From: Andrew Wang [mailto:Andrew.Wang@FENB-US.com]
Sent: Wednesday, November 12, 2008 6:56 PM
To: Comments
Cc: Cynthia Tseng; Robert Sweeney; Rick Copeland; Fred Tsai; Eileen Lyon
Subject: FDIC RIN 3064-AD37
November 12, 2008
Robert E. Feldman, Secretary
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429
Re: RIN # 3064-AD37
Dear Mr. Feldman:
The following comment letter is submitted on behalf of Far East National
Bank, a national banking association headquartered in Los Angeles,
California.
First, we support the Temporary Liquidity Guarantee Program (TLGP) to
enhance the liquidity of financial institutions and address the concerns of
depositors. However, we recommend several clarifications and modifications
to the interim rule issued on October 23, 2008 (Interim Rule), as set forth
below.
Debt Guarantee Program:
1. The Interim Rule should clarify that deposits and borrowings in overseas
branches of US Banks are not included as “senior unsecured debt” under the
TLGP.
Section 370.2(e)(1) defines “senior unsecured debt” to include “bank
deposits in an international banking facility (IBF) of an insured depository
institution.” However, the definition does not specifically indicate whether
or not overseas branches of US banks are intended to be included in the
program. We don’t believe overseas branches of US Banks are intended to be
covered under the program, since the domestic (overseas) deposits of such
branches are not FDIC insured. The FDIC’s intention should be clarified in
this regard.
As a result of the Federal Reserve’s effort to inject liquidity into global
markets, the LIBOR rate has dropped significantly, demonstrating that banks
with excess liquidity are more willing to lend to other financial
institutions. If the FDIC surcharge is imposed on domestic deposits of
overseas branches of US banks, US banks will be at a competitive
disadvantage with foreign banks borrowing US dollars from foreign
institutions, which will not be subject to the 75 basis point surcharge.
2. The borrowing limitation under Interim Rule should be modified to use an
average of Overnight Fed Fund Purchases with Correspondent Banks.
The borrowing limitation under the Debt Guarantee Program is determined by
calculating an institution’s outstanding senior unsecured debt as of a
single day, September 30, 2008. While this may be convenient for purposes of
calculating the amount since it is shown in banks’ call reports, it
misrepresents the amount of overnight Fed Fund activities for community
banks. We suggest that the FDIC base the borrowing limitation on the average
amount of senior unsecured debt for the quarter ending September 30, 2008.
3. The fees charged for overnight Federal Funds should be lower than 75
basis points and should be charged only after a bank exceeds the baseline
amount, determined with respect to an average borrowing base.
As drafted, the Interim Rule does not recognize the important function that
overnight Fed Fund activities play to facilitate the Federal Reserve’s
monetary policy and acknowledge the correspondent relationships that well
managed banks have built through time and trust.
The Federal Funds market is the medium through which excess reserves are
able to flow. Federal Funds accounts are analogous to interest bearing
transaction accounts for banks which utilize them to manage daily liquidity.
The Federal Reserve pays interest on excess funds deposited at the Federal
Reserve. Banks also may lend their excess Federal Funds through their
correspondent banking relationships. Strong community banks can access this
liquidity source without the need of an FDIC guarantee and at rates far
lower than other borrowings.
Financially sound banks which might otherwise opt out of the guarantee
program due to the high cost of the FDIC assessments may be unwilling to do
so because of the potential stigma associated with doing so, and thereby
penalizing stronger, well-managed banks.
By subjecting Federal Funds purchase activities to a 75 basis point fee
assessment and paying interest on excess reserves, it is foreseeable that
market liquidity will be damaged, as banks hold their excess reserves rather
than lending them through the Fed Funds market.
Accordingly, it is our view that overnight Federal Funds purchases should be
subject to a fee assessment based on the additional liquidity needed over
and above a baseline amount, determined with reference to an institution’s
average borrowings over the last quarter.
Additionally, we recommend that the FDIC differentiate between short term
and longer term borrowings in determining the fee assessment. Federal Funds
borrowings are typically overnight purchases, and should have a much lower
assessment than 75 basis points, which is designed for “term borrowing up to
3 years”.
Transaction Account Guarantee Program:
4. The fee assessed on banks that do not opt out of the Transaction Account
Guarantee Program should be based on the quarterly average balances of such
accounts rather than the quarter-end balance.
Section 370.7(c) of the Interim Rule provides: “Any eligible entity that
does not opt out of the transaction account guarantee program shall pay
quarterly an annualized 10 basis point assessment on any deposit amounts
exceeding the existing deposit insurance limit of $250,000, as reported on
its quarterly Reports of Condition and Income.”
Transaction accounts serve depositors’ daily business needs and therefore,
balances in these accounts tends to be highly volatile. Accordingly, it
would be more accurate to calculate the assessment on the quarterly average
balances on transaction accounts rather than quarter end balance.
It is not clear that how the call report format may be amended but it is
implied that banks shall report covered deposit balance over $250,000 on
depositor’s basis. For example, depositor A has $250,000 TCD and $50,000 in
DDA, shall the bank report $0 or $50,000 for the requirement of this
Section. To satisfy the spirit of the Interim Rule, $50,000 is more
reasonable, but it is not easily achieved at a minimal cost.
5. Certain interest-bearing accounts, such as NOW accounts and IOLTA
accounts, should be covered by the Transaction Account Guarantee Program.
During the technical briefing, FDIC representatives indicated that the
purpose in excluding such accounts was an intention not to insure the
investments of depositors above the regular FDIC guarantee amount, but to
ensure the stability of the banking system and to avoid rapid and
substantial outflows of uninsured deposits from institutions that are
perceived as stressed.
However, NOW accounts, though interest bearing, are a low cost source of
funds for community banks. Banks with higher percentage of DDA and NOW
accounts are usually financially sound and pose little risk to FDIC.
Furthermore, IOLTA accounts are not investments that inure to the benefit of
the depositor or the bank. In California, the law requires California
lawyers to place IOLTA accounts only at financial institutions that pay
dividend or interest rates to IOLTA customers comparable to rates paid to
similarly situated non-IOLTA customers, and that meet other requirements.
Client funds that are nominal in amount or are on deposit for such a short
period of time that the funds cannot earn net income (income over costs) for
the client, must be deposited or invested by attorneys into pooled IOLTA
(Interest on Lawyers’ Trust Accounts) on which the interest or dividends are
paid to the State Bar.
However, from the standpoint of the depositors, many of which are nonprofit
organizations in the case of NOW accounts, or attorneys holding clients’
funds in trust in the case of IOLTA accounts, it is less risky to keep those
funds in an institution perceived as “too big to fail.” This is likely to
lead to the withdrawal of such deposits from smaller, community banks.
For these reasons, we urge the FDIC to include NOW and IOLTA accounts in the
Transaction Account Guarantee Program.
We appreciate the opportunity to comment on the Temporary Liquidity
Guarantee Program, and will be happy to respond to any questions regarding
these comments.
Sincerely,
Cynthia Tseng
Chief Financial Officer
