As largely expected, the Board of Directors of the Federal Deposit Insurance Corporation on Tuesday voted to extend the debt guarantee portion of the highly-successful Temporary Liquidity Guarantee Program from June 30, 2009 through October 31, 2009. The FDIC also said in a press statement that it would begin to impose a surcharge on debt issued with a maturity of one-year or more beginning in the second quarter, in an effort to gradually phase-out the program. By making debt issuance under the TGLP more costly, the hope is that banks will choose to fund their operations through alternative means. “The TLGP has been effective in improving short-term and intermediate-term funding for banking organizations, but liquidity in the financial markets has not returned to pre-crisis levels,” said FDIC chairman Sheila Bair. “The extension will reduce the potential for market disruption when the TLGP ends and should provide a gradual phase-out period as institutions return to reliance on the private, non-guaranteed debt markets.” The surcharge for debt issued after April 1 runs from 10 basis points to as much as 50 basis points, depending on issuing date, maturity date and issuing entity, the FDIC said. Debt issued under the TGLP by a non-insured depository institution after June 30, for example, will carry the 50 basis point surcharge. Surcharges will be will be in addition to current fees for guaranteed debt and deposited into the Deposit Insurance Fund, instead of being set aside to cover potential TLG program losses, the FDIC said. “The surcharges recognize that a relatively small portion of the industry is actively using the debt guarantee, but all insured depository institutions ultimately bear the risks associated with this program,” Bair said. “Putting the surcharges in the DIF will bolster the reserves that support our regular insurance program.” Bair also said that the surcharges “should enable the FDIC to meaningfully reduce the 20 basis point special assessment proposed by the board on February 27th.” That special assessment has been met with stiff resistance from the banking lobby at the American Bankers Association. Write to Paul Jackson at [email protected].

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