergency systemic risk assessment on insured depository institutions if the fees and assessments collected under the TLGP are insufficient to cover any loss incurred under the TLGP.
    • The FDIC is providing a temporary guarantee for funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts above the existing $250,000 deposit insurance limit.
    • Whether or not an Eligible Entity remains in the TAGP, it must disclose in writing at its main office and at all branches at which deposits are taken its decision to participate in or opt-out of the TAGP.
    • If an institution uses sweep arrangements or takes other actions that result in noninterest-bearing transaction account funds being transferred to or reclassified as an interest-bearing account or a nontransaction account, this must be disclosed to affected customers. The affected customers must be advised in writing that such actions will void the FDIC guarantee.
    • The FDIC will temporarily guarantee newly issued unsubordinated debt in a total amount up to 125 percent of the par or face value of senior unsecured debt outstanding, excluding debt extended to affiliates, as of September 30, 2008, that is scheduled to mature before June 30, 2009.
    • If an Eligible Entity remains in the DGP, it must clearly disclose, in writing and in a commercially reasonable manner, what debt it is offering and whether the debt is guaranteed under this program. Such debt must be clearly identified as “guaranteed by the FDIC.”
    • Guaranteed debt may not be used to prepay nonguaranteed debt.
    • Beginning on November 13, 2008, any Eligible Entity that has not chosen to opt out of the DGP will be assessed fees for such coverage. All eligible debt issued from October 14, 2008 (and still outstanding on November 13, 2008), through June 30, 2009, will be charged an annualized fee equal to 75 basis points multiplied by the amount of debt issued. It will be calculated for the maturity period of that debt or June 30, 2012, whichever is earlier.
    • Beginning on November 13, 2008, 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.
    • Participating entities availing themselves of the TLGP are subject to the FDIC’s oversight regarding compliance with the terms of the program.

    Eligible Entities
    The following entities are eligible to participate in the TLGP subject to any restrictions that might be imposed by the FDIC in consultation with the institution’s primary regulator:

    • FDIC-insured depository institutions;
    • any U.S. bank holding company or financial holding company that has at least one insured depository institution subsidiary;
    • any U.S. savings and loan holding company that either engages only in activities that are permissible for financial holding companies to conduct under Section (4)(k) of the Bank Holding Company Act of 1956 (BHCA) or has at least one insured depository institution subsidiary that is the subject of an application that was pending on October 13, 2008, pursuant to Section 4(c)(8) of the BHCA; or
    • any other affiliate of the above described entities approved by the FDIC after consultation with the appropriate federal banking agency, which affiliate will be deemed to have opted into the DGP.

    All Eligible Entities within a holding company structure must make the same decision regarding participation in each component of the TLGP. If they do not, none of the members will be eligible for participation in that component of the TLGP.

    Debt Guarantee Program
    General. Under the DGP, the FDIC will temporarily guarantee all newly-issued senior unsecured debt up to prescribed limits that is issued by participating entities on or after October 14, 2008, through and including June 30, 2009.

    The FDIC may allow an affiliate of a participating entity to take part in the DGP; the FDIC must receive a written request and positive recommendation from the appropriate federal banking agency.

    After consultation with a participating entity’s appropriate federal banking agency, the FDIC may determine in its discretion that the entity shall not be permitted to participate in the TLGP. Termination of participation will have only a prospective effect. At that point, the entity must notify its customers and creditors that it is no longer issuing guaranteed debt.

    Definition of Guaranteed Debt. Senior unsecured debt guaranteed by the FDIC includes federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, certificates of deposit standing to the credit of a bank, bank deposits in an international banking facility of an insured depository institution, and Eurodollar deposits standing to the credit of a bank. Senior unsecured debt may be denominated in foreign currency.

    The senior unsecured debt must: (i) be noncontingent; (ii) be evidenced by a written agreement; (iii) contain a specified and fixed principal amount to be paid on a date certain; and (iv) not be subordinated to another liability.

