Federal Register: November 26, 2008 (Volume 73, Number 229)
DOCID: fr26no08-23 FR Doc E8-28184
FEDERAL DEPOSIT INSURANCE CORPORATION
Veterans Affairs Department
CFR Citation: 12 CFR Part 370
RIN ID: RIN 3064-AD37
NOTICE: Part VII
DOCID: fr26no08-23
DOCUMENT ACTION: Final rule.
SUBJECT CATEGORY:
Temporary Liquidity Guarantee Program
DATES: Effective Date: The Final Rule becomes effective on November 21, 2008, except that Sec. 370.5(h)(2), (h)(3), and (h)(4) are effective December 19, 2008.
DOCUMENT SUMMARY:
The FDIC is adopting a Final Rule to implement its Temporary Liquidity Guarantee Program. The Temporary Liquidity Guarantee Program, designed to avoid or mitigate adverse effects on economic conditions or financial stability, has two primary components: The Debt Guarantee Program, by which the FDIC will guarantee the payment of certain newly issued senior unsecured debt, and the Transaction Account Guarantee Program, by which the FDIC will guarantee certain noninterestbearing transaction accounts.
SUMMARY:
Federal Deposit Insurance Corporation,
SUPPLEMENTAL INFORMATION
I. Background
On November 21, 2008, the Board of Directors (Board) of the Federal Deposit Insurance Corporation (FDIC) adopted a Final Rule relating to the Temporary Liquidity Guarantee Program (TLG Program). The TLG Program was announced by the FDIC on October 14, 2008, as an initiative to counter the current systemwide crisis in the nation's financial sector. It provided two limited guarantee programs: One that guaranteed newlyissued senior unsecured debt of insured depository institutions and most U.S. holding companies (the Debt Guarantee Program), and another that guaranteed certain noninterestbearing transaction accounts at insured depository institutions (the Transaction Account Guarantee Program).
The FDIC's establishment of the TLG Program was preceded by a determination of systemic risk by the Secretary of the Treasury (after consultation with the President), following receipt of the written recommendation of the Board on October 13, 2008, along with a similar written recommendation of the Board of Governors of the Federal Reserve System (FRB).
The recommendations and eventual determination of systemic risk were made in accordance with section 13(c)(4)(G) to the Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1823(c)(4)(G). The determination of systemic risk allowed the FDIC to take certain actions to avoid or mitigate serious adverse effects on economic conditions and financial stability. The FDIC believes that the TLG Program promotes financial stability by preserving confidence in the banking system and encouraging liquidity in order to ease lending to creditworthy businesses and consumers. The FDIC anticipates that the TLG Program will favorably impact both the availability and the cost of credit. As a result, on October 23, 2008, the FDIC's Board authorized publication in the Federal Register and requested comment regarding an Interim Rule designed to implement the TLG Program. The Interim Rule with request for comments was published on October 29, 2008, and provided for a 15 day comment period.\1\
\1\ 73 FR 64179 (Oct. 29, 2008).
Later, the FDIC amended its Interim Rule. The Amended Interim Rule became effective on November 4, 2008, and was published in the Federal Register on November 7, 2008. It made three limited modifications to the Interim Rule. In the Amended Interim Rule, the FDIC extended the optout deadline for participation in the TLG Program from November 12, 2008 until December 5, 2008; extended the deadline for complying with specific disclosure requirements related to the TLG Program from December 1, 2008 until December 19, 2008; and established assessment procedures to accommodate the extended optout period. Additionally, in issuing the Amended Interim Rule, the FDIC requested comment on three additional questions relating to the TLG Program.
The FDIC received over 700 comments on the Interim Rule and the Amended Interim Rule and, after consideration of those comments, issues the Final Rule that follows.
II. The Interim Rule
The Interim Rule permitted the following eligible entities to
participate in the TLG Program: FDICinsured depository institutions,
any U.S. bank holding company or financial holding company, and any
U.S. savings and loan holding company that either engaged only in
activities permissible for financial holding companies to conduct under
section (4)(k) of the Bank Holding Company Act of 1956 (BHCA) or had at
least one insured depository institution subsidiary that was the
subject of an application that was pending on October 13, 2008,
pursuant to section 4(c)(8) of the BHCA. To be considered an ``eligible
entity'' under the Interim Rule, both bank holding companies and
savings and loan holding companies were required to have at least one
chartered and operating insured depository institution within their
holding company structure The Interim Rule permitted other affiliates
of insured depository institutions to participate in the program, with
the permission of the FDIC, granted in its sole discretion and on a
casebycase basis, after written request and positive recommendation by the appropriate Federal banking agency. In making this
determination, the FDIC would consider such factors as (1) the extent
of the financial activity of the entities within the holding company
structure; (2) the strength, from a ratings perspective, of the issuer
of the obligations that will be guaranteed; and (3) the size and extent of the activities of the organization.
The TLG Program became effective on October 14, 2008. The Interim
Rule provided that from October 14, 2008, all eligible entities would
be covered under both components of the TLG Program for the first 30
days of the program unless they opted out of either component of the
Program before then. Under the Interim Rule, the guarantees provided by
the TLG Program under either the Debt Guarantee Program or the
Transaction Account Guarantee Program would be offered at no cost to [[Page 72245]]
eligible entities until November 13, 2008. The Interim Rule provided
that by 11:59 p.m., Eastern Standard Time (EST) on November 12, 2008,
eligible entities were required to inform the FDIC whether they
intended to optout of one or both components of the TLG Program. (The
Interim Rule also permitted eligible entities to notify the FDIC before
that date of their intent to participate in the program.) An eligible
entity that did not optout of either or both programs became a
participating entity in the program, according to the Interim Rule.
Eligible entities that did not optout of the Debt Guarantee Program by
the optout date of November 12, 2008, were not permitted to select
which of their newlyissued senior unsecured debt would be guaranteed;
the Interim Rule provided that all senior unsecured debt issued by a
participating entity up to a limit of 125 percent of all senior
unsecured debt outstanding on September 30, 2008, and maturing by June
30, 2009, would be considered guaranteed debt when issued. The Interim
Rule allowed a participating entity to make a separate election and pay
a nonrefundable fee to issue nonguaranteed senior unsecured debt with
a maturity date after June 30, 2012, prior to reaching the 125 percent debt guarantee limit.
The Interim Rule permitted an eligible entity to optout of either the Debt Guarantee Program or the Transaction Account Guarantee Program or of both components of the TLG Program, but required all eligible entities within a U.S. Banking Holding Company or a U.S. Savings and Loan Holding Company structure to make the same decision regarding continued participation in each component of the TLG Program or none of the members of the holding company structure were considered eligible for participation in that component of the TLG Program.
