On November 21, 2008, the FDIC approved the final rule regarding the Temporary Liquidity Guarantee Program.  The FDIC also held a teleconference on the final rule (with 2,100 participants) summarizing the changes, which will be available on the FDIC’s website.

There are important changes from the FDIC’s interim rule, including: (i) the exclusion of short term borrowings (30 days or less) and an alternative minimum cap for guaranteed debt under the Senior Unsecured Debt Guarantee portion of the Program; and (ii) the inclusion of IOLTA and NOW accounts in the Transaction Account Guarantee portion of the Program.

We continue to expect that all banks will decide to remain in the Transaction Account Guarantee portion of the Program, but, with the revised terms, we believe community banks will need to closely examine whether to participate in the the Senior Unsecured Debt Guarantee portion of the Program.

Senior Unsecured Debt Guarantee

No Short Term Borrowings. The FDIC has revised the definition of guaranteed senior unsecured debt to exclude debt with a stated maturity of third days or less.  As a result, fed funds (and other short term borrowings) are excluded from eligibility for the FDIC’s debt guarantee (but not from the calculation of senior unsecured debt at September 30, 2008 for purposes of determining the debt guarantee cap).

Revised Assessment Rates. The FDIC has also revised the assessment rate for guaranteed debt.  For debt with a maturity of more than 30 days and less than 180 days, the annualized assessment rate will be 50 basis points.  For debt with a maturity of 181 to 364 days, the annualized assessment rate will be 75 basis points.  For debt with a maturity of 365 days or greater, the annualized assessment rate will be 100 basis points.  (There is also a 10 basis point surcharge for bank holding companies in which the consolidated assets of insured depository institutions constitutes less than 50 percent of the holding company’s total consolidated assets.)

Revised Maximum Debt Guarantee Cap. If a depository institution had senior unsecured debt as of the close of business on September 30, 2008 that was scheduled to mature on or before June 30, 2009, then the maximum amount that can be guaranteed remains 125% of that amount.  However, if an insured depository institution had, as of September 30, 2008, no senior unsecured debt or only had fed funds purchased, then the depository institution (but not its holding company) is entitled to a debt guarantee of up to 2% of its consolidated total liabilities as of September 30, 2008.

Limits on Uses and Recipients of Guaranteed Debt. Guaranteed debt cannot be: (i) used to prepay debt that is not FDIC-guaranteed; or (ii) issued to an affiliate, an insider of the participating entity, or an insider of an affiliate.

Procedures for Participating Entity to Issue Non-Guaranteed Debt.  If an institution does not opt out of the program and is eligible to issue FDIC-guaranteed debt (either because they had such debt outstanding at September 30, 2008 or because of the 2% alternative cap), then the institution generally may not issue long-term non-guaranteed senior unsecured debt until they have issued their full amount of guaranteed debt.  In order to be able to issue long-term non-guaranteed senior unsecured debt, an institution must (a) notify the FDIC of such intent prior to 11:59 pm EST on December 5, 2008, and (b) pay a nonrefundable fee equal to 37.5 basis points times the institutions cap on issuing guaranteed senior unsecured debt (although such fees will offset any future issuances of guaranteed debt).

Requesting Exemptions. The final rules do not provide significant details on the process that will be used for exceptions, but they do provide that requests to establish or increase a debt guarantee limit must be made in writing to the FDIC and the appropriate federal banking authority.  The letter application should describe the details of the request, provide a summary of the applicant’s strategic operating plan, and describe the proposed use of debt proceeds.  The factors to be considered by the FDIC in evaluating applications include the financial condition and supervisory history of the applicant.  No exemption request is needed to rely on the 2% alternative cap by a depository institution so long as the institution had no senior unsecured debt (other than fed funds purchased) at September 30, 2008.

