FDIC Issues Notice of Proposed Rulemaking Addressing Expiration of the TLGP’s Debt Guarantee Program; Comments Due by October 1, 2009

September 21, 2009

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets.

We are providing updates on key regulatory and legislative issues, as well as information on legal issues that we believe could prove useful as firms and other entities navigate these challenging times.

This update focuses on the Notice of Proposed Rulemaking issued on September 9, 2009 (the “Notice of Proposed Rulemaking”) by the Federal Deposit Insurance Corporation (the "FDIC") relating to the expiration of the issuance period for the Debt Guarantee Program, a component of the Temporary Liquidity Guarantee Program (the "TLGP").[1]  The Notice of Proposed Rulemaking was published in the Federal Register on September 16, 2009.

Summary

Under TLGP, established November 2008, the FDIC guaranteed two kinds of financial institution debt: newly issued senior unsecured debt and non-interest bearing transaction deposit accounts.  The program was designed to encourage interbank lending and appears to have performed this function.  The guarantee of newly issued debt was originally set to extend to issuances occurring through June 30, 2009.  However, in June the FDIC extended this part of the program for four months, with some limitations.  Similarly, the guarantee of funds in noninterest-bearing transaction accounts was originally set to extend only through December 31, 2009.  However, in August the FDIC extended this part of the program for six months, with an accompanying increase in guarantee fees.  The current proposal sets two possible alternatives for phasing out the guarantee of newly issued debt: either having it expire as planned or having it expire but replacing it with an FDIC-established, temporary six-month emergency guarantee facility.  The FDIC is seeking comments on the proposal with a deadline of October 1.

Background

On October 13, 2008, the FDIC adopted the TLGP, which guarantees newly issued senior unsecured debt of banks, thrifts, and most holding companies of federally insured depository institutions (the "Debt Guarantee Program") as well as non-interest bearing transaction deposit accounts (the "Transaction Account Guarantee Program").  Through these programs, the FDIC hoped to restore liquidity to the frozen credit markets, and in particular, to encourage interbank lending.

On October 23, 2008, the FDIC issued an interim rule with a comment period lasting until November 13, 2008; the FDIC subsequently amended the Interim Rule on November 3, 2008 (the "Interim Rule").  After receiving more than 700 comments on the Interim Rule, on November 21, 2008, the FDIC Board approved a final rule (the "Final Rule") governing the program.  The Final Rule set forth the parameters for the two key components of the TLGP, the Debt Guarantee Program and the Transaction Account Guarantee Program.[2]  Under the Debt Guarantee Program, the FDIC guarantees newly issued senior unsecured debt up to set amounts until June 30, 2009, with the FDIC’s guarantee for such debt to expire no later than June 30, 2012.  Under the Transaction Account Guarantee Program, the FDIC provides for a full guarantee of funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts through December 31, 2009.

Under the Debt Guarantee Program, the FDIC temporarily guarantees newly issued senior unsecured debt of FDIC-insured depository institutions, U.S. bank holding companies or financial holding companies, and U.S. savings and loan holding companies that either engage 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 an insured depository institution that the FDIC, after written request and positive recommendation by the appropriate Federal banking agency, designates as an eligible entity. 

The amount of senior unsecured debt eligible for the Program is capped at 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 on or before June 30, 2009.  If an insured depository institution had no senior unsecured debt, or only had Federal funds purchased, outstanding on September 30, 2008, its debt guarantee limit is two percent of its consolidated total liabilities as of September 30, 2008.

In June 2009, the FDIC issued a final rule extending for four months the period during which participating entities could issue FDIC-guaranteed debt under the Debt Guarantee Program.  Under this rule, all insured depository institutions and those other participating entities that had issued FDIC-guaranteed debt on or before April 1, 2009 are permitted to participate in the extended Debt Guarantee Program without application to the FDIC.  Other participating entities that receive approval from the FDIC also may participate in the extended Debt Guarantee Program.  The rule also extended the expiration of the guarantee period from June 30, 2012 to December 31, 2012.  As a result, participating entities may issue FDIC-guaranteed debt through and including October 31, 2009, where the FDIC’s guarantee expires no later than December 31, 2012.