The Interim Rule required an eligible entity's optout decision(s) to be made publicly available. In the Interim Rule, the FDIC committed to maintain and post on its website a list of entities that opted out of either or both components of the TLG Program. The Interim Rule required each eligible entity to make clear to relevant parties whether or not it chose to participate in either or both components of the TLG Program.
According to the Interim Rule, if an eligible entity remained in the Debt Guarantee Program of the TLG Program, it was required to clearly disclose to interested lenders and creditors, in writing and in a commercially reasonable manner, what debt it was offering and whether the debt was guaranteed under this program. Similarly, the Interim Rule provided that an eligible entity had to prominently post a notice in the lobby of its main office and at all of its branches disclosing its decision on whether to participate in, or optout of, the Transaction Account Guarantee Program. These disclosures were required to be provided in simple, readily understandable text, and, if the eligible entity decided to participate in the Transaction Account Guarantee Program, the Interim Rule required the notice to state that noninterestbearing transaction accounts were fully guaranteed by the FDIC. The Interim Rule provided that if the institution used sweep arrangements or took other actions that resulted in funds in a noninterestbearing transaction account being transferred to or reclassified as an interestbearing account or a nontransaction account, the institution also must disclose those actions to the affected customers and clearly advise them in writing that such actions would void the transaction account guarantee. The Interim Rule required the described disclosures to be made by December 1, 2008.
A. The Debt Guarantee Program
The Debt Guarantee Program, as described in the Interim Rule, temporarily would guarantee all newlyissued senior unsecured debt up to prescribed limits issued by participating entities on or after October 14, 2008, through and including June 30, 2009. The guarantee would not extend beyond June 30, 2012. The Interim Rule explained that, as a result of this guarantee, the unpaid principal and contract interest of an entity's newlyissued senior unsecured debt would be paid by the FDIC if the issuing insured depository institution failed or if a bankruptcy petition were filed by the respective issuing holding company.
In the Interim Rule, senior unsecured debt included, 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 (IBF) of an insured depository institution, and Eurodollar deposits standing to the credit of a bank. Senior unsecured debt was permitted to be denominated in foreign currency. For purposes of the Interim Rule, the term ``bank'' in the phrase ``standing to the credit of a bank'' meant an insured depository institution or a depository institution regulated by a foreign bank supervisory agency. To be eligible for the Debt Guarantee Program, senior unsecured debt was required to be noncontingent. Finally, the Interim Rule required senior unsecured debt to be evidenced by a written agreement, contain a specified and fixed principal amount to be paid on a date certain, and not be subordinated to another liability.
The preamble to the Interim Rule explained that the purpose of the Debt Guarantee Program was to provide liquidity to the interbank lending market and promote stability in the unsecured funding market and not to encourage innovative, exotic or complex funding structures or to protect lenders who make risky loans. Thus, as explained in the Interim Rule, for purposes of the Debt Guarantee Program, some instruments were excluded from the definition of senior unsecured debt. Some of these exclusions from that definition were, for example, obligations from guarantees or other contingent liabilities, derivatives, derivativelinked products, debt paired with any other security, convertible debt, capital notes, the unsecured portion of otherwise secured debt, negotiable certificates of deposit, and deposits in foreign currency and Eurodollar deposits that represent funds swept from individual, partnership or corporate accounts held at insured depository institutions. Also excluded from the definition of ``senior unsecured debt'' were loans from affiliates, including parents and subsidiaries, and institutionaffiliated parties.
The Interim Rule explained that debt eligible for coverage under the Debt Guarantee Program had to be issued by participating entities on or before June 30, 2009. The FDIC agreed to guarantee such debt until the earlier of the maturity date of the debt or until June 30, 2012. The Interim Rule provided an absolute limit for coverage: coverage would expire at 11:59 p.m. EST on June 30, 2012, whether or not the liability had matured at that time. In order for the newly issued senior unsecured debt to be guaranteed by the FDIC, the Interim Rule required the debt instrument to be clearly identified as ``guaranteed by the FDIC.''
As explained in the Interim Rule, absent additional action by the
FDIC, the maximum amount of senior unsecured debt that could be issued
pursuant to the Debt Guarantee Program was equal to 125 percent of the
par or face value of senior unsecured debt outstanding as of September
30, 2008, that was scheduled to mature on or before June 30, 2009. The
Interim Rule provided that the maximum guaranteed amount would be
calculated for each individual participating entity within a holding company structure. In the
[[Page 72246]]
Interim Rule, the FDIC outlined procedures that required each
participating entity to calculate its outstanding senior unsecured debt
as of September 30, 2008, and to provide that informationeven if the amount of the senior unsecured debt was zeroto the FDIC.
The 125 percent limit described in the Interim Rule could be adjusted for participating entities if the FDIC, in consultation with any appropriate Federal banking agency, determined it was necessary. Additionally, the Interim Rule provided that, after written request and positive recommendation by the appropriate Federal banking agency, the FDIC, in its sole discretion and on a casebycase basis, may allow an affiliate of a participating entity to take part in the Debt Guarantee Program. Factors that would be relevant to this determination are (1) the extent of the financial activity of the entities within the holding company structure; (2) the strength, from a ratings perspective, of the issuer of the obligations that will be guaranteed; and (3) the size and extent of the activities of the organization.
The Interim Rule also stated that, again, on a caseby case basis, the FDIC could authorize a participating entity to exceed the 125 percent limitation or limit its participation to less than 125 percent.
A participating entity was prohibited by the Interim Rule from representing that its debt was guaranteed by the FDIC if it did not comply with the rules governing the Debt Guarantee Program. If the issuing entity opted out of the Debt Guarantee Program, the Interim Rule provided that it could no longer represent that its newlyissued debt was guaranteed by the FDIC. Similarly, once an entity has reached its 125 percent limit, it was prohibited from representing that any additional debt was guaranteed by the FDIC, and was required to specifically disclose that such debt was not guaranteed.
After consultation with a participating entity's appropriate Federal banking agency, the Interim Rule provided that the FDIC, in its discretion, could determine that a participating entity should not be permitted to continue to participate in the TLG Program. The FDIC explained that termination of an entity's participation in the Program would have only a prospective effect, and the FDIC required the entity to notify its customers and creditors that it was no longer issuing guaranteed debt.
