In a recent speech FDIC Chairman Sheila Bair credited the FDIC’s Temporary Liquidity Guarantee Program (TLGP) with an important role in America’s emergence from the 2008-2009’s recession. Although the exact extent of the American economy’s recovery is debatable, there is general agreement that the TLGP has contributed to stabilizing US credit markets. This has been accomplished in the main by allowing banks to issue short-term notes with FDIC backing. So far over $329.5 billion of such notes have been issued and the program is proving its worth both in terms of helping banks to raise capital and unblocking the credit markets. Although the main beneficiaries have been the banks, other eligible financial institutions, for example, American Express, have also been making effective use of the program.
What does the Temporary Liquidity Guarantee Program Include?
The Temporary Liquidity Guarantee Program was introduced in October 2008 to remove blockages in the credit market, and in particular to encourage inter-bank lending. The FDIC’s Chairman’s statement on October 23rd 2008 described the two chief elements in this program as:
- A Debt Guarantee Program (DGP) aimed at improving bank access to liquidity and encouraging investor confidence by guaranteeing new, senior unsecured debt for a specific period.
- A Transaction Account Guarantee Program (TAG) offering unlimited insurance coverage of non-interest bearing deposit transaction accounts. The aim was to answer concerns of small businesses whose payroll accounts frequently exceed the $250,000 coverage provided by the maximum FDIC insurance. The absence of these guarantees encouraged businesspeople to remove their accounts from the smaller banks and further reduce their stability.
The TLGP has been financed by fee charged to participating financial institutions with participants having the right to opt out of the scheme when they conclude doing so to be in their best interests.
Plans for the FDIC’s Gradual Withdrawal from Credit Guarantees
The positive impact of the TLGP on the credit market has produced a situation where the FDIC now proposes phasing out the loan guarantee element. This move is in line with Chairman’s Bair’s frequently stated belief that the financial markets should be returned as soon as possible to their free natural functioning. Obviously the withdrawal of FDIC support needs to be made gradually and to this end the FDIC decided to distinguish between the running down of the DGP and TAG elements of the program.
Regarding the DGP facility, the FDIC proposed to allow banks to continue to issue FDIC-guaranteed debt up to October 31st 2009 with this debt guaranteed up until December 31st 2012. Nevertheless, just in case this optimistic complete withdrawal of new guarantees is a little premature, the FDIC are also considering offering to certain individual program participants a six month additional “emergency” DGP extension if they satisfy certain criterion, for example, evidence of collateral to guarantee the FDIC’s reimbursement. The six month’s emergency DGP extension proposal is similar to that adopted on August 26th 2009 when the FDIC decided to extend the TAG element of the TLGP for a further six months beyond its Dec 31st 2009 expiry date.
While the TLGP can serve as an outstanding example of successful government interference with the free working of the financial markets, and the proposed changes should boost the confidence of both bank management and customers, success in this battle is not the equivalent of a victory over the worst recession in eighty years. Now the threat of the banking liquidity crisis has dissipated, the US government faces what might prove an even more daunting challenge – in the words of Sheila Bair, “…we may need to redirect our efforts to help meet the credit needs of household and small business borrowers.”