FDIC To End Bank Loan Guarantee Program

Debt Guarantees To End

The FDIC announced its intentions today to let the Temporary Liquidity Guarantee Program(TLGP) expire on its originally planned termination date of October 31, 2009.  The TLGP was implemented in October 2008 to address disruptions in the credit markets that resulted in the inability of financial institutions to obtain new funding or roll over existing debts.

According to FDIC Chairman Sheila Bair, “The TLGP has been very effective at helping financial institutions bridge the uncertainty and dysfunction that plagued our credit markets last fall.  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. It is also important to note that the FDIC has collected over $9 billion in fees associated with this program. The FDIC will be using some of this money to off set resolution costs associated with bank failures.”

In the latest FDIC report on the TLGP dated July 31, 2009, the number of banks using the TLGP had declined to 94 from 97 and the amount of debt guaranteed under the program decreased by 5.6% or $19 billion.  (See FDIC Loan Guarantees Decline).  In addition,  General Electric announced its planned exit from the TLGP program in July based on the ability to directly access the capital markets without government debt guarantees.  Many of the major banking institutions that participated in the TLGP are also expected to exit the debt guarantee program.  The total amount of debt guaranteed under the TLGP currently stands at $320 billion.  Since some of the debt guarantees exceed a term of 3 years, the TLGP will take a number of years to completely wind down.

Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program

Debt Issuance under Guarantee Program
(dollar figures in millions)
July 31, 2009
Number Debt Outstanding Cap1 for Group Debt Outstanding Share of Cap
Insured Depository Institutions with Assets <= $10 Billion 42 1,632 2,974 54.9%
Insured Depository Institutions with Assets > $10 Billion 20 57,533 314,758 18.3%
Bank and Thrift Holding Companies, Non-Insured Affiliates 32 260,980 471,194 55.4%
All Issuers 94 320,145 788,925 40.6%
1 The amount of FDIC-guaranteed debt that can be issued by each eligible entity, or its cap, is based on the amount of senior unsecured debt outstanding as of September 30, 2008. The cap for a depository institution with no senior unsecured debt outstanding at September 30, 2008, is set at 2 percent of total liabilities. See http://www2.fdic.gov/qbp/2008dec/tlgp2c.html for more information.

Did The TLGP Prevent A Banking Meltdown?

Although the TLGP program has been criticized by some as a giveaway to the banking industry, the guarantee program proved vital in prevented the collapse of many banks that had been frozen out of the credit markets.   Given the systemic risk to the overall economy from a banking industry on the verge of collapse in late 2008,  the government had little choice but to act forcefully in supplying liquidity to the banking system.  The Federal Reserve and the Treasury enlisted the FDIC to provide government debt guarantees that helped to contain a banking crisis that was quickly spiraling out of control.

FDIC Proposed Alternatives For Ending TLGP

The FDIC, under its “Notice of Proposed Rulemaking” provides for two different alternatives to end the TLGP as well as a plan to allow the debt guarantee program to continue under specific emergency conditions.

Under Alternative A, the DGP would conclude as provided under current regulation. All insured depository institutions (IDIs) and other qualifying entities currently participating in the DGP would be permitted to issue FDIC-guaranteed senior unsecured debt until October 31, 2009, with the FDIC’s guarantee expiring no later than December 31, 2012.

Under Alternative B, the DGP generally would expire as above. However, the FDIC would establish a limited emergency guarantee facility that would permit IDIs (and other entities that had issued FDIC-guaranteed senior unsecured debt by September 9, 2009) to apply to the FDIC to issue FDIC-guaranteed debt for an additional six months. The FDIC’s guarantee would continue to expire no later than December 31, 2012.

To use the emergency guarantee facility described in Alternative B, applicants would be required to demonstrate their inability to issue non-guaranteed debt or to replace maturing debt as a result of market disruptions or other circumstances beyond their control. Applicants approved by the FDIC would pay an annualized participation fee of at least 300 basis points on FDIC-guaranteed debt issued and would be subject to other conditions imposed by the FDIC in accordance with Alternative B.

The large annual fee of 3% on debt guaranteed under the “emergency guarantee” seems designed to encourage banks to view FDIC assistance as a last resort measure.  The fee on the original loan guarantee program was 75 basis points.

Considering that the FDIC has earned over $9 billion on the TLGP to date and accomplished its goal of providing last resort liquidity to the banking system when needed, the TLGP program should be viewed as a success.  The program’s intention was not to keep afloat zombie banks that should have been closed but to forestall a widespread banking collapse.  Since the program was never designed to permanently replace private banking capital, winding down the TLGP at this point makes sense.

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