FDIC Temporary Liquidity Guarantee Program

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1 FDIC Temporary Liquidity Guarantee Program The FDIC Issues Interim Rule Regarding Temporary Liquidity Guarantee Program SUMMARY On Thursday, October 23, the Federal Deposit Insurance Corporation ( FDIC ) issued an interim rule regarding its Temporary Liquidity Guarantee Program (the TLGP ). The TLGP has two primary components: (i) the Debt Guarantee Program, under which the FDIC will guarantee the payment of certain newly-issued senior unsecured debt, and (ii) the Transaction Account Guarantee Program, under which the FDIC will guarantee certain non-interest bearing transaction accounts. The guarantees provided by both the Debt Guarantee Program and the Transaction Account Guarantee Program are open to all eligible entities, which include: (i) any FDIC-insured depository institution, (ii) any U.S. bank holding company, and (iii) any U.S. savings and loan holding company that engages only in activities that are permissible for financial holding companies to conduct under Section 4(k) of the Bank Holding Company Act 1. A U.S. bank holding company or savings and loan company is defined as one organized under the laws of any State of the United States or the District of Columbia. The FDIC may on a case-bycase basis allow an otherwise ineligible holding company or affiliate of a participating entity to issue guaranteed debt under the Debt Guarantee Program for the benefit of the participating entity. All eligible entities are covered by both the Debt Guarantee Program and the Transaction Account Guarantee Program unless they affirmatively opt out of either or both programs on or before November 12, All eligible entities within a holding company structure must make the same decision regarding continued participation in each component of the program. The interim rule became effective on October 23. Comments on the interim rule are due within 15 days from the date the rule is published in the Federal Register, which is expected to be Wednesday, New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 October 29. If the interim rule is published in the Federal Register on October 29, the comment period would end on November 13, after the end of the opt out period. BACKGROUND On October 13, 2008, the Secretary of the Treasury (after consultation with the President) made a systemic risk determination, pursuant to Section 141 of the Federal Deposit Insurance Corporation Improvement Act of 1991, upon receipt of a recommendation by the Board of Directors of the FDIC and the Board of Governors of the Federal Reserve System. Following this determination, the FDIC announced the TLGP. The TLPG includes two initiatives aimed at reducing systemic risk, specifically relating to senior unsecured debt of insured depository institutions and their U.S. holding companies and certain noninterest-bearing transaction accounts at insured depository institutions. The FDIC will cover the costs associated with the TLGP through special fees assessed to participating institutions, as discussed below. The FDIC will impose an emergency special assessment on insured depository institutions if these special fees are insufficient to cover any loss incurred as a result of the program. DEBT GUARANTEE PROGRAM What Is Covered Under the Debt Guarantee Program, the FDIC will guarantee senior unsecured debt issued on or after October 14, 2008 through and including June 30, The maximum amount of debt that eligible entities can issue under the guarantee is 125% of the par value of the entity s senior unsecured debt, excluding debt extended to affiliates, outstanding as of September 30, 2008 and scheduled to mature by June 30, This maximum guaranteed amount is calculated for each individual participating entity within a holding company structure. The maximum amount may be adjusted for eligible entities on a caseby-case basis, including by allowing guarantee coverage to those entities that had no amount of senior unsecured debt outstanding as of September 30, 2008, by the FDIC after consultation with other primary federal regulators as appropriate. The FDIC will provide guarantee coverage until the earlier of the eligible debt s maturity date or June 30, For eligible entities that opt out of the program, the FDIC will guarantee newly-issued senior unsecured debt on or after October 14, 2008 until the earlier of the date of the opt-out or November 12, Senior unsecured debt includes, without limitation, federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, certificates of deposit standing to the credit of a bank, bank deposits in an international banking facility of an insured depository institution, and Eurodollar deposits standing to the credit of a bank. It does not include obligations under guarantees or other contingent liabilities, derivatives or derivative-linked products. Senior unsecured debt may be denominated in a foreign currency. To be eligible, the debt must be evidenced by a written agreement, -2-