Master Agreement. The final rule requires participating entities to execute and file a “Master Agreement” with the FDIC as part of its notification of participation in the Debt Guarantee Program.  Under this document, the participating entity: (1) acknowledges and agrees to the establishment of a debt owed to the FDIC for any payment made in satisfaction of the FDIC’s guarantee of a debt issuance by the participating entity and agrees to honor immediately the FDIC’s demand for payment on that debt; (2) arranges for the assignment to the FDIC by the holder of any guaranteed debt issued by the participating entity of all rights and interests in respect of that debt upon payment to the holder by the FDIC under the guarantee and for the debtholders to release the FDIC of any further liability under the Debt Guarantee Program with respect to the particular issuance of debt; and (3) provides for the issuer to elect to designate an authorized representative of the bondholders for purposes of making a claim on the guarantee.  A copy of the Master Agreement is available on the FDIC’s website.

Guarantee Triggered by Payment Default. Under the final rules, the FDIC’s debt guarantee will be triggered by any payment default rather than bankruptcy or receivership.

Risk Weighting of Bank Debt. On the conference call, the FDIC confirmed that they would not be modifying the risk weighting for bank debt, whether guaranteed or not.

Transaction Account Guarantee

Inclusion of IOLTA and NOW Accounts. Noninterest-bearing transaction accounts have been expanded to include: (i) all IOLTA accounts; and (ii) NOW accounts with interest rates no higher than 50 basis points (and a commitment not to pay more than 50 basis points through December 31, 2009).  (Lawyers appear to have better lobbyists than general NOW account holders, as there is no limit on the interest rate to be paid on IOLTA accounts that qualify for the unlimited insurance guarantee.)  Any NOW accounts that pay more than 50 basis points, may be included so long as the rate is reduced to 50 basis points or less on or before January 1, 2009.

Fees. Participation in the noninterest-bearing transaction account program will require quarterly fees of an annualized 10 basis point assessment on total amounts over $250,000 in transaction accounts, as reported on quarterly Call Reports.  Changes to the Call Reports are coming to explicitly report the aggregate account balance over $250,000 (as of quarter-end).

Inclusion of Public Funds Accounts. On the conference call, the FDIC clarified that public funds held in NOW accounts, even if otherwise secured, would be included in the assessments (assuming the NOW account paid no more than 50 basis points).   Institutions may wish to consider paying in excess of 50 basis points as of January 1, 2009 to exclude such accounts from the Transaction Account Guarantee.

Opt-Out and Opt-In Options and Disclosure

Affirmative action is needed to opt-out of either part of the FDIC’s Temporary Liquidity Guarantee Program.  Each eligible entity must inform the FDIC if it desires to opt out of the debt guarantee program or the transaction account guarantee program, or both by 11:59 pm EST on December 5, 2008.  Failure to opt-out by that deadline constitutes a decision to continue in the program after that date.  The FDIC’s website provides the revised Election Form, which will also be available on FDICconnect starting on November 24, 2008.

The FDIC will publish on its website a list of all eligible entities that have opted out of either portion of the Temporary Liquidity Guarantee Program.  Guaranteed debt must contain the following statement:

This debt is guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program and is backed by the full faith and credit of the United States.  The details of the FDIC guarantee are provided in the FDIC’s regulations, 12 CFR Part 370, and at the FDIC’s website, www.fdic.gov/tlgp.  The expiration date of the FDIC’s guarantee is the earlier of the maturity date of the debt or June 30, 2012.

Non-guaranteed debt must contain the following statement:

This debt is not guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.

Each insured depository institution that offers noninterest-bearing transaction accounts must post a prominent notice in the lobby of its main office, each domestic branch office, and if it offers Internet deposit services, on its website clearly indicating whether the institution is participating in the transaction account guarantee.  The FDIC provided the following sample disclosures:

For Participating Institutions

[Institution Name] is participating in the FDIC’s Transaction Account Guarantee Program.  Under that program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account.  Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.

For Non-Participating Institutions

[Institution Name] has chosen not to participate in the FDIC’s Transaction Account Guarantee Program.  Customers of [Institution Name] with noninterest-bearing transaction accounts will continue to be insured through December 31, 2009 for up to $250,000 under the FDIC’s general deposit insurance rules.

No fees will be collected under either part of the Temporary Liquidity Guarantee Program for the period from October 14, 2008 through November 12, 2008, and any entity that opts out on or prior to December 5, 2008 will not pay any assessments.