    To avoid the creation of innovative, exotic or complex funding structures, the DGP excludes from its coverage such items as: obligations from guarantees or other contingent liabilities, derivatives, derivative-linked products, debt paired with any other security, convertible debt, capital notes, the unsecured portion of otherwise secured debt, negotiable certificates of deposit, and deposits in foreign currency and Eurodollar deposits that represent funds swept from individual, partnership or corporate accounts held at insured depository institutions. Loans to affiliates, including parents and subsidiaries, or to institution affiliated parties, including controlling shareholders, directors, and officers, are also excluded from the DGP. Debt that is contractually subordinated to other debt of the entity is not eligible for the program.

    In order for the newly-issued senior unsecured debt to be guaranteed, the debt instrument must be clearly identified in writing in a commercially reasonable manner on the face of any documentation as “guaranteed by the FDIC.” In addition, the guarantee must be properly disclosed to creditors.

    Guarantee Term. Eligible debt must be issued on or before June 30, 2009. The FDIC will provide the guarantee coverage for eligible debt until the earlier of the maturity date of the debt or 11:59 p.m. EST on June 30, 2012, regardless of whether the liability has matured at that time.

    If an Eligible Entity chooses to opt out of the DGP, the guarantee will terminate on the earlier of 11:59 p.m. EST on November 12, 2008, or at the time of the Eligible Entity’s opt-out decision.

    Guarantee Limits. The FDIC will temporarily guarantee newly issued unsubordinated debt in a total amount up to 125 percent of the par or face value of senior unsecured debt outstanding, excluding debt extended to affiliates, as of September 30, 2008, that is scheduled to mature before June 30, 2009. For a holding company with multiple participants, the maximum guaranteed amount must be calculated for each individual entity.

    The FDIC may also grant a participating entity authority to temporarily exceed the 125 percent limitation or may limit a participating entity to less than 125 percent.

    The 125 percent limit may be adjusted for certain entities if the FDIC, in consultation with any appropriate federal banking agency, determines it necessary.

    Each participating entity must calculate its outstanding senior unsecured debt as of September 30, 2008 and provide that information (even if the amount of the senior unsecured debt is zero) to the FDIC. Subsequent updates are required. All reports must contain a certification from the institution’s chief financial officer (or equivalent) certifying the accuracy of the information reported.

    A participating entity may not represent that its debt is guaranteed by the FDIC if it does not comply with the rules governing the DGP. If the issuing entity has opted out of the DGP, it may no longer represent that its newly issued debt is guaranteed by the FDIC. Similarly, once the 125 percent limit has been reached, the entity may not represent that any additional debt is guaranteed by the FDIC; moreover, the entity must specifically disclose that such debt is not guaranteed.

    Additional Supervision. Entities that participate in the DGP must supply information requested by the FDIC and will be subject to periodic FDIC on-site reviews to determine compliance with the program’s terms and requirements.

    Compliance with Other Laws. The FDIC’s agreement arising from the DGP does not exempt an entity from complying with federal and state securities laws and with any other applicable laws when issuing guaranteed debt.

    Transaction Account Guarantee Program
    General. The FDIC is providing a temporary guarantee for funds held at FDIC insured depository institutions in noninterest-bearing transaction accounts above the existing $250,000 deposit insurance limit.

    Guarantee Term. The coverage became effective on October 14, 2008 and will continue through December 31, 2009 (for participating institutions). The guarantee is in addition to and separate from the coverage provided under the FDIC’s general deposit insurance regulations.

    Covered Accounts. A “noninterest-bearing transaction account” is a transaction account with respect to which interest is neither accrued nor paid and on which the insured depository institution does not reserve the right to require advance notice of an intended withdrawal. This definition encompasses (i) traditional demand deposit checking accounts that allow for an unlimited number of deposits and withdrawals at any time; and (ii) payment-processing accounts, such as payroll accounts, used by an insured depository institution’s business customers. It also encompasses official checks issued by an insured depository institution. NOW accounts and MMD accounts are not noninterest-bearing transaction accounts.

    Account features (such as fee waivers or fee-reducing credits) do not prevent an account from qualifying under TAGP as long as the account otherwise satisfies the definition.

