FDIC Provides Details on Bank Liquidity Guarantee Program

Details of the FDIC Temporary Liquidity Guarantee Program are starting to emerge. Under the program, the FDIC plans to back newly issued senior unsecured debt of banks, thrifts and holding companies. Certain newly issued senior unsecured debt issued through June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy. Covered debt appears to include promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. Coverage would expire June 30, 2012, even if the maturity exceeds that date.

In addition, any participating depository institution will be able to provide full deposit insurance coverage for non-interest bearing deposit transaction accounts, regardless of dollar amount. These are mainly payment-processing accounts, such as payroll accounts used by businesses. Frequently, these exceed the current maximum limit of $250,000. This new, temporary guarantee—which expires at the end of 2009—will help stabilize these accounts.

There will be costs associated with the program. Participants will be charged a 75-basis point fee to cover new debt.

There will be a 10-basis point surcharge for deposit insurance coverage of non-interest bearing deposit transaction accounts (i.e. business checking accounts).

Program coverage will encompass all FDIC-insured banks and thrifts for the first 30 days without incurring any costs. After that initial period, however, institutions no longer wishing to participate must opt out or be assessed for future participation. If an institution opts out, the guarantees are good only for the first 30 days.