The FDIC has approved a number of significant changes to its Temporary Liquidity Guarantee Program (TLGP), which the agency had enacted just last month. The program seeks to correct disruptions in the credit market, and particularly in the interbank lending market, which reduces banks’ liquidity and impaired their ability to lend.

Eligible entities have until December 5 to opt out of the TLGP. Once in the program, an entity is in for the duration. Those that choose to opt out will not be able to participate at a later date. Any debt issued on or before June 30, 2009, will be fully protected through the earlier of the maturity of the debt instrument or June 30, 2012.

The TLG Program provides two limited guarantee programs. One guarantees newly issued senior unsecured debt of insured depository institutions and most U.S. holding companies; the other guarantees certain noninterest-bearing transaction accounts at insured depository institutions. The agency’s goal is to decrease the cost of bank funding so that bank lending to consumers and businesses will normalize.

“We are confident that the changes our board approved today will create significant investor demand, and dramatically reduce funding costs for eligible banks and bank holding companies,” said FDIC Chairman Sheila C. Bair. “I’m confident that the program — working in complement with the Treasury’s Troubled Assets Relief Program and the Federal Reserve’s Commercial Paper Funding Facility — will achieve its intended purpose to help insured banks increase lending — in a responsible way — to consumers and businesses.”

Many Comments, Some Changes

The FDIC received more than 700 comments on its October interim rule, many of them critical. For example, some community bankers said that while they appreciate the efforts being made to strengthen confidence in the banking system, they have not been experiencing capital or liquidity problems and, therefore, do not see the need for the TLG Program. In fact, they consider the TLG Program’s potential to raise their cost of funds detrimental.

The FDIC highlighted three changes made in the final rule:

• The debt guarantee will be triggered by payment default rather than bankruptcy or receivership. This change will add value to the guarantee and help entities obtain lower cost funding.
• Short-term debt issued for one month or less will not be included in the Debt Guarantee Program, consistent with the objective of the program to facilitate longer term lending.
• The fees to participate in the debt guarantee component of the TLGP have changed. Previously, the fee was to be 75 basis points for guaranteed debt. Now, fees will be based on a sliding scale, depending on maturity. Shorter-term debt will have a lower fee structure and longer-term debt will have a higher fee. The range will be 50 basis points on debt of 180 days or less to 100 basis points for debt with maturities of one year or longer, on an annualized basis.

Under the transaction account guarantee program, a participating institution will be able to provide customers full coverage on non-interest bearing transaction accounts for an annual fee of 10 basis points. The coverage will be in effect only until the end of 2009. The FDIC included NOW accounts with interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts) in the transaction account program.