Under the Interim Rule, entities that chose to participate in the Debt Guarantee Program and to issue guaranteed debt had to agree to supply information requested by the FDIC, as well as to be subject to periodic FDIC onsite reviews as needed after consultation with the appropriate federal banking agency to determine compliance with the terms and requirements of the TLG Program. Participating entities also would be bound by the FDIC's decisions, in consultation with the appropriate Federal banking agency, regarding the management of the TLG Program. If an entity participated in the Debt Guarantee Program, the Interim Rule provided that it was not exempt from complying with federal and state securities laws and with any other applicable laws. B. The Transaction Account Guarantee Program
The Transaction Account Guarantee Program as described in the Interim Rule, provided for a temporary full guarantee by the FDIC for funds held at FDICinsured depository institutions in noninterest bearing transaction accounts above the existing deposit insurance limit. This coverage became effective on October 14, 2008, and would continue through December 31, 2009 (assuming that the insured depository institution does not optout of this component of the TLG Program).
Under the Interim Rule, a ``noninterestbearing transaction account'' was 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 was designed to encompass traditional demand deposit checking accounts that allowed for an unlimited number of deposits and withdrawals at any time and official checks issued by an insured depository institution. The definition contained in the Interim Rule specifically did not include negotiable order of withdrawal (NOW) accounts or money market deposit accounts (MMDAs).
The Interim Rule recognized that depository institutions sometimes waive fees or provide feereducing credits for customers with checking accounts and stated that such account features do not prevent an account from qualifying under the Transaction Account Guarantee Program, if the account otherwise satisfies the definition.
The Interim Rule clarified that the guarantee provided for noninterestbearing transaction accounts is in addition to and separate from the general deposit insurance coverage provided for in 12 CFR Part 330. The FDIC stated that although the unlimited coverage for noninterestbearing transaction accounts under the TLG Program is intended primarily to apply to transaction accounts held by businesses, it also applies to all such accounts held by any depositor.
The Interim Rule included a provision relating to sweep accounts. Under this provision, the FDIC stated that it would treat funds in 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, and the FDIC stated that it would treat the funds as being in the account to which the funds were transferred. The Interim Rule provided an exception for funds swept from a noninterestbearing transaction account to a noninterestbearing savings account: \2\ such swept funds would be treated as being in a noninterestbearing transaction account. As a result of this treatment, the Interim Rule provided that funds swept into a noninterestbearing savings account would be guaranteed under the Transaction Account Guarantee Program. \2\ For purposes of this rule, ``savings account'' is a type of ``savings deposit'' as defined in Regulation D issued by the Board of Governors of the Federal Reserve System, 12 CFR 204.2(d). C. Fees for the TLG Program
The Interim Rule provided for fees related to both components of the TLG Program. It provided that, beginning on November 13, 2008, any eligible entity that had not opted out of the Debt Guarantee Program would be assessed fees for continued coverage. According to the Interim Rule, all eligible debt issued by such entities from October 14, 2008 (and still outstanding on November 13, 2008), through June 30, 2009, would be charged an annualized fee equal to 75 basis points multiplied by the amount of debt issued, and calculated for the maturity period of that debt or June 30, 2012, whichever was earlier. (The Interim Rule explained that a deduction from this calculation would be made for the first 30 days of the program, for which no fees would be charged.) The Interim Rule further provided that if any participating entity issued eligible debt guaranteed by the Debt Guarantee Program, the participating entity's assessment would be based on the total amount of debt issued and the maturity date at issuance and that if the guaranteed debt was ultimately retired before its scheduled [[Page 72247]]
maturity, there would be no refund of prepaid fees.
If an eligible entity did not optout, the Interim Rule indicated that all newlyissued senior unsecured debt up to the maximum amount would become guaranteed as and when issued. Participating entities were prohibited from issuing guaranteed debt in excess of the maximum amount for the institution and also were prohibited from issuing non guaranteed debt until the maximum allowable amount of guaranteed debt had been issued.
The Interim Rule permitted one exception to the prohibition against issuing nonguaranteed debt until the maximum allowable amount of guaranteed debt had been issued. A participating entity could issue nonguaranteed debt with maturities beyond June 30, 2012, at any time, in any amount, and without regard to the guarantee limit only if the entity informed the FDIC of its election to do so. This election was required to be made through FDICconnect on or before11:59 pm EST on November 12, 2008, and any party exercising this option was required to pay a nonrefundable fee. This nonrefundable fee equaled 37.5 basis points times the amount of the entity's senior unsecured debt with a maturity date on or before June 30, 2009, outstanding as of September 30, 2008.
If a participating entity nonetheless issued debt identified as ``guaranteed by the FDIC'' in excess of the FDIC'S limit, according to the Interim Rule, the participating entity would have its assessment rate for guaranteed debt increased to 150 basis points on all outstanding guaranteed debt. For this violation (and for other violations of the TLG Program), a participating entity and its institutionaffiliated parties will be subject to enforcement actions under section 8 of the FDI Act (12 U.S.C. 1818), including, for example, assessment of civil money penalties under section 8(i) of the FDI Act (12 U.S.C. 1818(i)), removal and prohibition orders under section 8(e) of the FDI Act (12 U.S.C. 1818(e)), and cease and desist orders under section 8(b) of the FDI Act (12 U.S.C. 1818(b)). The violation of any provision of the program by an insured depository institution also constitutes grounds for terminating the institution's deposit insurance under section 8(a)(2) of the FDI Act (12 U.S.C. 1818(a)(2)). The appropriate Federal banking agency for the participating entity will consult with the FDIC in enforcing the provisions of this part. The appropriate Federal banking agency and the FDIC also have enforcement authority under section 18(a)(4)(C) of the FDI Act (12 U.S.C. 1828(a)(4)(C)) to pursue an enforcement action if a person knowingly misrepresents that any deposit liability, obligation, certificate, or share is insured when it is not in fact insured. Moreover, a participating entity's default in the payment of any debt may be considered an unsafe or unsound practice and may result in enforcement action.
The Interim Rule recognized that much of the outstanding debt as of September 30, 2008, which was not guaranteed, would be rolled over into guaranteed debt only when the outstanding debt matured. The Interim Rule stated that the nonrefundable fee would be collected in six equal monthly installments. The Interim Rule provided that an entity electing the nonrefundable fee option also would be billed as it issued guaranteed debt under the Debt Guarantee Program, and that the amounts paid as a nonrefundable fee were to be applied to offset these bills until the nonrefundable fee was exhausted. Thereafter, according to the Interim Rule, the institution would be required to pay additional assessments on guaranteed debt as it issued the debt.
Under the Transaction Account Guarantee Program described in the Interim Rule, the FDIC committed to provide a full guarantee for deposits held at FDICinsured institutions in noninterestbearing transaction accounts. This coverage became effective on October 14, 2008, and would expire on December 31, 2009 (assuming the insured depository institution did not optout of the Transaction Account Guarantee Program). The Interim Rule provided that all insured depository institutions were automatically enrolled in the Transaction Account Guarantee Program for an initial thirtyday period (from October 14, 2008, through November 12, 2008) at no cost.
