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2008 Annual Report
2008 Annual Report
IV. Financial Statements and Notes
Deposit Insurance Fund (DIF) – Cont.
14. Systemic Risk Transactions
Any loss incurred by the DIF as a result of actions taken or assistance provided pursuant to a systemic risk determination must be recovered from all insured depository institutions through one or more emergency special assessments. The special assessment will be based on the amount of each insured depository institution’s average total assets during the assessment period, minus the sum of the amount of the institution’s average total tangible equity and the amount of the institution’s average total subordinated debt.
Pursuant to a systemic risk determination invoked during 2008, the FDIC established the Temporary Liquidity Guarantee Program (TLGP) for insured depository institutions and certain holding companies. The FDIC received consideration in exchange for guarantees issued under the TLGP.
The DIF has recognized a liability for the non-contingent fair value of the obligation the FDIC has undertaken to stand ready to perform over the term of the guarantees in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). Pursuant to FIN 45, at inception, the fair value of the non-contingent obligation is measured at the amount of consideration received in exchange for issuing the guarantee. This liability is reported as “Guarantee obligations-systemic risk” and any related asset received as consideration is designated for systemic risk on the balance sheet. As guarantee expenses are incurred (including contingent liabilities), the DIF will reduce the recorded
Temporary Liquidity Guarantee Program
Debt Guarantee Program
Fees for participation in the DGP depend on the maturity of debt issued. The cost of the guarantee to insured depository institutions is 50 basis points for debt with maturities of 180 days or less, 75 basis points for debt with maturities of 181 days to 364 days, and 100 basis points for debt with maturities 365 days or greater. Other eligible entities are required to pay an additional 10 basis points if, as of September 30, 2008, the combined assets of all insured depository institutions affiliated with such entity represent less than 50 percent of consolidated holding company assets.
The FDIC’s payment obligation under the DGP will be triggered by a payment default. In the event of default, the FDIC will continue to make scheduled principal and interest payments under the terms of the debt instrument through its maturity. The debtholder or representative must assign to the FDIC the right to receive any and all distributions on the guaranteed debt from any insolvency proceeding, including the proceeds of any receivership or bankruptcy estate, to the extent of payments made under the guarantee.
Debt guarantee fees collected during 2008 of $2.2 billion are included in the “Cash and cash equivalents – restricted – systemic risk” line item and recognized as “Guarantee obligations-systemic risk” on the Balance Sheet. As of December 31, 2008, the total amount of guaranteed debt outstanding is $224 billion. If all eligible entities issued debt up to the program’s allowable limit, the maximum exposure would be $940 billion. At this time, the program has been operating for a relatively short time and no losses have yet been incurred. The FDIC continuously evaluates the financial condition and prospects of eligible entities through its supervisory process. The program is adjusted as appropriate based on each institution’s profile.
Upon notification to the FDIC no later than December 5, 2008, a participating entity could elect to issue senior unsecured non-guaranteed debt with maturities beyond June 30, 2012, at any time, in any amount, and without regard to the guarantee limit. This election required a nonrefundable fee equal to 37.5 basis points applied to the outstanding amount of the entity’s eligible senior unsecured debt as of September 30, 2008 with a maturity date on or before June 30, 2009. As of December 31, 2008, the FDIC collected nonrefundable fees of $195 million and reflected a receivable of $974 million in the “Receivable – systemic risk” line item. The nonrefundable fees are designated for TLGP expected losses and payments.
Transaction Account Guarantee Program
Upon the failure of a participating insured depository institution, the FDIC will pay the guaranteed claims of depositors for funds in a non-interest bearing transaction account as soon as possible in accordance with regulations governing the payment of insured deposits. Upon payment of such claims, the FDIC will be subrogated to the claims of depositors against the failed entity.
At December 31, 2008, the “Receivable – systemic risk” line item includes $90 million of estimated TAG fees due from insured depository institutions. This receivable was collected at the end of the first quarter of 2009. At December 31, 2008, the TLGP contingent liability associated with non-interest bearing transaction accounts for the anticipated failure of insured institutions participating in the TAG is $1.4 billion. During 2008, the DIF recorded estimated losses of $23.5 million for non-interest bearing transaction accounts of the 2008 failures. Both amounts are recorded as “Systemic risk expenses” and a corresponding amount of guarantee fees was recognized as “Systemic risk revenue.”
As of December 31, 2008, the maximum estimated exposure under the TAG is $680 billion.
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