Debt guarantee program for U.S. banks is altered

By Karey Wutkowski

WASHINGTON (Reuters) - U.S. bank regulators on Friday made several changes to a Federal Deposit Insurance Corp program designed to reduce banks' funding costs and increase their liquidity.

The guarantee program for banks' new debt was tweaked to introduce a tiered pricing structure on the fees charged to banks, based on the debt's maturity.

A prompt payment mechanism was also created in the case of a payment default, and short-term debt with a maturity of 30 days or less was excluded from the program.

The FDIC board on Friday approved a final rule for the Temporary Liquidity Guarantee Program, which was initially put in place last month. It received more than 700 comments on the plan.

"The goal of the TLG 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," FDIC Chairman Sheila Bair said at the FDIC meeting.

The agency has said the guarantees would insure a pool of about $1.4 trillion in new senior unsecured debt and also $400 billion to $500 billion in transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.

All FDIC-insured institutions are currently covered in the program at no cost, but they will have to start paying assessment fees for the guarantees if they do not opt out by Dec. 5.

The assessment fees will be on a sliding scale based on maturity. Debt with a maturity of 180 days or less, excluding overnight debt, will have an annualized assessment rate of 50 basis points, or 0.5 percent. Debt with a maturity of 181 to 364 days will have a 75 basis point fee, and debt with a maturity of 365 days or greater will have a 100 basis point fee.

The FDIC originally proposed to charge a standard fee of 75 basis points to guarantee eligible debt.

The industry balked at this rate. A group of banks including JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N) and Bank of America Corp (BAC.N) sent a letter to the FDIC, saying the high cost could drive banks away from the overnight federal funds market.

"Such an outcome would not achieve the FDIC's goal of improving short-term unsecured interbank funding markets," the letter said.

The FDIC also altered the guarantee program to exclude any overnight borrowing, or short-term borrowing of 30 days or less.

The agency said it had received comments that a guarantee is unnecessary for overnight commitments, in particular, federal funds purchased, and that the guarantee program could have a disruptive effect on the market.

Another significant change involved payment claims in the case of default. The FDIC's guarantee will now be triggered by payment default rather than a receivership or bankruptcy.

The FDIC initially put the program in place last month as a complement to the Treasury Department's $250 billion capital injection plan for U.S. banks and the Federal Reserve's commercial paper funding facility. The measures came at a time when the credit markets were virtually frozen and interbank lending had almost ground to a halt.