Beginning on November 13, 2008, if an insured depository institution did not optout of the Transaction Account Guarantee Program, it would be assessed on a quarterly basis an annualized 10 basis point assessment on balances in noninterestbearing transaction accounts that exceed the existing deposit insurance limit of $250,000, according to the Interim Rule. In the Interim Rule, the FDIC stated its intent to collect such assessments at the same time and in the same manner as it collects an institution's quarterly deposit insurance assessments under existing part 327, although the assessments related to the Transaction Account Guarantee Program would be in addition to an institution's riskbased assessment imposed under that part.
The Interim Rule also required the FDIC to impose an emergency
systemic risk assessment on insured depository institutions if the fees
and assessments collected under the TLG Program proved insufficient to
cover losses incurred as a result of the program. In addition, if at
the conclusion of these programs there were any excess funds collected
from the fees associated with the TLG Program, the Interim Rule
provided that the funds would remain as part of the Deposit Insurance Fund.
D. Payment of Claims by the FDIC Pursuant to the Transaction Account Guarantee Program
The Interim Rule established a process for payment and recovery of FDIC guarantees of ``noninterestbearing transaction accounts.'' In the Interim Rule, the FDIC stated that its obligation to make payment, as guarantor of deposits held in noninterestbearing transaction accounts, arose upon the failure of a participating federally insured depository institution. The Interim Rule also noted that the payment and claims process for satisfying claims under the Transaction Account Guarantee Program generally would follow the procedures prescribed for deposit insurance claims pursuant to section 11(f) of the FDI Act, 12 U.S.C. 1821(f), and that the FDIC would be subrogated to the rights of depositors against the institution pursuant to section 11(g) of the FDI Act, 12 U.S.C. 1821(g).
The FDIC stated that it would make payment to the depositor for the
guaranteed amount under the Transaction Account Guarantee Program or
would make such guaranteed amounts available in an account at another
insured depository institution when it fulfilled its deposit insurance
obligation under Part 330. The Interim Rule provided that the payment
made pursuant to the Transaction Account Guarantee Program would be
made as soon as possible after the FDIC, in its sole discretion,
determined whether the deposit was eligible and what amount would be
guaranteed. In the preamble to the Interim Rule, the FDIC stated its
intent to make the entire amount of a qualifying transaction account
available to the depositor on the next business day following the
failure of an institution that participated in the Transaction Account
Guarantee Program. If there is no acquiring institution for a
transaction account guaranteed by the Transaction Account Guarantee
Program, in the preamble to the Interim Rule, the FDIC also stated its
intent to mail a check to the depositor for the full amount of the guaranteed
[[Page 72248]]
account within days of the insured depository institution's failure.
The Interim Rule provided that the FDIC would be subrogated to all rights of the depositor against the institution with respect to noninterestbearing transaction accounts guaranteed by the Transaction Account Guarantee Program, and the preamble explained that this included the right of the FDIC to receive dividends from the proceeds of the receivership estate of the institution. The preamble to the Interim Rule also explained that the FDIC, as manager of the Deposit Insurance Fund, would be entitled to receive dividends in the deposit class for that portion of the account and that the FDIC would be entitled to receive dividends from the receiver for assuming its obligation with regard to the uninsured portion of the guaranteed transactional deposit accounts.
The Interim Rule provided that claims related to noninterest bearing transaction accounts would be paid in accordance with 12 U.S.C. 1821(f) and 12 CFR 330. The preamble to that rule provided that in paying such claims, the FDIC would rely on the books and records of the insured depository institution to establish ownership and that the FDIC could require a claimant to file a proof of claim (POC) in accordance with section 11(f)(2) of the FDI Act, 12 U.S.C. 1821(f)(2). The Interim Rule provided that the FDIC's determination of the guaranteed amount would be final and would be considered a final administrative determination subject to judicial review in accordance with Chapter 7 of Title 5. The Interim Rule permitted a noninterestbearing transaction account depositor to seek judicial review of the FDIC's determination on payment of the guaranteed amount in the United States district court for the federal judicial district where the principal place of business of the depository institution is located within 60 days of the date on which the FDIC's final determination is issued. E. Payment of Claims by the FDIC Pursuant to the Debt Guarantee Program: Insured Depository Institution Debt
The Interim Rule indicated that, with respect to debt issued by an
insured depository institution, the FDIC's obligation to make payment
is triggered by the failure of a participating insured depository
institution and that the FDIC would use its established receivership
claims process to process guarantee requests. The Interim Rule required
claimants under the Debt Guarantee Program to present their claims
within 90 days of the publication of the claims notice by the receiver
for the failed institution. In the preamble to the Interim Rule, the
FDIC projected that many debtholders, particularly sellers of federal
funds, would be paid on the next business day immediately following the
failure of an insured depository institution, but that, in all
instances, the FDIC would commit to pay claims expeditiously and strive
to make payment on the business day following the establishment of the
validity of the claim. The Interim Rule also provided that the FDIC
would be subrogated to the rights of any creditor paid under this aspect of the Debt Guarantee Program.
F. Payment of Claims by the FDIC Pursuant to the Debt Guarantee Program: Holding Company Debt
Under the Interim Rule, for senior unsecured debt of holding companies eligible for payment based on the Debt Guarantee Program, the FDIC's obligation to make payment would be triggered on the date of the filing of a bankruptcy petition involving a participating holding company. The Interim Rule also provided that the FDIC would pay the debtholder the principal amount of the debt and contract interest to the date of the filing of the bankruptcy petition and that the FDIC would pay interest on a claim for debt until paid at the 90day Tbill rate in effect when the bankruptcy petition was filed if payment for the claim were delayed beyond the next business day after the filing of the bankruptcy petition.
As with claims for debt issued by insured depository institutions, in the Interim Rule, the FDIC committed to expedite the claims payment process related to guaranteed debt, but the FDIC stated that it would not be required to make payment on the guaranteed amount for a debt asserted against a bankruptcy estate, unless and until the claim for the unsecured senior debt has been determined to be an allowed claim against the bankruptcy estate and such claim was not subject to reconsideration under 11 U.S.C. 502(j).
The Interim Rule required the holder of eligible debt to file a timely claim against a participating holding company's bankruptcy estate and to submit evidence of the timely filed bankruptcy POC to the FDIC within 90 days of the published bar date of the bankruptcy proceeding. In the preamble to the Interim Rule, the FDIC explained that it could also consider the books and records of the holding company and its affiliates to determine the holder of the unsecured senior debt and the amount eligible for payment under the Debt Guarantee Program.
