FDIC extends debt guarantee of TLGP through Oct. 31

By Susanna Moon

Chicago, March 17 - The board of directors of the Federal Deposit Insurance Corp. voted to extend the debt guarantee portion of the Temporary Liquidity Guarantee Program through Oct. 31, 2009 from June 30, according to an FDIC press release.

The FDIC also will impose a surcharge on debt issued with a maturity of one-year or more beginning in the second quarter to gradually phase out the 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," FDIC chairman Sheila C. Bair said in the release.

"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."

With the extension, all insured depository institutions and those additional participants, such as holding companies, that have actively participated in the debt guarantee portion of the program by issuing guaranteed debt before April 1 may continue to issue guaranteed debt through Oct. 31 without application.

The guarantee on debt issued before April 1 will expire no later than June 30, 2012. The guarantee on debt issued on or after April 1 will expire no later than Dec. 31, 2012.

Participants that are not insured depository institutions and that have not issued FDIC-guaranteed debt before April 1 must apply by June 30, if they wish to issue guaranteed debt after that date, the release said.

If the application is approved, the guarantee on debt issued on or after April 1 will expire no later than Dec. 31, 2012.

Surcharges on guaranteed debt

The board also voted to impose surcharges on guaranteed debt that has a maturity of one year or more and is issued on or after April 1. For guaranteed debt that is issued by June 30 and matures by June 30, the surcharge will be 10 basis points on an annualized basis for an insured depository institution and 20 bps for all others. For all other guaranteed debt that uses the extension, the surcharge will be 25 bps for an insured depository institution and 50 bps for all others.

Surcharges will be in addition to current fees for guaranteed debt and deposited into the Deposit Insurance Fund instead of being set aside to cover potential TLG program losses.

"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," Bair noted.

"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 Feb. 27," Bair said.

The FDIC said it created the program in October as part of a coordinated effort by the FDIC, the U.S. Department of the Treasury and the Federal Reserve to remedy unprecedented disruptions in credit markets and the resulting inability of financial institutions to fund themselves and make loans to creditworthy borrowers.

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