WASHINGTON — In one of the first concrete steps the government has taken to unwind itself from the banking industry, the Federal Deposit Insurance Corp. said Tuesday it would let its debt guarantee program expire at the end of the month while leaving a six-month window to deal with near term emergencies.
The agency's final rule would let banks that have participated in the Temporary Liquidity Guarantee Program issue new guaranteed debt after Oct. 31 under certain conditions, but face significantly higher fees if they do so.
"It should be clear that this is not a continuation of the program, but an ending of the program with just a short-term emergency facility that is only available for clearly unforeseen and unexpected events," FDIC Chairman Sheila Bair said at a board meeting. "It would carry very high fees, so I think we are almost completely out and I think it is a good sign that the markets are normalizing and the system is repairing itself."
Observers praised the FDIC's decision and said it was part of a coordinated effort to unwind various rescue programs established during the crisis.
"I would suspect that the FDIC has coordinated its effort here with the Treasury Department and with the Federal Reserve in terms of other programs that have stabilized the market," said Ron Glancz, a partner at Venable LLP. "It tells us that they're not going to go cold turkey. It's going to be an evolutionary process."
Although some observers warned last year when the FDIC began the program that banks would have trouble weaning themselves from it, the agency's move suggests early fears that the government would not be able to disentangle itself were overblown. Many observers said they expect other government programs to also unwind in a relatively smooth manner.
"It's a clear indication that these other programs are going away pretty soon," said Gil Schwartz, a partner at Schwartz & Ballen LLP. "I would expect to see several of the Fed arrangements wound down, too."
The six-month emergency program is much narrower in scope than the original TLGP, and the FDIC made it clear that not all struggling institutions would qualify.
Only banks that participated in the program — 4,464 institutions — are eligible to apply for permission to issue government-backed debt until April 30. Those institutions would have to prove that they could not issue non-guaranteed unsubordinated debt in the marketplace and that they are otherwise viable. A relative handful of nonbanks may also apply to issue debt. Of the 3,764 nonbanks that were part of the TLGP program, the FDIC said that only the ones that issued debt under the program before Sept. 9 would be able to apply to the agency to issue more debt after Oct. 31. As of June 30, only 33 nonbanks had issued FDIC-backed debt.
The fees for issuing more debt would be as much as six times higher than the original charges to use the program. The FDIC raised the fee to 300 basis points, well above the range of 50 to 175 basis points when the program began operation. So far, the agency has earned $9.4 billion in fees, and has taken no losses as part of the program.
"What they've recognized is that it is those exceptional cases that linger but those also are significantly more risky to provide a guarantee for," said James Chessen, the chief economist for the American Bankers Association. "I think what they've tried to do is to set requirements to price that risk."
Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc., said the 300 basis-point surcharge was high, but not outrageous. "It's a lot," she said. "The FDIC is trying to balance a punitive number with one that shows they didn't keep the candy store open with something an otherwise viable institution with a liquidity squeeze could handle."
Under the rule, participants in the emergency program will have to adhere to restrictions on dividend payouts, executive pay and bonuses.
Though the FDIC's move seemed to indicate a broader government strategy, observers also pointed out that there were substantial differences between the various agencies' rescue programs, and their unwinding will not be identical in every case.
But a central theme is running through the various efforts, observers said. "The policy is gradual withdrawal and trying to find ways to price rescues going forward," Petrou said.
Chessen praised the FDIC's decision. "The program was successful," he said of the TLGP. "The vast majority of institutions don't need it anymore, but it makes sense to keep a program available because we are not fully through the economic problem."
He added that the high standards for the new emergency program offered banks paying into the Deposit Insurance Fund some protection.
"My big concern is that it is a greater risk to all the institutions that support this program, and I think the FDIC is trying to price that appropriately to acknowledge that greater risk," Chessen said.
