FDIC looks to extend debt guarantee program

Banks may soon have six more months of access to the FDIC's debt guarantee program, which was set to expire on October 31. The FDIC board voted unanimously to seek comment for 15 days on extending the program on an emergency-only basis, according to Bloomberg on Thursday.

The program allowed banks, for a fee, to issue new debt with government backing that protects investors in the event of a collapse.

Federal Reserve Chairman Ben Bernanke, a big supporter of the program, believes the Temporary Liquidity Guarantee Program was instrumental in keeping markets stable during the worst of the 2008 financial crisis. The FDIC debt guarantee program is part of the TLGP program. Bankers want the FDIC to spell out how it will end the program so they can plan their transition away from the program.

So far the program has been a money-maker for the FDIC. The agency has collected about $9.3 billion in fees from participants and has not faced any guarantee payouts to date. As long as this record continues, the program will end with a profit for the government.

Under the limited extension, if approved after the comment period, the FDIC will phase out the program. Banks will have to apply to the board for permission to access the extended aid. They will also need to show that they were unable to issue non-guaranteed debt due to market disruptions or other emergency circumstances. As currently proposed during the comment period, the emergency debt facility will cover debt issued through April 30, 2010 for any banks that get agency approval. The debt guarantees will extend through December 31, 2012.

As of July 31, the FDIC had about $320 billion in outstanding debt guaranteed by the program from firms including Citigroup (C) and General Electric (GE). Banks must be weaned from this debt program before than can repay their TARP funds and escape its restrictions. In other words, they must be able to issue debt without FDIC guarantees before the Treasury Department will consider the bank healthy enough to get off TARP.

Basically this change will begin the phase-out of the FDIC's program by extending its deadline but tightening the rules. FDIC is already well along the path to ending the program. Just $10.8 billion in new FDIC-guaranteed bonds were issued in the third quarter of this year. That's down from $130.2 billion in the first quarter and $34.7 billion in the second quarter, according to data from Bloomberg.

Another type of guarantee being phased out is guarantees for business checking and other transactional accounts. The guarantee above the $250,000 deposit insurance limit will expire on June 30, 2010, unless extended further. Banks that take advantage of this extra six months of coverage must pay higher fees.

Lita Epstein has written 25 books including Reading Financial Reports for Dummies.

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