WASHINGTON — The Federal Deposit Insurance Corp. is letting hundreds of banking companies change their applications for the debt guarantee program in response to confusion over its cost.
At least 500 banks, thrifts, and holding companies mistakenly signed up for an advanced version of the program, thinking they would receive the added benefits for free. The FDIC said it would let all those entities — and as many as 300 more the agency has contacted — participate in just the standard guarantee program, therefore escaping the extra charges.
"We are working with banks, and we will continue to work with banks, in making sure that they make the right elections," said Diane Ellis, an associate director in the agency's division of insurance and research.
The voluntary liquidity protection is part of an effort the FDIC launched in October to bolster the frozen credit markets. It is charging between 50 and 100 basis points for standard coverage of all senior unsecured debt.
Confusion arose because the agency is also offering an advanced version of the program — meant for large banks with more complex debt issuances — in which the banks can choose which senior unsecured debt is guaranteed. The standard version covers all of an institution's newly issued debt for three years.
Those choosing the extra flexibility must immediately pay 37.5 basis points of their Sept. 30 debt balance — on top of the standard charge. (The extra fee can be used as a credit to offset future costs of the program).
Several small institutions with zero debt balances thought they could receive the flexibility free of cost. They did not realize that for banks without any debt as of Sept. 30, the FDIC would apply an extra charge on 2% of their total liabilities. As a result, many banks were unexpectedly hit with a fat bill at the start of the program.
"This optional program to issue long-term nonguaranteed debt was not well understood," said James Chessen, the chief economist of the American Bankers Association. "It was very confusing to bankers, and they didn't understand that there would be an up-front cost."
All banks, thrifts, and holding companies received the debt coverage until Dec. 5, when the free opt-out period ended. A list posted by the FDIC last week said over 3,100 entities had backed out.