FDIC Federal Register Citations

From: Gary Propheter [mailto:gpropheter@beobank.com]
Sent: Wednesday, October 29, 2008 2:00 PM
To: Comments
Cc: Mark Lemmon; George Koffler; Jeff Bailey
Subject: RIN # 3064-AD37

Gentlemen,

I feel the FDIC Temporary Liquidity Guarantee Program (TLGP) is fatally flawed in ways that will actually reduce market access to liquidity for those banks that currently have adequate liquidity capacity.

1. The 75 basis point insurance premiums on qualified borrowing is onerous and will cause earnings pressure on institutions that already have issues with their net interest margin.

2. The cost differential introduced with the insurance premium will price correspondent bank deposits out of the reach of many banks and force the smaller banks to the Fed Discount Window or FHLB borrowings on a secured basis, as the cost of providing additional security is less than the insurance fee. What’s happens when the guarantee ends in 2009? I feel the correspondent bank lines will not recover and this Program will have changed the correspondent banking landscape forever.

3. The limitation of the guarantee to borrowings effective 09/30/08 punishes banks with good liquidity plans and who were not borrowing at end-of-quarter. For example, Bank of Eastern Oregon was using only $4.8MM of our $15MM in correspondent lines on 9/30. The rule then restricts us to 125% of that amount, or $6MM – the FDIC through the TLGP will wipe out $9MM of our liquidity plan – don’t hurt well managed banks while you try to solve issues at badly managed ones. If this rule stays effect, you will then force us to choose which correspondent relationships to keep and push us to the Fed Discount Window or FHLB – both of these will hurt the market long-term, especially if you multiply by the hundreds of other banks in our position. FDIC assurances that borrowing limits will be reviewed and may be reassessed based on historical usage effectively states that a bank’s liquidity management plan is no longer relevant. Is the FDIC position that the FDIC will now determine and manage what a bank’s liquidity needs are, and obviate a bank’s liquidity planning? And that the FDIC will cut off our access to what it feels is excess liquidity? By artificially setting the market using guaranteed and non-guaranteed lines, the FDIC will effectively destroy one of the fundamental bases of correspondent banking in the United States.

4. It is unclear is preferred debt issue under the Capital Purchase Program is subject to the insurance premium mentioned above

I recommend the FDIC consider the following changes to allow the TLGP to work more as intended:

A. Reduce the insurance premium to 25 or less basis points to reduce margin pressures and the impact on current and future correspondent banking relationships.

B. Either remove the 9/30/08 limitations of the guarantee and all premiums on overnight borrowings between correspondent banks altogether, or apply the premiums to new or increased lines of credit after 9/30/08 while encouraging the continued use of existing overnight lines between well-capitalized correspondents.

C. While we realize the FDIC is doing everything it can to increase premiums to build the insurance fund, the TLGP punishes good banks and continues to allow bad banks to survive. Assess premiums based on the behaviors that contribute to bank failures, not on everyday, normal activities. If a bank has a high level of core deposits to risk-weighted assets, and has a solidly performing lending portfolio, it should be at a competitive advantage – this program places these banks at a competitive disadvantage – we are your best customer, don’t punish us.

D. Please ensure TLGP costs do not apply to CPP advances.

Thank you for listening to my thoughts,

Gary L. Propheter
EVP & Chief Operations Officer
Bank of Eastern Oregon
PO Box 39
Heppner, OR 97836
541-676-0207
FAX: 541-676-0226
gpropheter@beobank.com