    Although coverage is intended primarily to apply to business transaction accounts, it applies to all such accounts held by any depositor at the same institution. For example, if a consumer has a $250,000 certificate of deposit and a noninterest-bearing checking account for $50,000 (assuming the depositor has no other funds at the institution), he or she would be fully insured for $300,000. Coverage of $250,000 will be provided for the CD under the FDIC’s deposit insurance coverage. Coverage of the $50,000 checking account would be provided under the TAGP.

    Disclosure. Whether or not an Eligible Entity remains in the TAGP, it must prominently disclose in writing at its main office and at all branches at which deposits are taken its decision to participate in or opt-out of the program.

    These disclosures must be provided in simple, readily understandable text. They must also clearly state whether covered noninterest-bearing transaction accounts are fully insured by the FDIC.

    The disclosures must be posted by December 1, 2008. Prior to that date, the institution should provide adequate disclosures of these materials in a commercially reasonable manner.

    Sweep Accounts. The FDIC will treat funds in sweep accounts in accordance with its rules and procedures for determining sweep balances at a failed depository institution. Funds which are swept or transferred from a noninterest-bearing transaction account to another type of deposit or nondeposit account will be treated as being in the account to which the funds were transferred. Funds swept from a noninterest-bearing transaction account to a noninterest-bearing savings account will be treated as being in a noninterest-bearing transaction account and will be guaranteed under the TAGP.

    If an institution uses sweep arrangements or takes other actions that result in funds in a noninterest-bearing transaction account being transferred to or reclassified as an interest-bearing account or a nontransaction account, this must be disclosed to affected customers, and the affected customers must be advised in writing that such actions will void the transaction account guarantee.

    Fees
    Guaranteed Debt. Beginning on November 13, 2008, any Eligible Entity that has not chosen to opt out of the DGP will be assessed fees for continued coverage. All eligible debt issued from October 14, 2008 (and still outstanding on November 13, 2008) through June 30, 2009, will be charged an annualized fee equal to 75 basis points multiplied by the amount of debt issued. The fee will be calculated for the maturity period of that debt or June 30, 2012, whichever is earlier. Fees will not be charged during the first 30 days of the program.

    Fees will not be refunded if the guaranteed debt is retired before its scheduled maturity.

    If an Eligible Entity does not opt out, all newly-issued senior unsecured debt up to the maximum amount will be guaranteed as and when issued.

    Except as discussed below, an entity must issue the maximum allowable amount of guaranteed debt before issuing nonguaranteed debt. Once it has reached this maximum, a participating entity can then issue nonguaranteed debt in any amount and for any maturity.

    Penalty. If a participating entity issues debt identified as “guaranteed by the FDIC” in excess of the limit established by the FDIC, it will have its assessment rate for guaranteed debt increased to 150 basis points on all outstanding guaranteed debt. Furthermore, the participating entity and its institution-affiliated parties may be subject to enforcement actions including the assessment of civil money penalties.

    Issuance of Non-Guaranteed Senior Unsecured Debt. Eligible Entities that do not opt out of the DGP on or before November 12, 2008 will be unable to select which newly issued senior unsecured debt is guaranteed debt as they issue such debt. All senior unsecured debt issued during the initial 30-day period by the participating entity will become guaranteed debt as and when issued.

    If an entity desires to issue nonguaranteed senior unsecured debt before issuing the maximum amount of guaranteed debt, it must elect to do so through FDIC connect on or before 11:59 p.m. EST on November 12, 2008.

    The entity will pay a nonrefundable fee in exchange for which it will be able to issue, at any time and without regard to the cap, nonguaranteed senior unsecured debt with a maturity date after June 30, 2012. The fee will be applied to the par or face value of senior unsecured debt, excluding debt extended to affiliates, outstanding as of September 30, 2008, that is scheduled to mature by June 30, 2009. The fee will equal 37.5 basis points.

    An entity electing the nonrefundable fee option will also be billed as it issues guaranteed debt under the DGP. The amounts paid as a nonrefundable fee will be applied to offset these bills until the nonrefundable fee is exhausted. Thereafter, the institution will have to pay additional assessments on guaranteed debt as it issues the debt.

    Excess Funds. At the expiration of the TLGP, if funds remain after the FDIC has satisfied all eligible claims, the surplus funds will remain in the Deposit Insurance Fund (DIF) and will be included in the future calculation of the reserve ratio.