The Interim Rule required the holder of the senior unsecured debt to assign its rights, title and interest in the unsecured senior debt to the FDIC and to transfer its allowed claim in bankruptcy to the FDIC to receive payment under the Debt Guarantee Program. The Interim Rule explained that this assignment included the right of the FDIC to receive principal and interest payments on the unsecured senior debt from the proceeds of the bankruptcy estate of the holding company. The assignment, as explained in the preamble to the Interim Rule, would entitle the FDIC to receive distributions from the liquidation or other resolution of the bankruptcy estate in accordance with 11 U.S.C. 726 or a confirmed plan of reorganization or liquidation in accordance with 11 U.S.C. 1129. The Interim Rule also provided that if the holder of the senior unsecured debt received any distribution from the bankruptcy estate prior to the FDIC's payment under the guarantee, the guaranteed amount paid by the FDIC would be reduced by the amount the holder received in the distribution from the bankruptcy estate.
III. The Amended Interim Rule
The Interim Rule established an optout deadline of November 12, 2008, and a deadline of November 13, 2008, for submitting comments to the FDIC relating to the Interim Rule. The FDIC intended to issue a final rule only after the expiration of the comment period and consideration of comments related to the Interim Rule. In order to provide eligible entities an opportunity to review the final rule before they were required to decide whether or not to optout of the TLG Program, the FDIC amended its Interim Rule. The Amended Interim Rule differs from the Interim Rule in three ways: It extended the opt out date for participation in the TLG Program from November 12, 2008, until December 5, 2008; extended the deadline for complying with specific disclosure requirements related to the TLG Program from December 1, 2008 until December 19, 2008; and established some changes to the previously announced assessment procedures to accommodate the extended optout period. Apart from these and other related conforming technical modifications, as well as a few grammatical changes, the Amended Interim Rule made no other modifications to the text of the Interim Rule.
When establishing December 5, 2008, as the new optout deadline, the FDIC
[[Page 72249]]
amended the Interim Rule to make conforming modifications to part 370
that referred to or were based upon the previous optout deadline of
November 12, 2008. These amendments were considered technical. As
evidenced by the discussion that follows, other changes in the Amended
Interim Rule that related to assessments under the Debt Guarantee
Program and the Transaction Account Guarantee Program could be considered more substantive.
According to the Interim Rule, eligible entities were not required to pay any assessment associated with the Debt Guarantee Program for the period from October 14, 2008, through November 12, 2008. The Amended Interim Rule retained this provision. In addition, the Amended Interim Rule provided that if an eligible entity opted out of the Debt Guarantee Program by the extended deadline of December 5, 2008, the entity would not be required to pay any assessment under the program.
The Interim Rule also contained notice and certification requirements for eligible entities that issue guaranteed debt under the Debt Guarantee Program for the period from October 14, 2008 through November 12, 2008, and for the period after November 12, 2008, respectively. Although the notification and certification requirements did not change in the Amended Interim Rule, the references in those sections to the former optout deadline of November 12, 2008, were changed to reflect the new optout deadline of December 5, 2008.
Regarding the initiation of assessments related to the Debt Guarantee Program, the Interim Rule provided that beginning on November 13, 2008, any eligible entity that had chosen not to optout of this aspect of the TLG Program would be charged assessments as provided in part 370. The Interim Rule did not distinguish between overnight debt instruments and other types of newlyissued senior unsecured debt. Although the manner of calculating assessments did not change in the Amended Interim Rule, the revisions relating to the initiation of assessments reflected two modifications. The first change reflected the newly extended optout deadline, and the second change differentiated between overnight debt instruments and other newlyissued senior unsecured debt and explained how assessments would be treated for overnight debt instruments as compared with other newlyissued senior unsecured debt.
The Amended Interim Rule provided that assessments would accrue, with respect to each eligible entity that did not optout of the Debt Guarantee Program on or before December 5, 2008: (1) Beginning on November 13, 2008, on all senior unsecured debt, other than overnight debt instruments, issued by it on or after October 14, 2008, that was still outstanding on November 13, 2008; (2) beginning on November 13, 2008, on all senior unsecured debt, other than overnight debt instruments, issued by it on or after November 13, 2008, and before December 6, 2008; and (3) beginning on December 6, 2008, on all senior unsecured debt issued by it on or after December 6, 2008. According to the Amended Interim Rule, calculations related to both overnight debt instruments and other newlyissued unsecured debt continue to be made in accordance with the Interim Rule.
According to the Interim Rule, eligible entities were not required to pay an assessment associated with the Transaction Account Guarantee Program from the period from October 14, 2008, through November 12, 2008. To this, the Amended Interim Rule added that if an eligible entity opted out of the Transaction Account Guarantee Program by the extended optout deadline of December 5, 2008, then it would not be responsible for paying any assessment under the program.
Regarding the initiation of assessments for the Transaction Account
Guarantee Program, the Interim Rule provided that for the period
beginning on November 13, 2008, and continuing through December 31,
2009, any eligible entity that did not notify the FDIC that it had
opted out of this component would be charged an assessment for its
participation in the Transaction Account Guarantee Program. The Amended
Interim Rule reflected the newlyextended optout date. The Amended
Interim Rule provided that beginning on November 13, 2008, an eligible
entity that had not opted out of the Transaction Account Guarantee
Program on or before December 5, 2008, would be required to pay the
FDIC assessments on all deposit amounts in noninterestbearing
transaction accounts. The Amended Interim Rule also indicated that
calculations related to the amount of assessments for the Transaction
Account Guarantee Program would continue to be made in accordance with the Interim Rule.
IV. Comments on the Interim Rule and the Amended Interim Rule
The FDIC received over [700] comments on the Interim Rule and the Amended Interim Rule
The FDIC invited general comments on all aspects of the Interim Rule and sought comments from the public for suggestions as to its implementation. In addition, the FDIC raised specific questions regarding the possibility of more expeditious processing of claims under the Debt Guarantee Program: Whether coverage for certain NOW accounts should be provided under the Transaction Account Guarantee Program; whether the disclosures required in the Interim Rule were beneficial in light of the potential costs in providing them; and the general administrative cost of the Interim Rule. In the Amended Interim Rule, the FDIC sought comment on three additional areas of interest: Suggested rates for shortterm borrowings versus longer term borrowings; the possibility of combining holding company and bank debt (without exceeding their combined guaranteed debt limit); and suggestions for establishing a guaranteed debt limit for those institutions that had no senior unsecured debt outstanding as of September 30, 2008.
Some of the comments received by the FDIC were equally applicable to both components of the TLG Program; others related specifically to either the Transaction Account Guarantee Program or the Debt Guarantee Program. A summary of the collective comments received in response to the Interim Rule and the Amended Interim Rule (as well as the FDIC's response to those comments) follows.
