US Banks Call For Tweaks To FDIC Debt Guarantee Program
Additionally, the 75 basis-point fee for the FDIC's new "Temporary Liquidity Guarantee Program" is too high, argued the nine banks - Bank of America Corp. (BAC), the Bank of New York Mellon Corp. (BK), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Merrill Lynch & Co. (MER), Morgan Stanley (MS), State Street Corp (STT) and Wells Fargo & Co. (WFC) - in a recent 18-page filing to the FDIC. The comment period ended Thursday.
The banks said they strongly support the agency's efforts to ease the credit crunch. However, they said the new program to guarantee newly issued senior unsecured debt and non-interest bearing transaction deposit accounts "falls short" because it doesn't include an unconditional guarantee of timely payment of principal and interest when due. Without that, investors will attach less value to the guarantee compared to the debt-guarantee program introduced in the U.K., for instance, the banks wrote in the filing.
Under the current rules, "guarantee obligations of U.S. banks are likely to be significantly less liquid and more costly than those of U.K.-based banks, as well as of banks based in other countries," said the group. "This leaves U.S. institutions at a disadvantage when compared to their U.K. and some other counterparts."
The banks called on the FDIC to amend the program rules to expressly state that the guarantees are backed by the full faith and credit of the U.S. government.
"This is essential in gaining investor confidence in the guarantee and critical to achieving the important objective of having a risk weighting of zero assigned by the Board of Governors of the Federal Reserve System or the applicable regulatory agencies for the institutions' issuances," the banks said.
FDIC announced the program to guarantee newly issued senior unsecured debt of banks, thrifts and certain holding companies on Oct. 14. The program also provides full coverage of non-interest bearing deposit transaction accounts.
On Wednesday, General Electric Co. (GE) announced that through the new FDIC program, the government will insure up to $139 billion of debt issued by its financing arm GE Capital Corp.
Under the program, certain newly issued senior unsecured debt - such as commercial paper and inter-bank funding - that is issued on or before June 30, 2009, would be fully protected in the event the issuing institution fails.
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. The program is free for participants for the first 30 days. After that, institutions that don't want to participate must opt out.
In their filing, the banks said the 75 basis-point fee is too high considering the current level of interest rates. As a result, financial firms might decide to increase their use of secured borrowing sources such as the Federal Reserve's discount window and the Fed's Term Auction Facility. "Such an outcome would not achieve the FDIC's goal of improving short-term unsecured inter-bank funding markets," they said.
The nine banks also voiced concerns about the FDIC's move to prevent participating institutions from opting out of the FDIC guarantee for debt with a stated maturity before June 30, 2012.
"Institutions should have the flexibility to issue senior unsecured debt regardless of the stated maturity," the banks said.
-By Maya Jackson Randall, Dow Jones Newswires; 202-862-9255; maya.jackson-randall@dowjones.com -0-
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November 13, 2008 14:16 ET (19:16 GMT)
Publié le 13 novembre 2008 Copyright © 2008 Dowjones
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