In addition, the FDIC addressed the expiration of the Transaction Account Guarantee Program component of the TLGP.  On June 23, 2009, the FDIC proposed two alternatives for phasing out the Transaction Account Guarantee Program.  The first proposed alternative provided that the Transaction Account Guarantee Program would expire on December 31, 2009, as required by the terms of the Final Rule.  The second proposed alternative provided for a limited six-month extension to that program. Following consideration of the comments submitted in response to the two alternatives, on August 26, 2009, the FDIC issued a final rule providing for a six-month extension of the Transaction Account Guarantee Program, through June 30, 2010.  The extended Transaction Account Guarantee Program is available to any participating insured depository institution that does not elect to opt-out of the extension, subject to an increased fee for the FDIC’s guarantee of qualifying non-interest bearing transaction accounts during the extension period.

Use of the Debt Guarantee Program

The Debt Guarantee Program drew heavy participation from the outset.  By December 31, 2008, 64 issuers were participating in the program, representing $224 billion in debt guaranteed by the FDIC.  Participation steadily increased over the next several months, peaking in May 2009 when the number of issuers reached 101 and the amount of debt outstanding was approximately $346 billion.  In recent months, however, the FDIC has seen a decline in the participation under the Debt Guarantee Program, with each month since May representing a decrease from the previous month in the number of issuers and amount outstanding.  In June and July, the number of issuers declined to 97 and 94, respectively, and the amount of debt outstanding shrank to $339 billion and $320 billion, respectively.  By the end of August, the number of issuers had fallen to 92 and the amount of debt outstanding dropped to $307 billion.

The FDIC issued the Notice of Proposed Rulemaking in response to its perception of program need.  FDIC Chairman Sheila Bair noted the following:  "As domestic credit and liquidity markets appear to be normalizing and the number of entities utilizing the Debt Guarantee Program has decreased, now is an important time to make clear our intent to end the program."

The Notice of Proposed Rulemaking

The Notice of Proposed Rulemaking sets forth two alternatives for phasing out the Debt Guarantee Program component of the TLGP:

Under Alternative A, the Debt Guarantee Program would expire under the current regulations.  Under this alternative, insured depository institutions and certain other participating entities would be permitted to issue FDIC guaranteed debt no later than October 31, 2009, and the FDIC’s guarantee for such debt would expire no later than December 31, 2012.

Under Alternative B, the Debt Guarantee Program would expire as described under Alternative A.  However, the FDIC would establish a temporary six-month emergency guarantee facility to be made available in emergency circumstances to insured depository institutions and certain other entities participating in the Debt Guarantee Program upon application to and with the prior approval of the FDIC.  Entities seeking to participate in the emergency guarantee facility would be required to submit an application to the FDIC on or before April 30, 2010, and demonstrate an inability to issue non-guaranteed debt to replace maturing senior unsecured debt as a result of market disruptions or other circumstances beyond the entity’s control.  If approved by the FDIC, senior unsecured debt issued under the emergency guarantee facility would be guaranteed by the FDIC until a date no later than December 31, 2012, and would be subject to an annualized participation fee of at least 300 basis points.  If Alternative B were adopted, with the exception of the prior approval requirement and the increased participation fee, the terms of the FDIC guarantee would remain unchanged from the existing Debt Guarantee Program. 

Deadline for Comments

The FDIC requests comments on all aspects of the notice and particularly asks commenters to indicate a preference for either Alternative A or Alternative B as a means of providing the most appropriate phase out of the Debt Guarantee Program.  Written comments must be received by the FDIC by October 1, 2009.

 [1]  For the full text of the Notice of Proposed Rulemaking and other information on the TLGP, see http://www.fdic.gov/regulations/resources/tlgp/index.html.

 [2]  Additional information with respect to the Final Rule is available at Final TLGP Rule.

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