WASHINGTON — In response to industry criticism, the Federal Deposit Insurance Corp. revamped a rule Friday in an effort to open its liquidity guarantee to more banks and investors.
The new rule scraps a uniform 75-basis-point fee for senior debt covered by the program, which bankers had said was excessive, and replaces it with a tiered system that prices debt based on its maturity. Under the change, assessments for most participants would range between 50 and 100 basis points.
The rule also eliminates certain short-term debt from coverage and clarifies that the FDIC will start paying bond holders as soon as an institution stops making payments.
"The changes … should create significant investor demand, and I expect that the industry will take full advantage of the guarantee," FDIC Chairman Sheila Bair said at an agency board meeting.
She emphasized that the program's ultimate goal is to spur lending.
"Helping banks obtain funding at a reasonable cost, however, is only a means to an end," she said. "The goal of the … program is to bolster our economy by placing banks on a strong, stable liquidity footing so that they can maximize their capability to engage in prudent lending."
The agency started the voluntary program last month to calm depositors and bond holders spooked by the financial crisis. Under the program, banks can get a full guarantee of zero-interest checking deposits until the end of 2009, and protection of debt issued between Oct. 14 and June 30, 2009, until June 2012.
Though all institutions are getting the coverage free of charge until Dec. 5, banks that do not opt out before that date must begin paying fees.
In comment letters banks had protested the pricing, saying 75 basis points was prohibitive for some institutions and would drastically drive up the cost of interbank lending.
Interbank loans, which would have been guaranteed, are attractive because they charge little interest. (The loans are based on the Federal Reserve's key interest rate, known as the federal funds rate, which is now 1%). But industry representatives said the coverage fee would erase the cost savings.
In response, the FDIC presented three prices for the debt guarantee, based on its duration, to allow more institutions to participate. Debt with a maturity of 180 days or less would be guaranteed for 50 basis points. A guarantee for debt maturing after one year would cost 100 basis points. Debt with maturities in between would be protected for 75 basis points.
Moreover, the agency removed coverage for debt with maturities of 30 days or less to bypass the cost concern on short-term interbank funding.
Keeping that debt in the program "would have been very disruptive to the market and would really hinder monetary policy," James Chessen, the American Bankers Association's chief economist, said after the board meeting.
(The FDIC did not change the interim rule's 10-basis-point fee for no-interest deposits that exceed the standard insurance limit of $250,000 per account.)
The final rule also addresses an industry concern that the initial plan would turn off investors because of a lack of a clarity on when the FDIC would begin compensating bond holders. The agency tried to clear up this uncertainty by stating that payments would begin as soon as an institution's payments ended either because of failure, bankruptcy, or otherwise.
"There can be no doubt that the full faith and credit of the United States stands behind any obligation that is covered by this guarantee," said Comptroller of the Currency John Dugan.
Yet the final rule did not make every change sought by bankers.
Some industry comments expressed concern that the agency's plan to post a public list of institutions opting out of the program would raise depositor anxiety about these institutions' condition. The agency did not drop its plan for the public list.
"People need to be able to look somewhere and get a list of who has opted out," John Thomas, a deputy general counsel at the FDIC, said during the board meeting. "There are all sorts of reasons why an institution would opt out. That doesn't mean there is a problem with the institution. It means they have made that business choice."
The rule also provided flexibility for the amount of debt the agency would allow to be covered.
Under the interim rule, an institution's guaranteed debt could not exceed 125% of its debt at Sept. 30 of this year. But this posed a problem for institutions that had no debt at that date but wanted to make new issuances. The FDIC said that, for these institutions, the guaranteed debt could equal 2% of their total liabilities.