General Comments Regarding the TLG Program
The FDIC received a number of comments that expressed general support of the FDIC's efforts to establish and implement the TLG Program. These commenters stated their belief that the TLG Program could help ease the strains in the credit markets, improve the access of financial institutions to liquidity, mitigate systemic risks in the financial system, and preserve public confidence in banks and other financial institutions.
However, the FDIC also received some comments from community
bankers stating that, while they appreciate the efforts being made to
strengthen confidence in the banking system, they have not been
experiencing capital or liquidity problems and, therefore, do not see
the need for the TLG Program and, in fact, consider the TLG Program's
potential to raise their cost of funds detrimental. In particular, the
commenters raised the possibility that if they choose to optout of the
Debt Guarantee Program they may have to pay more for correspondent
banking services and may be stigmatized. As discussed below, the Final Rule excludes shortterm senior unsecured
[[Page 72250]]
debt with a maturity of thirty days or less from the Debt Guarantee
Program, which should ease the concerns of these commenters, since the
comments raised questions primarily about overnight funding.
One commenter observed that the Debt Guarantee Program may pose adverse selection risks where only weak institutions participate in the Debt Guarantee Program and strong institutions optout. While acknowledging the concerns raised by the commenter, the FDIC is confident that the benefits of the program, coupled with the revisions made to the Final Rule in response to industry comments will ensure that the majority of strong institutions will participate. In addition, working with the other primary federal regulators, the FDIC's supervisory staff will also closely monitor and limit, as appropriate, use by weaker institutions.
A banking trade association emphasized the FDIC's need to retain flexibility to adjust the program and quickly correct problems. In the commenter's view, this flexibility would include both the flexibility to change the elements of the guarantee (including debt covered, pricing, and terms) and the ability of banks to participate or not in the program. The FDIC believes that the changes it is making in the rule and the discretion it retains in implementing the rule are the most appropriate means of addressing these concerns.
Competitive Issues and Potential Effects on Other Entities
A number of commenters indicated that differences between the FDIC's Debt Guarantee Program and the debt guarantee programs in other countries could create competitive disparities. These commenters specifically recommended that the FDIC emphasize that its guarantee is backed by the full faith and credit of the federal government and that the FDIC revise the program to guarantee timely payment of principal and interest. The FDIC agrees with these comments and has revised the nature of the guarantee to cover timely payment of principal and interest as discussed below. Also, the disclosure required by the Final Rule for debt issued under the Debt Guarantee Program includes the statement that the debt is backed by the full faith and credit of the United States.
A comment from one of the regulators of a Government Sponsored Enterprise (GSE) and an insurer of that GSE's bonds warned of potential disruptions, dislocations, and investor confusion in the debt markets due to the FDIC's debt guarantee that may disadvantage the GSEs. These two commenters neither supported nor opposed the Amended Interim Rule and noted that these potential unintended consequences are mitigated by the fact that the program is temporary. The FDIC agrees that this temporary program should not significantly affect the GSE debt markets. In addition, this program has the potential to lower the funding costs of most of the major mortgage originators, which may have a beneficial impact on mortgage availability and costs.
One commenter noted that the Debt Guarantee Program will reduce secured borrowing and harm the earnings of Federal Home Loan Banks, which are owned by insured institutions. In the FDIC's view, Federal Home Loan Banks function well under ordinary circumstances, when market failures have not prevented healthy institutions from borrowing on an unsecured basis. The Debt Guarantee Program is a timelimited program intended to restore normal functioning to the market; and, therefore, it should not materially affect the Federal Home Loan Banks. Extending the OptOut Deadline
The FDIC also received several comments requesting that the optout deadline established in the Interim Rule be extended until the Final Rule was announced to permit eligible entities sufficient time to review the Final Rule and make a more informed decision regarding their participation in the TLG Program. Recognizing these concerns, in its Amended Interim Rule, the FDIC extended the optout deadline from November 12, 2008 until December 5, 2008, and made corresponding changes to other dates affected by the revised optout deadline. Systemic Risk Assessment
A few commenters raised the issue of the systemic risk assessment. The Amended Interim Rule provides that, if the assessments for the TLG Program are insufficient to cover the expenses related to the program, an emergency special assessment will be made on all insured depository institutions. While acknowledging that section 13(c)(4)(G)(ii) of the FDI Act, 12 U.S.C. 1823(c)(4)(G)(ii), requires the FDIC to levy a systemic risk assessment against all insured depository institutions, the commenters suggested that such an assessment be levied against all entities that participate in the TLG Program, not against those insured depository institutions that optout. Another trade association commenter requested that the FDIC levy a special assessment to entities owned by holding companies with significant nonbank subsidiaries in proportion to program losses generated by such entities. Absent legislative changes, however, the FDIC has no authority to alter the statutory requirements of the systemic risk assessment provision and must levy the assessment on all insured depository institutions (and only insured depository institutions), in accordance with the statute.
The Board of Governors of the Federal Reserve System (Federal
Reserve Board), as primary supervisor of bank holding companies (BHCs),
strongly supports including BHCs in the TLG Program. Indeed, Federal
Reserve Board staff has warned that not including BHCs ``would pose
significant risks to individual insured depository institutions (IDIs)
and the banking system as a whole.'' \3\ The rationale for guaranteeing
holding company debt is to promote liquidity in the banking industry,
since bank and thrift holding companies, rather than banks and thrifts
themselves, issue most senior unsecured debt in many holding company
structures. The holding companies, in turn, provide liquidity to their
bank and thrift subsidiaries. The FDIC expects its Debt Guarantee
Program to yield more revenue than costs. Further, the FDIC is
modifying the fee structure for the Debt Guarantee Program to impose
modestly higher fees on holding companies whose insured depository
institutions present less than 50 percent of consolidated assets.
Guaranteeing BHC debt is not without risks to the Deposit Insurance
Fund (DIF), though the Federal Reserve Board has provided strong
assurances that they will use all supervisory powers available to them
to minimize these risks.\4\ The Office of Comptroller of the Currency
and the Office of Thrift Supervision have made similar assurances. For
these reasons and based on its own analysis of the risks presented, the
FDIC believes the risks are acceptable and anticipates that revenue
collected for the guarantee under the Debt Guarantee Program will be
sufficient to cover the costs. Any surplus funds will be put in the DIF
to ease pressure on premiums paid by depository institutions.
\3\ Memorandum dated November 19, 2008, to FDIC Chairman Sheila C. Bair from Federal Reserve Board Staff at page 1.
