The FDIC’s new “Temporary Liquidity Guarantee Program” announced as part of the crisis package aims at strengthening confidence and encouraging liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount.

The FDIC adopted the program based on its statutory authority to prevent systemic risk. The Secretary of the Treasury, after consultation with the President and the Federal Reserve Board, made a comparable systemic risk determination.

Under this part of the plan, certain newly issued senior unsecured debt issued on or before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy.  This guarantee extends to promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt.  Coverage would be limited to June 30, 2012, even if the maturity exceeds that date.

Participating depository institutions will also be able to provide full deposit insurance coverage for non-interest bearing deposit transaction accounts, regardless of dollar amount.  These accounts are mainly payment-processing accounts, such as payroll accounts used by businesses.  These accounts frequently exceed the current maximum limit of $250,000.  This new, temporary guarantee will expire at the end of 2009.

FDIC Chairman Sheila Bair stressed that the program will be funded through special fees and does not rely on taxpayer funding.  Participants will be charged a 75-basis point fee to protect their new debt issues, and a 10-basis point surcharge will be added to a participating institution’s current insurance assessment in order to fully cover the non-interest bearing deposit transaction accounts.

All FDIC-insured institutions will be covered under the program for the first 30 days without incurring any costs.  After that initial period, however, institutions wishing to no longer participate must opt out or be assessed for future participation.  If an institution opts out, the guarantees are good only for the first 30 days.

Fed Implements Commercial Paper Program

Another element of the crisis response package the President outlined on October 14 is the Federal Reserve’s Commercial Paper Funding Facility (CPFF) program.  The CPFF is intended to provide a broad backstop for the commercial paper market and thereby further increase access to funding for businesses in all sectors of our economy.  Beginning October 27, the CPFF will fund purchases of commercial paper of three-month maturity from high-quality issuers.