    Transaction Accounts. The FDIC’s guarantee for noninterest-bearing transaction accounts became effective on October 14, 2008, and will expire on January 1, 2010 (assuming the insured depository institution does not opt out of the TAGP). All insured depository institutions are automatically enrolled in this program for an initial 30-day period (from October 14, 2008, through November 12, 2008). Insured depository institutions are not required to pay any assessments during this initial 30-day period.

    Beginning on November 13, 2008, 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. These fees will be collected at the same time as the FDIC collects an institution’s quarterly deposit insurance assessments. Assessments associated with the TAGP will be in addition to an institution’s risk-based assessment.

    Excess Funds. At the expiration of the TLGP, if funds remain after the FDIC has satisfied all eligible claims, the surplus funds will remain in the DIF and will be included in the future calculation of the reserve ratio.

    Payment of Claims by the FDIC Pursuant to the Transaction Account Guarantee Program

    The FDIC’s obligation to make payment on guaranteed deposits held in noninterest-bearing transaction accounts will arise when the institution fails. The payment and claims process for satisfying claims under the TAGP generally will follow the procedures prescribed for deposit insurance claims pursuant to Section 11(f) of the Federal Deposit
    Insurance Act.

    The FDIC will make payment to the depositor for the guaranteed amount under the TAGP or will make such guaranteed amount available in an account at another insured depository institution at the same time it fulfills its deposit insurance obligation.

    Payment will be made as soon as possible after the FDIC determines whether the deposit is eligible and what amount is guaranteed. It is anticipated that the FDIC will make the entire amount available to the depositor on the next business day following the failure of the institution.

    If there is no acquiring institution for a transaction account under the program, the FDIC will mail a check to the depositor for the full amount of the guaranteed account.

    The FDIC will be subrogated to all rights of the depositor against the institution with respect to noninterest-bearing transaction accounts guaranteed by the TAGP.

    The FDIC will rely on the books and records of the institution to establish ownership and coverage for payment of deposits subject to the program. The FDIC will be able if it chooses to require the depositor to file a proof of claim (POC).

    Payment of Claims by the FDIC Pursuant to the Debt Guarantee Program: Insured Depository Institution Debt

    The FDIC will guarantee senior unsecured debt for institutions that have chosen to participate in the DGP. The FDIC’s obligation to make payment arises upon the failure of the institution. In that event, the FDIC’s receivership claims process will be used to process guarantee requests.

    The FDIC will pay interest until payment is made on the eligible debt at the 90-day T-bill rate in effect when the bankruptcy petition was filed.

    Debt holders must present evidence to the FDIC within 90 days of the publication of the claims notice by the receiver for the failed institution.

    The FDIC anticipates that many debt holders, particularly sellers of federal funds, will be paid on the next business day immediately following the failure of an insured depository institution.

    The FDIC will be subrogated to the rights of any creditor it pays under the program.

    Payment of Claims by the FDIC Pursuant to the Debt Guarantee Program: Holding Company Debt

    The FDIC will make payment to the debt holder for the principal amount of the debt and interest to the date of the filing of a bankruptcy petition by the issuing institution.

    The FDIC will pay interest until payment is made on the eligible debt at the 90-day T-bill rate in effect when the bankruptcy petition was filed.

    The FDIC normally will require the debt holder to file a POC within 90 days of the published bar date of the bankruptcy proceeding.

    In order to be eligible for the DGP, the holder of the unsecured senior debt must timely file a bankruptcy POC against the holding company’s bankruptcy estate and present evidence of such timely filed bankruptcy POC.

    The FDIC will review the books and records of the holding company and its affiliates to determine if the holder of the unsecured senior debt is eligible for payment under the DGP.

    Payment will not be made until it has been determined that the debt is an allowable claim against the bankruptcy estate.

    The holder of the unsecured senior debt must assign its rights, title and interest in the debt to the FDIC and transfer its validated claim in bankruptcy to the FDIC. If any distribution is received from the bankruptcy estate prior to the FDIC’s payment under the guarantee, the guaranteed amount paid by the FDIC will be reduced by the amount the holder has received.