\4\ Letter dated November 19, 2008, to FDIC Chairman Sheila C.
Bair from Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke.
Cost and Benefit
In the Interim Rule, the FDIC asked whether the collection of
information was necessary for the proper performance of the FDIC's duties and
[[Page 72251]]
whether the information sought had practical utility. Further, the FDIC
asked whether its burden estimates were accurate and whether the
assumptions that supported its burden calculation were valid.
Commenters were asked to address ways to enhance the quality and
clarity of the information collected and to provide suggestions for
minimizing the burden of affected parties in providing the requested
information to the FDIC. Although the FDIC received no comments that
were specifically responsive to these questions, the FDIC continues to
believe that the TLG Program will enhance financial stability and will
preserve confidence in the banking system without placing undue
restrictions on participating entities or those who may someday seek
payment under the Program's debt or transaction account guarantees,
particularly in light of the changes made to the claims and payment processes in the Final Rule.
Comments Related to the Scope of the Debt Guarantee Program
In the Amended Interim Rule, the FDIC sought comment as to whether the FDIC should charge different guarantee fees for federal funds or other shortterm borrowings as compared to longer term debt instruments. In addition, the FDIC sought suggestions for establishing the differentiating criteria for the types of borrowings and for the actual rates that should be paid for each type. The FDIC received a substantial number of comments regarding these issues and regarding definitions applicable to the Debt Guarantee Program.
Federal Funds and Other ShortTerm Instruments
The FDIC received a large number of comments urging either the exclusion of federal funds and similar overnight instruments from the Debt Guarantee Program or the reduction in the annualized 75 basis point guarantee fee for overnight borrowings from annualized 75 basis points to 10 or 25 basis points. Several commenters suggested that the Debt Guarantee Program should cover federal funds on an unlimited basis, but at a significantly lower fee.
The commenters indicated that the level of fees called for in the Amended Interim Rule is prohibitively expensive for shortterm maturity instruments, such as federal funds, given the low prevailing effective rate for federal funds. These commenters felt that the proposed fee structure could lead many eligible institutions that would otherwise participate in the program to optout of the Debt Guarantee Program altogether or to shift from federal funds to secured shortterm borrowings from sources such as the Federal Reserve discount window, the Federal Reserve's Term Auction Facility (TAF), or Federal Home Loan Banks. Other commenters and market participants have also expressed the view that various federal programs have contributed to improved liquidity in the shortterm funding market and, therefore, the FDIC's guarantee of debt with very shortterm maturities, such as overnight federal funds, is no longer necessary or desirable in light of the costs that would be associated with such guarantees.
Based on these comments, in the Final Rule, the FDIC has revised the definition of guaranteed senior unsecured debt to exclude debt with a stated maturity of thirty days or less. The FDIC acknowledges that the 75 basis point guarantee fee may be too high for shortterm money market instruments such as overnight federal funds or Eurodollars in relation to prevailing overnight interest rates. Furthermore, recent market data from the Federal Reserve Board and market participants suggest less significant disruption in shortterm money markets, particularly as the Federal Reserve Board lowers shortterm interest rates and actively provides liquidity. Many entities that are eligible to participate in the TLG Program have, in fact, shortened their funding maturities considerably as they continue to experience difficulties obtaining longerterm unsecured debt, with much of the recently issued debt either being secured or having a maturity of 30 days or less. The FDIC believes that the Debt Guarantee Program should help institutions to obtain stable, longerterm sources of funding where liquidity is currently most lacking.
Fees
As discussed above, several commenters stated that fees for short term instruments were too high. One trade association urged the FDIC to adopt a riskbased pricing model for the Debt Guarantee Program with guarantee fees ranging from under 10 basis points to no more than 50 basis points depending on a bank's CAMELS rating and the term of the borrowings and that small bank and thrift holding companies should be assessed a fee based on the CAMELS ratings for the companies' financial institution subsidiaries. Other commenters suggested that the FDIC develop a sliding scale for fees based on the maturity of the instruments, especially for very shortterm instruments like federal funds. As discussed in more detail below, the Final Rule adopts a sliding rate scale based on an instrument's maturity. Rates for shorter term debt (180 days or less, excluding overnight debt) are less than 75 basis points; rates for longer term debt (365 days or greater) are slightly higher.
A banking trade association urged the FDIC to exclude holding companies with significant nonbank subsidiaries from the Debt Guarantee Program on the grounds that community banks and other insured depository institutions would be forced to pay for losses on these guarantees through a special assessment on FDICinsured institutions only. In the alternative, the association asked the FDIC to develop a methodology for these entities to pay a special assessment for their proportional share of any Program losses. The FDIC believes that it is essential to allow some holding companies to participate in the Debt Guarantee Program to provide liquidity to the interbank lending market and promote stability in the unsecured funding market. As discussed earlier, the FDIC does not have the statutory authority to levy a special assessment on nondepository institutions. However, the FDIC has decided to increase the Debt Guarantee Program fees by 10 basis points for holding companies where affiliated insured depository institutions constitute less than half of holding company consolidated assets.
The Interim Rule required each participating entity in the Debt Guarantee Program to take necessary action to allow the FDIC to debit its assessments from the entity's designated deposit account as provided for in section 327(a)(2). The Interim Rule required funds to be available in the designated account for direct debit by the FDIC on the first business day after the invoice is posted on FDICconnect. One commenter asked how a holding company could minimize the risk of violating section 23A of the Federal Reserve Act, assuming that the holding company intended to deposit funds in its affiliated insured depository institution's ACH account for the FDIC's direct debit of both the holding company's assessment and the bank's assessment. To avoid violations of 23A of the Federal Reserve Act, the FDIC expects participating holding companies to fund its affiliated insured depository institution's ACH account in advance of the FDIC's direct debit of the assessments.
Requirement of a Written Agreement
The Amended Interim Rule defines senior unsecured debt in part as
unsecured borrowing that is evidenced by a written agreement. The FDIC [[Page 72252]]
received several comments that urged the FDIC to make an exception for
this requirement for federal funds. Several commenters also noted that
certain types of shortterm debt, such as overnight transactions or
transactions with maturities of one week or less, typically are not
evidenced by a written agreement. As noted above, in the Final Rule the
FDIC has excluded obligations with a stated maturity of thirty days or
less from the definition of senior unsecured debt. The FDIC anticipates
that this action will satisfy those with concerns regarding written
agreements applicable to federal funds and other shortterm debt. Also,
the FDIC has clarified in the Final Rule that trade confirmations are a
sufficient form of written agreement to establish eligibility as a
senior unsecured debt for purposes of the Debt Guarantee Program. Full Faith and Credit
Several commenters sought confirmation that the guarantees provided
by the FDIC under the Debt Guarantee Program were backed by the full
faith and credit of the United States. The FDIC has concluded that the
FDIC's guarantee of qualifying debt under the Debt Guarantee Program is
subject to the full faith and credit of the United States pursuant to
section 15(d) of the FDI Act, 12 U.S.C. 1825(d). Under both the Amended
Interim Rule and the Final Rule adopted by the FDIC, the principal
amount and term to or date of maturity of conforming debt instruments
citing the FDIC guarantee on their facewill effectively be
incorporated by reference into the FDIC's debt guarantee, and the provisions of section 15(d) are therefore satisfied.
