From: Don Abernathy [mailto:dabernathy@TheBankersBank.com]
Sent: Thursday, November 13, 2008 8:51 AM
Subject: Comments on Fed Funds in TLGP
Robert E. Feldman
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D.C. 20429
Subject: RIN # 3064-AD37 -Temporary Liquidity Guarantee Program
Dear Mr. Feldman:
The Bankers Bank (TBB) appreciates the opportunity to comment on the
FDIC's TLGP. TBB 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.
TBB is a bankers' bank that acts as a fed funds agent for roughly 250
community banks. On average, 180 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
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 exposure, 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. TBB 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. TBB 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
• 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
• 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?