Sheshunoff & Co. Investment Banking

For more details, the FDIC Final Rule is available on this website. And the FAQs are located here.

On October 14, 2008, the FDIC, in coordination with United States Treasury and the Federal Reserve, announced a Temporary Liquidity Guarantee Program (TLGP) as one of the initiatives related to the Emergency Economic Stabilization Act of 2008. The purpose of TLGP is to enhance and assure liquidity within the banking system. This is a general overview of the main points of the program.

TLGP is composed of two separate programs:

• The Transaction Account Guarantee Program
• The Debt Guarantee Program
• All institutions had to notify FDIC on or before December 5, 2008 of intention to opt-out of either or both. If no notice was given, the institution is in one or both programs.
• The decision to opt-out/opt-in was irrevocable. An institution involved in a merger has a one-time opt-in window.
• The FDIC has posted the institutions that have opted-out of the programs on its website.

Transaction Account Guarantee Program

• Guarantees the full amount above the existing limit in noninterest-bearing transaction accounts, IOLTAs and NOW accounts paying 0.50 percent or less per annum. Does NOT cover MMDAs or funds deposited into sweep accounts (unless it’s a noninterest-bearing savings account).
• Purpose is to cover payment-processing, payroll and operating accounts.
• Every institution must prominently display its decision to opt-in or out in all deposit-taking offices and on the institution’s homepage (or other access point for on-line banking services). Safe harbor language is in the Final Rule.
• Fee: Free until December 5, 2008 for those that opted out. Beginning November 13, 2008, participating institutions pay an annualized 10 basis point assessment on amounts in excess of limit. Collected in same manner as regular quarterly assessment.
• Expires December 31, 2009.

The Debt Guarantee Program

• Guarantees senior unsecured debt of an institution or holding company up to prescribed limits.
• Purpose is to provide liquidity to the inter-bank market and promote stability in the unsecured funding market for banks.
• Participating institutions must clearly inform lenders and creditors in writing the debt offered and that it is “guaranteed by the FDIC”. Safe harbor language is available in the Final Rule.
• Senior unsecured debt includes (after December 5, 2008) obligations with a stated maturity of more than 30 days and includes only the following: Fed Funds purchased, commercial paper, promissory notes, unsubordinated unsecured notes, CDs issued to credit of a bank, bank deposits in an IBF of an insured depository, Eurodollar deposits to credit of a bank, and US dollar-denominated deposits on deposit at a foreign branch of a US insured depository institution to the credit of an insured institution or foreign bank (except central banks, IMF, etc).
• Senior unsecured debt may pay a fixed or floating rate of interest based on a “commonly-used reference rate” (single index such as T-Bill, Prime or Libor).
• Eligibility requirements of senior unsecured debt:
• Non-contingent
• Evidenced by a written agreement or trade confirmation
• Specified, fixed principal amount and maturity date
• Not subordinated, by its terms, to another liability
• Guarantee Limit:
• 125% of amount of senior unsecured debt outstanding at September 30, 2008 scheduled to mature on or before June 30, 2009 or 2% of consolidated total liabilities as of September 30, 2008. All participating institutions had to report the amount as of September 30, 2008 to the FDIC even if it is zero no later than December 5, 2008.
• Limit may be shared by participating entities in a group (ie: insured sub and holding company) as long as total outstanding for group is within group limit.
• FDIC has discretion to grant guarantee coverage to a participant that had no senior unsecured debt outstanding as of September 30, 2008, after consulting primary federal regulator.
• Debt issued in amounts greater than the limit will subject all guaranteed debt issued to a 100% increase in the assessment rate and the institution to possible enforcement actions (up to termination of deposit insurance).
• Guarantee Period: November 13, 2008 or from issue date under the program until the earlier of maturity or June 30, 2012. Debt issued with a maturity date later than June 30, 2012 will no longer be guaranteed after that date.
• Assessment Fee:
• Calculated on an annualized basis by multiplying the fee times the term of the debt times the amount of the debt.
• Fee is paid upfront and is non-refundable if debt is retired early. For those with debt outstanding as of December 5, 2008 that opt-in, fees will be assessed for November 13 through December 5 (excluding overnight debt instruments).
• Fee is based on maturity of debt as follows: 31-180 days – 50 basis points; 181-364 days – 75 basis points; over 365 days – 100 basis points.
• Cannot issue unguaranteed debt until maximum level of guaranteed debt is reached.
• Cannot be used to prepay existing debt that is not FDIC-guaranteed.
• Participants must agree to terms of the Master Agreement.
• FDIC will consider a default on guaranteed debt such that the FDIC must make payment grounds for appointment of FDIC as conservator/receiver.
• Debt issuances are subject to all relevant federal and state laws.

Sheshunoff & Co. Guidance

Sheshunoff & Co. Investment Banking is continually in communication with the leading financial industry accounting and legal advisory teams at the heart of the issue. Sheshunoff has been the trusted financial advisory service to the community banking industry for over 30 years and is focused on providing our clients up-to-date and concise assistance in this most historical moment for U.S. financial institutions.

Sheshunoff’s web site will maintain relevant program updates and links to industry web sites, so visit us often for the latest information. To determine the impact of CPP on your organization, please contact us at 800.279.2241.

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