Establishing Guarantee Cap for Institutions With No or Limited Senior Unsecured Debt
The Amended Interim Rule established September 30, 2008, as the threshold date by which the limit for eligible debt coverage for a participating entity is calculated. On that date, if a participating entity has no senior unsecured debt, it can still seek to have some amount of debt covered by the Debt Guarantee Program in an amount to be determined by the FDIC on a casebycase basis following discussion with the appropriate Federal banking agency. In the Amended Interim Rule, the FDIC asked whether it should establish an alternative method for establishing a guarantee cap for such institutions and, if so, what the alternative method should be.
A number of commenters expressed concern that the Debt Guarantee Program could have an unintended negative impact on eligible institutions with little or no federal funds purchased and outstanding on the threshold date of September 30, 2008. In particular, these commenters expressed concern that liquidity available on an unsecured basis prior to establishment of the Debt Guarantee Program would no longer be available to them as lenders and would give preference to guaranteed borrowers. Several commenters recommended that the FDIC remedy these concerns by defining the cap as the greater of (1) 125% of senior unsecured debt outstanding on September 30, 2008 and maturing on or before June 30, 2009, or (2) either 100% of the federal funds accommodations lines available to the institution as of September 30, 2008, or a percentage of total assets or total liabilities outstanding on September 30, 2008. Others suggested that the guarantee cap should be calculated based on the highest amount of senior unsecured debt outstanding during 2008, the average amount of senior unsecured debt outstanding during 2008, the average amount of senior unsecured debt outstanding during the third quarter of 2008, varying percentages of total assets and total liabilities as of September 30, 2008, and fixed dollar amounts.
The FDIC has established an alternative method for establishing a guarantee cap for insured depository institutions that either had no senior unsecured debt outstanding or only had federal funds purchased as of September 30, 2008, but that would like to participate in the Debt Guarantee Program. The FDIC has determined that the debt guarantee limit for such an eligible insured depository institution will be two percent of the participating entity's consolidated total liabilities as of September 30, 2008, as set forth in the Final Rule.
For institutions that had senior unsecured debt other than federal funds outstanding as of the threshold date of September 30, 2008, the debt guarantee limit is determined using a definition of senior unsecured debt inclusive of debt obligations with maturities of thirty days or less that also meet the remaining requirements of Sec. 370.2(e). Such obligations are excluded from the definition of senior unsecured debt after December 5, 2008 in the Final Rule.
Clarification of Eligible Instruments
Several commenters asked the FDIC to clarify whether certain instruments are covered within the definition of senior unsecured debt contained in the Amended Interim Rule. Specifically, these commenters asked whether senior unsecured debt includes inflationlinked securities with a fixed principal amount, indexlinked principal protected securities, putable bonds, callable bonds, zerocoupon bonds, extendible securities, stepup coupons and retail debt securities. A trade association urged the FDIC to include principalprotected structured notes in the definition of eligible senior unsecured debt. This commenter argues that such products are analogous to indexed certificates of deposit that qualify for deposit insurance coverage.
The purpose of the Debt Guarantee Program is not to promote
innovative, exotic or complex funding structures, but to provide
liquidity to the interbank lending market. According to the Amended
Interim Rule, senior unsecured debt specifically excludes any debt
instruments that are either derivatives or derivativelinked products.
Most of the instruments mentioned by the commenters are derivative
linked products, structured notes\5\, or instruments with embedded
options. The FDIC continues to believe that such instruments expose the
FDIC to undue risk without materially enhancing liquidity in the inter
bank lending market. The Final Rule further clarifies the definition of
senior unsecured debt to exclude any debts that are paired or bundled
with other securities, regardless of whether the target investor is
institutional or retail, structured notes, securities with embedded
options, retail debt securities, and obligations used for trade credit (e.g., letters of credit or banker's acceptances).
\5\ As defined in the Call Report instructions for schedule RC
B, ``structured notes'' includes, but are not limited to (1)
floating rate debt securities whose payment of interest is based
upon a single variable index of a Constant Maturity Treasury (CMT)
rate or a Cost of Funds Index (COFI) or changes in the Consumer
Price Index (CPI), (2) stepup bonds, (3) index amortizing notes,
(4) dual index notes, (5) deleveraged bonds, (6) range bonds, and (7) inverse floaters.
One commenter asked for clarification regarding whether preferred debt issued under the TARP CPP would be subject to guarantee fees under the TLG Program. Another commenter suggested that the FDIC should guarantee structured products or convertible debt securities used to redeem preferred stock issued under the TARP CPP. Senior preferred stock issued under the TARP CPP is considered equity, and does not meet the definition of senior unsecured debt under the Final Rule. Furthermore, as noted in the TARP CCP's term sheet, senior preferred stock is
FOR FURTHER INFORMATION CONTACT
Munsell W. St. Clair, Section Chief, Division of Insurance and Research, (202) 8988967 or
mstclair@fdic.gov; Lisa Ryu, Section Chief, Division of Insurance and
Research, (202) 8983538 or LRyu@fdic.gov; Richard Bogue, Counsel,
Legal Division, (202) 8983726 or rbogue@fdic.gov; Robert Fick,
Counsel, Legal Division, (202) 8988962 or rfick@fdic.gov; A. Ann
Johnson, Counsel, Legal Division, (202) 8983573 or aajohnson@fdic.gov;
Gail Patelunas, Deputy Director, Division of Resolutions and
Receiverships, (202) 8986779 or gpatelunas@fdic.gov; John Corston,
Associate Director, Large Bank Supervision, Division of Supervision and
Consumer Protection, (202) 8986548 or jcorston@fdic.gov; Serena L.
Owens, Associate Director, Supervision and Applications Branch,
Division of Supervision and Consumer Protection, (202) 8988996 or
sowens@fdic.gov; Donna Saulnier, Manager, Assessment Policy Section,
Division of Finance, (703) 5626167 or dsaulnier@fdic.gov; Michael L.
Hetzner, Senior Assessment Specialist, Division of Finance, (703) 562
6405 or mhetzner@fdic.gov.