FDIC Extends Deadlines for Government-Guaranteed Debt Program

By: •

The Federal Deposit Insurance Corporation extended a program that allows bank holding companies to issue government-backed debt on Tuesday.

The FDIC extended the deadlines to issue debt and for the debt to expire by six months each for the Temporary Liquidity Guarantee Program.

"The TLGP has been effective in improving short-term and intermediate-term funding for banking organizations, but liquidity in the financial markets has not returned to pre-crisis levels," said FDIC Chairman Sheila C. Bair. "The extension will reduce the potential for market disruption when the TLGP ends and should provide a gradual phase-out period as institutions return to reliance on the private, non-guaranteed debt markets."

The program gives banks and other financial institutions the opportunity to borrow money at rates far below the prevailing market levels. The new deadline to issue debt is now Oct. 31, 2009 and the securities must now expire no later than Dec. 31, 2012.

On March 9, Bank of America sold $2 billion in 3-year notes under the FDIC program. The notes have an AAA-rating and are yielding 2.20%. Uninsured Bank of America notes with a similar maturity have a rating of A- and are trading at 12.79%.

In addition to the coupon, issuers under the FDIC program pay an insurance premium to cover the cost of a potential default. The premium is about 100 basis points depending on the maturity. On Tuesday, the FDIC voted to impose an additional surcharge of 10 basis points for FDIC-insured institutions and 20 basis points for other bank holding companies. On debt issued after June 30, the surcharges will be 25 basis points and 50 basis points, respectively.

"The surcharges recognize that a relatively small portion of the industry is actively using the debt guarantee, but all insured depository institutions ultimately bear the risks associated with this program," noted Chairman Bair.

"Putting the surcharges in the DIF will bolster the reserves that support our regular insurance program. Surcharge revenues collected in the second quarter, combined with Congressional action to increase our borrowing authority, should enable the FDIC to meaningfully reduce the 20 basis point special assessment proposed by the board on February 27th."

By Adam Button and edited by Sarah Sussman
©CEP News Ltd. 2009