GFOA of the US & Canada

FDIC Changes - Implications for Government Investors

The Federal Deposit Insurance Corporation (FDIC) has taken steps to strengthen confidence and liquidity in the banking system. Some of the changes have implications for government investors.

On May 19, 2009, Congress passed legislation extending the $250,000 Federal Deposit Insurance Corporation (FDIC) deposit insurance coverage limit through 2013. President Obama is expected to sign the legislation into law. In October 2008, the FDIC temporarily increased coverage from $100,000 to $250,000. This increase in coverage was scheduled to remain in effect until December 31, 2009, at which time coverage was scheduled to revert to $100,000.

Governments should consider whether they might be able to reduce collateralization levels during this period in light of the extension. They also should take this change into account when evaluating their exposure to custodial credit risk for purposes of financial statement disclosure.

The new legislation also allows the FDIC to borrow as much as $100 billion from the Treasury Department. The measure is meant to boost confidence in the FDIC’s deposit insurance fund, which fell to just $19 billion from $52.4 billion at the end of 2007. Thirty-three banks have failed year-to-date 2009. The expanded borrowing authority is expected to reduce the special assessment the FDIC had levied on banks as a way of strengthening the FDIC fund.

The FDIC also created a Temporary Liquidity Guarantee Program (TLGP). The program guarantees newly issued senior unsecured debt of insured depository institutions (banks, thrifts) and certain holding companies. This debt must be issued by June 30, 2009, with maturities up to three years or maturing June 30, 2012. Effectively, the bank corporate debt will be guaranteed by the FDIC and the full faith of the United States government. Bank participation in the program is optional. To participate, banks must meet certain eligibility criteria and are assessed higher fees than non-participating banks. Government investors that consider investing in such FDIC guaranteed debt should confirm that the bank has not opted out of the program by checking the list of banks that have opted out at the FDIC site. Also, governments should review state statutes and their own investment policy to determine whether such investments would be considered corporate debt under state statute, or qualify instead as debt guaranteed by a government agency.

The Program also provides full coverage of non-interest bearing deposit transaction accounts, interest on lawyers trust accounts (IOLTAs), and negotiable order of withdrawal (NOW) accounts with interest rates no higher than 0.50%, regardless of dollar amount. Once again banks that chose to participate in this Program are assessed a higher fee for the additional account coverage and may opt not to participate in this program. Government investors should confirm that their bank is a participant by checking the FDIC’s opt out list. Government investors also should determine how they will continue to monitor a bank’s participation in the Program (i.e., whether they will do the monitoring themselves and/or require the bank inform them of changes in their participation). Because this coverage applies only to non-interest bearing accounts or accounts or which interest does not exceed 0.50%, it is very important to monitor interest levels, since coverage ceases if the interest rate exceeds this ceiling. Governments should compare the interest offered on such accounts with interest on collateralized investments such as collateralized certificates of deposit. Governments also should keep in mind that this increase in coverage is in effect until December 31, 2009. Likewise, governments should consider what this means for their collateralization requirements and whether they can reduce collateral during this period.

For complete coverage of the FDIC and the FDIC TLGP, government investors are encouraged to visit the FDIC Web site and to review the Final TLGP Rule. Governments should also seek legal counsel if they need help determining whether an investment is permissible under state statute.

February 3, 2009