3 contain a specified and fixed principal amount to be paid in full on a date certain, non-contingent, and not be subordinated to another liability. Eligible entities in the program are prohibited from issuing non-guaranteed debt until the 125% limit is reached, with the exception of certain long-term issuances described below. Eligible entities may issue non-guaranteed debt once they have reached their 125% limit. The FDIC may on a case-by-case basis allow an otherwise ineligible holding company or affiliate of a participating entity to issue guaranteed debt for the benefit of the participating entity. The FDIC will make this determination after written request and a positive recommendation by the appropriate Federal banking agency. Fees The FDIC will not assess any fees for guarantees provided under the program for the first 30 days, or though November 12, For eligible entities that do not opt out of the program, starting November 13, 2008, all guaranteed debt issued from October 14, 2008 (and still outstanding on November 13, 2008) through June 30, 2009, will be charged an annualized fee equal to 75 basis points multiplied by the amount of debt issued, and calculated for the period until the maturity of that debt or June 12, 2012, whichever is earlier. Participating entities may elect to retain the option of issuing certain long-term issuances of nonguaranteed senior unsecured debt before issuing the maximum amount of guaranteed debt by paying a one-time non-refundable fee by November 12, This non-refundable fee will be calculated as the 75 basis point annual rate charged for six months (or 37.5 basis points) on the amount of senior unsecured debt, excluding debt extended to affiliates, that is outstanding as of September 30, 2008 and scheduled to mature by June 30, Eligible entities that pay this 37.5 basis point fee will be allowed to issue, at any time and without regard to the 125% limit, non-guaranteed senior unsecured debt with a maturity date after June 30, The non-refundable fee will be collected in six equal monthly installments and be credited towards issuances of guaranteed debt under the program. How the Guarantee Works Under the FDIC guarantee, the FDIC s obligation to make payments arises upon the failure of the institution issuing the debt. With respect to FDIC insured depository institutions, the obligation arises when the institution enters into FDIC receivership. The FDIC will follow the well-established receivership claims process and anticipates that most holders, particularly sellers of federal funds, will be paid on the business day after failure. With respect to guaranteed debt issued by holding companies, the FDIC s obligation arises when the company files for bankruptcy protection. Holders of the debt must file a bankruptcy proof of claim within 90 days of the published bar date of the bankruptcy proceeding. The FDIC will make payment to the debt -3-

4 holder for the principal amount of the debt and interest to the date of the filing of the bankruptcy petition and will pay interest at the 90 day T-Bill rate in effect if there is a delay in payment beyond the next business day after the filing of the bankruptcy petition. The FDIC generally will not make payment unless the claim has been allowed against the bankruptcy estate and is not subject to reconsideration under 11 U.S.C. 502(j). The FDIC will be subrogated to the rights of any debt holder it pays under the program. TRANSACTION ACCOUNT GUARANTEE PROGRAM What Is Covered Under the Transaction Account Guarantee Program, the FDIC has provided a temporary full guarantee for funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts. This coverage became effective on October 14, 2008, and will continue for participating institutions through December 31, For institutions that opt out of the program, the coverage will end on November 12, Under the interim rule, a noninterest-bearing transaction account is defined as a transaction account with respect to which interest is neither accrued nor paid and on which the insured depository institution does not reserve the right to require advance notice of an intended withdrawal. This definition encompasses traditional checking accounts that allow for an unlimited number of deposits and withdrawals at any time. This definition, however, does not encompass negotiable order of withdrawal accounts and money market deposit accounts. The guarantee provided is in addition to and separate from the $250,000 coverage provided under the FDIC s general deposit insurance regulations through December 31, Under the interim rule, the FDIC will treat sweep accounts in accordance with the usual rules and procedures for determining sweep balances at a failed depository institution. Under these procedures, funds may be swept or transferred from a noninterest-bearing transaction account to another type of deposit or nondeposit account. The FDIC will treat the funds as being in the account to which the funds were transferred. The interim rule makes an exception to this treatment of sweep accounts where funds are swept from a noninterest-bearing account to a noninterest-bearing savings account. In that case, the swept funds will be guaranteed under the Transaction Account Guarantee Program. Otherwise, funds swept into an interest-bearing account will only be insured under the FDIC s general insurance regulations. Fees Institutions are not required to pay any assessments for the guarantee provided during the initial 30-day period ending November 12, Beginning on November 13, 2008, institutions that have not opted out of the program will be assessed on a quarterly basis an annualized 10 basis point assessment on -4-

5 balances in noninterest-bearing transaction accounts that exceed the existing general deposit insurance limit of $250,000. The FDIC will collect these assessments at the same time and in the same manner that it collects an institution s general quarterly deposit insurance assessments. How the Guarantee Works The payment and claims process for satisfying claims under the program will follow generally the procedures for other FDIC-insured deposit claims. The FDIC s obligation to make payments arises upon the failure of the participating institution. The FDIC will make the payments under the program as soon as possible after the institution enters into FDIC receivership. The FDIC will be subrogated to the rights of any depositor it pays under the program. * * * ENDNOTES 1 Eligible entities also include savings and loan holding companies with at least one depository institution subsidiary that was the subject of an application pending on October 13, 2008, pursuant to Section 4(c)(8) of the Bank Holding Company Act. Copyright Sullivan & Cromwell LLP

6 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance and corporate transactions, significant litigation and corporate investigations, and complex regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 700 lawyers on four continents, with four offices in the U.S., including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Jennifer Rish ( ; or Alison Alifano ( ; in our New York office. CONTACTS New York H. Rodgin Cohen Mitchell S. Eitel Michael T. Escue Donald J. Toumey Mark J. Welshimer Michael M. Wiseman Washington, D.C. William F. Kroener III J. Virgil Mattingly Samuel R. Woodall III NY12532:

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