FDIC Federal Register Citations

From: James Echtermeyer
Sent: Monday, November 10, 2008 5:48 PM
To: Comments
Cc: Bill Mitchell; Dale Utley; Jim Williams
Subject: RIN 3064-AD37 - Temporary Liquidity Guarantee Program

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

Washington, D.C. 20429

Subject:  RIN # 3064-AD37 -Temporary Liquidity Guarantee Program

Dear Mr. Feldman:

Bankers' Bank of the West (BBW) appreciates the opportunity to comment on the FDIC's TLGP.  BBW is one of 20 commercial bankers' banks and provides a wide range of correspondent banking services to nearly 400 community banks.  We support the agency's efforts to establish confidence in the banking industry.  However, there are numerous issues with the program and technical clarifications needed in order to ensure the program works as intended and does not put community banks at a disadvantage.  We also want to thank the FDIC for its decision to extend the TLGP deadline.  This was a critical first step to resolving issues.

BBW is a bankers' bank that acts as a fed funds agent for roughly 300 community banks.  On average, 140 community banks sell excess funds to our agent fed funds pool.  By aggregating the excess funds of our respondent bank customers, we gain efficiencies and obtain better rates for our respondent banks.  From this large pool of funds, we can also diversify sales of fed funds to large upstream banks and reduce credit risk.  The support of bankers' banks also allows community banks to compete with the large complex banking organizations.  Finally, by charter banker's banks are not allowed to attract traditional deposits and instead rely on their agent fed funds pool as a source of funding to support thousands of community banks.  In fact, our unsecured debt is entirely comprised of fed funds purchased.  A significant change or reduction in such a valuable funding source will greatly restrict banker's banks ability to support community banks and will diminish healthy competition within the industry.

Bankers' banks provide a significant source of liquidity to thousands of community banks.  The TLGP will strengthen confidence in inter-bank lending; however, the TLGP along with the Fed's proposal to pay interest on reserves will place community banks at a great disadvantage.  Issues and ideas we ask the agency to consider are outlined below.

First, the FDIC must coordinate the TLGP with the Fed's program to pay interest on reserves.  Currently, these two programs are in conflict with each other and the combination of the two will reduce overnight funding available to thousands of community banks.  A goal of the TLGP is to encourage inter-bank lending (i.e. fed funds).  However, the Fed's payment of interest on reserves encourages banks to remove excess funds from the fed funds market.  The market is disrupted further by the Fed paying rates so far above the market.

Second, the TLGP states the FDIC will guarantee unsecured debt issued on or after October 14, 2008, through June 30, 2009.  TLGP also states that eligible debt must be issued on or before June 30, 2009, and that coverage for such debt will last until the earlier of maturity or June 30, 2012.  Overnight fed funds mature daily, so the guarantee program for fed funds will end July 1, 2009.  Has the agency considered how the industry will transition out of the program and will there be a way for banks to continue the guarantee?

Third, the 75bps fee is not commensurate with the risk of fed funds.  Fed funds are sold between federally regulated institutions.  Fed funds mature daily and any bank can protect itself each day by redirecting sales to other financial institutions.  In fact, risk based capital guidelines even risk weight fed funds at only 20%.  Additionally, bankers' banks are owned by other federally regulated financial institutions, which provides them a unique and strong source of financial strength.

Related to the fee and risk expoure, the FDIC must define how they will handle fed funds in the event a bank with fed funds purchased is taken into receivership.  The question that must be asked is, How many banks have lost fed funds sold to a bank that failed or was taken into receivership? 

The 75bps fee on fed funds is too high and significantly more than the current margin that can be earned in the fed funds market.  This fee will establish a two-tier fed funds market that the large banks will arbitrage and use to take advantage of community banks.  In all likelihood, community banks will pay higher rates to purchase fed funds and receive lower rates when they sell fed funds.  Large banks already take advantage of the arbitrage opportunities within the Fed's TAF program.  BBW suggests that a fee of 10 basis points based on the quarterly average balance of fed funds purchased would be commensurate with the risk and fair. 

The extension of deadlines for the TLGP, published in the Federal Register November 9, 2008, asked for comment on Section 370.3(b) and whether FDIC should establish an alternative cap for eligible entities that had no unsecured debt outstanding on September 30, 2008.  For community banks the most common form of unsecured debt is fed funds purchased.  The amount of fed funds a bank may purchase is typically defined within a written fed funds borrowing line.  BBW proposes that an alternative cap be established for these entities that is based on the total amount of available fed funds borrowing lines that were documented in writing and available as of September 30, 2008.

Other technical issues related to how the program works include:

• The TLGP states that the limit of the guaranty will be calculated on debt outstanding on September 30, 2008.  It is still unclear on what amount the 125% limit will be calculated for fed funds.  Will it be based on the whole 125% limit or an average balance?  It would be unfair to calculate the fee on committed but unused funds. 

• The proposed rule states unsecured debt must be documented in writing.  Fed funds sales are not documented in writing.  Clarification is needed on this issue.

• The rule does not address the procedural aspects of managing a fed funds pool, or fed funds activities for that matter.  Banks that sell fed funds to an agent pool do not know to what banks the funds were sold until the next day because agent fed funds sold are distributed on a pro rata or other basis.  The pro rata distribution cannot be determined until all sales are complete.  How will the guarantee be applied to debt that is not issued in a clear chronological order?

• Fed funds are bought and sold throughout the day.  How can a bank purchasing fed funds from a pool of hundreds of selling banks know when or to whom to give notice when it goes over its 125% cap?

• During the interim period, how does a bank get approval to exceed the 125% cap? 

• Section 370.6(c) states the initiation of assessments will be calculated on "all senior unsecured debt, other than overnight debt instruments."  Does overnight debt instruments include fed funds purchased?  If so, are fed funds not subject to assessment?

Thank you for the opportunity to provide comment.

Sincerely,

James H. Echtermeyer, SVP

Bankers' Bank of the West