Temporary Liquidity Guarantee Program

The Temporary Liquidity Guarantee Program (TLGP) is a program adopted by the Federal Deposit Insurance Corporation (FDIC) on October 13, 2008 during the global financial crisis of 2008 to encourage liquidity in the interbank lending market.

Several of the stated purposes of this program are (1) "to decrease the cost of bank funding so that bank lending to consumers and businesses will normalize." ^[1] and (2) "to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding company, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount."

The TLG Program became effective on October 14, 2008 and was subsequently revised based on bank feedback.

Many FDIC insured entities have chosen to not participate ("opt out") in one or both of these programs.

Interim Rule, Amended Interim Rule, and Final Rule

The Interim Rule with request for comments was published on October 29, 2008, and provided for a 15-day comment period. The FDIC received more than 700 comments during the 15-day comment period. 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.

In its Amended Interim Rule, the FDIC extended the opt-out deadline from November 12, 2008 until December 5, 2008, and made corresponding changes to other dates affected by the revised opt-out deadline. Those that choose to opt out will not be able to participate at a later date. Any debt issued on or before June 30, 2009, will be fully protected through the earlier of the maturity of the debt instrument or June 30, 2012.

The Final Rule was published November 21, 2008. According to the official November 21, 2008 FDIC press release, "We are confident that the changes our Board approved today will create significant investor demand, and dramatically reduce funding costs for eligible banks and bank holding companies," said FDIC Chairman Sheila C. Bair. "I expect that the industry will take full advantage of this guarantee. I'm confident that the program—working in complement with the Treasury's Troubled Assets Relief Program and the Federal Reserve's Commercial Paper Funding Facility —will achieve its intended purpose to help insured banks increase lending—in a responsible way—to consumers and businesses."

Components

The Temporary Liquidity Guarantee Program, 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 noninterest-bearing transaction accounts. FDIC insured entities may opt out of either program.

Debt Guarantee Program

The preamble to the Interim Rule explained that the purpose of the Debt Guarantee Program was to provide liquidity to the inter-bank 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.

The Debt Guarantee Program, as described in the Interim Rule, temporarily would guarantee all newly issued senior unsecured debt up to prescribed limits issued by participating entities on or after October 14, 2008, through and including June 30, 2009. (and thus the program would last approximately six months) 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 newly issued 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. Over 6000 entities have opted out of this program. DGP Opt-out list (.xls)

The Debt Guarantee Program passed out debt guarantees in excess of $600 billion. yet, unlike the other major agencies bailing out the financial sector during the global financial crisis of 2008—the Federal Reserve and the U.S. Treasury—the FDIC has never disclosed the identity of all the banks taking advantage of the bailout guarantees. Wilson and Wu (2011) find that the recipients of the FDIC debt guarantees paid their CEOs significantly more than their peers. Thus, bailed out CEOs mad significantly more than bank CEOs not accepting the FDIC's bailout loan guarantees.^[2]

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 FDIC-insured 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. On August 26, 2009, the FDIC extended the Transaction Account Guarantee Program for six months, through June 30, 2010.^[3] The guarantee was then extended an additional six months, through December 31, 2010.^[4] Thereafter section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act will provide a similar transaction account insurance, from December 31, 2010 through December 31, 2012.^[5]

See also

• Global financial crisis of 2008

The Senate on 12/13/12 failed to advance legislation (S. 3637) that would have provided a two-year extension of the Transaction Account Guarantee program, practically guaranteeing that the program will expire as scheduled on Dec. 31.

References

• FDIC resources for TLGP
• text of final rule
• FDIC press release concerning release of final rule