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From: Jim Franks [mailto:jfranks@arbankersbank.com]
Sent: Monday, November 03, 2008 1:55 PM
To: Comments
Subject: RIN 3064-AD37 - Temporary Liquidity Guarantee Program

Via e-mail

November 3, 2008

Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Room 6028
Washington, D.C. 20429

RE: RIN 3064–AD37 – Temporary Liquidity Guarantee Program

Dear Mr. Feldman:

Thank you for allowing Arkansas Bankers' Bank to comment on the FDIC’s new Temporary Liquidity Guarantee Program.

Arkansas Bankers' Bank (ABB) is one of 20 or so “bankers’ banks” in the country, founded in 1990. Some 83 Arkansas community banks are the stockholders of ABB. ABB serves approximately 120 of the 140 commercial banks in Arkansas. The services ABB provides its customer banks include such things as cash letter settlement, investment purchases/sales, safekeeping, and cash management to specifically include a managed “agency” Fed Funds pool.

While ABB is appreciative of what FDIC and other government entities have done and are doing to stabilize the world financial crisis, I would be remiss if I did not say that ABB and its stockholder/customer banks did not cause this debacle. Nevertheless, ABB realizes that all banks will help pay to resolve these issues.

What ABB would like to discuss in this comment is specifically the Fed Funds aspect of the “guaranteed debt” component of the TLGP.

Limiting Covered Debt (Fed Funds) to 125% of 9/30 Debt – Guarantee ALL Fed Funds

Statements such as the following were made in the Federal Register:

“In light of the unprecedented disruption in the nation’s credit markets…”

“…taken steps to preserve the nation’s confidence in its financial institutions and in the American and global economy.”

“…the nation’s entire financial system appears to be at risk.”

In view of the apparent seriousness in these and other similar statements, and what certainly appears to be a resulting highly complex program for guaranteed Fed Funds purchases, would it not be appropriate to guarantee the entire Fed Funds market? Surely the program would be far easier to manage without the convoluted 125% calculation. Taking into consideration that any overnight Fed Funds guarantee ends in eight months, would the extra risk not be more than offset by the stability created, a goal expressly stated by FDIC?

75 Basis Point Fee

ABB’s customer and stockholder banks that have commented to us say the 75 basis point fee for the debt guarantee program is “cost prohibitive,” “punitive,” and “excessive.” Couple this with what ABB hears from its customer banks that because of the excess fee, they will likely “opt out” of the program, the income received by FDIC will be less than anticipated. However, a significantly lower fee, 20 basis points as opposed to 75, for example, coupled with the suggestion above to guarantee all Fed Funds purchases, would lead to a significantly higher participation rate, and correspondingly, a higher amount of income. While it might be argued that a net higher risk level exists with a lower fee, I query how many times in history have Fed Funds not been returned the next day? Furthermore, the “systemic risk” regulations say that this program cannot be paid for from the Deposit Insurance Fund, and that any deficit would require an additional and separate assessment on banks. Thus, if the fee ultimately proves to be too low to pay any losses, then banks have to pay anyway.

Written Instrument Requirement

In reviewing the Interim Rule for the TLG Program adopted by the FDIC board on October 23 and published in the Federal Register on October 29, it states that in order for a bank that remains in the senior debt guarantee program to purchase Fed Funds and have these funds “guaranteed” for the benefit of the Fed Funds selling banks, the debt must be evidenced by a written instrument and on its face it must state “guaranteed by the FDIC.” Specifically, the Interim Rule adopted on October 23 states as follows:

In order for the newly-issued senior unsecured debt to be guaranteed, the debt instrument must be clearly identified in writing in a commercially reasonable manner on the face of any documentation as “guaranteed by the FDIC,” and this fact must be properly disclosed to the creditors.

And, § 370.5(h)(2) as published in the Federal Register states:

If an eligible entity does not opt out of the debt guarantee program, it must clearly identify, in writing and in a commercially reasonable manner, to any interested lender or creditor whether the newly issued debt it is offering is guaranteed or not.

ABB’s experience with Fed Funds is there is no written agreement. So, how can the “guaranteed by the FDIC” statement (or any of the other required written information) be placed on a written agreement that does not exist? In a teleconference on October 27 between FDIC and the Bankers’ Banks Council (consisting of a representative of each bankers’ bank), the FDIC participants acknowledged they were unaware that Fed Funds were not evidenced by a written document. They offered no viable suggestions on a solution to the technical issue.

Also, many Fed Funds transactions occur in a “Pool” environment (as opposed to a bank-to-bank direct scenario). This is what ABB does for its stockholder/customer banks. In a Pool environment, sellers of funds place their funds in the Pool and the Pool agency administrator (i.e., ABB) sells these funds as agent and on behalf of the selling banks, on a prorata basis, to the purchasing Pool banks. In many cases, the number of banks purchasing funds from the ABB Pool on a given day are over 30, and the number of selling banks may be over 50. Thus, each seller of funds is selling some of its funds, prorata, to every purchaser in the Pool. This provides diversification to the selling banks, a prudent “safety and soundness” procedure. Assuming all purchasing banks in the Pool remain in the senior debt guarantee program, does this mean that each purchasing/guaranteeing bank must issue a written debt agreement to every selling bank in the Pool (with the FDIC guarantee language as well as other required information)? (For clarification, the Pool does not purchase any Fed Funds; it only puts buyers and sellers together.) Since Fed Funds are almost always “overnight,” must this be done each and every day? The Rule seems to say as much. Using the information above as to 30 purchasing banks and 50 selling banks on a daily basis, this would require some 1,500 daily “written instruments” containing the requisite information (amount, maturity, special guarantee language).

Another point to consider is that most of ABB’s Pool banks do not know what their respective Fed Funds positions are (either selling or purchasing) until very late in the day. Plus, the funds from the purchasing banks are returned first thing the next morning. So, logically, if a “written instrument” of some kind was required, most likely it would be issued the next day – after the funds have been returned. In that case, it seems the “guarantee” is pretty much moot.

Sincerely,
Jim Franks
Arkansas Bankers' Bank

 


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