FDIC Federal Register Citations

From: Stewart McClure
Sent: Wednesday, November 12, 2008 4:01 PM
To: Comments Subject: RIN#3064-AD37

Robert E. Feldman Executive Secretary Federal Deposit Insurance Corporation 550 17th Street, N.W. Washington, DC 20429 Attention: Comments

Re: RIN# 3064-AD37

Dear Mr. Feldman:

I am writing to comment upon the FDIC’s Interim Rule creating Part 370 of the FDIC’s regulations and implementing the Temporary Liquidity Guarantee Program. My concern regards Section 370.3(b) of the Interim Rule, setting forth the amount of debt eligible for FDIC guarantees under the program. Under this section, “…the maximum amount of debt to be used under the guarantee is 125 percent of the par value of the participating entity’s senior unsecured debt…outstanding as of September 30, 2008…”

Like many community banks, the only senior unsecured debt that Somerset Hills Bank has had outstanding, and is likely to have outstanding in the future, is Fed funds purchased. However, due to the variable nature of our funding needs, we did not have any Fed funds purchased outstanding on September 30, 2008. Therefore, under the regulation, the only way Somerset Hills Bank can participate in the Temporary Liquidity Guarantee Program is for the FDIC to determine, at its discretion and on a case by case basis, that we should be permitted to participate and the amount the FDIC will guarantee. The Interim Rule contains no guidance on the standards the FDIC will apply, or the amount that the agency may be willing to guarantee.

We have contacted the New York Regional Office regarding this issue, and have been told that the FDIC is aware of the issue and is working on issuing additional guidance. Notwithstanding the work the agency is already doing, I felt it was appropriate to write and express my concerns on this issue, to ensure that you understand the potential harm that may be caused by the Interim Rule as written, and to suggest a potential alternative standard.

Somerset Hills Bank is a healthy, profitable and well capitalized community bank. We remain a committed source of credit for our local communities. However, our ability to continue to provide credit is dependent upon our liquidity. As competition for deposits in our northern New Jersey marketplace is fierce, we must at times seek alternative sources of liquidity. Fed funds have always played a role in our liquidity planning, and we currently have over $25 million in committed but unused Fed funds lines of credit. However, I am concerned whether this liquidity will remain available to us when the obligations of other borrowers are guaranteed by the FDIC, and ours are not. As a lender, one would surely prefer to extend credit backed by the full faith and credit of an agency of the United States government than on an unsecured basis. Even if credit is available to us, what impact will the absence of the FDIC’s guarantee have on the cost? Bankers have consistently been told by regulators to risk-price credit. Any sensible lender will charge more for unsecured debt than for credit backed by the FDIC’s guarantee.

A reduction in liquidity available to Somerset Hills Bank, or an increase in the cost of the liquidity, will clearly have a negative impact on our ability to continue to offer credit in the markets we serve. Unless the Interim Rule is revised to address this issue, it will have the perverse and unintended effect of reducing liquidity, and therefore credit, at a time when the entire Federal government is working to ensure that credit remains available.

Since I understand that the FDIC needs to be able to quantify, and perhaps limit, the amount of credit it guarantees, I would not suggest that the Temporary Liquidity Guarantee Program be unlimited. Rather, to address the needs of institutions like Somerset Hills Bank that had no senior unsecured debt outstanding on September 30, 2008, I would suggest that the standard be revised to 15% of an institution’s total liabilities as of September 30, 2008. This number can be easily calculated off of an institution’s Call Report, and will ensure that no institution is shut out of the program simply because it did not have senior unsecured debt outstanding on a particular day.

I thank you for your consideration, and would be happy to discuss this issue further with any appropriate parties at the FDIC.

Very Truly Yours,

Stewart E. McClure, Jr. President & CEO