From: Jim Franks [mailto:firstname.lastname@example.org]
Sent: Monday, November 03, 2008 1:55 PM
Subject: RIN 3064-AD37 - Temporary Liquidity Guarantee Program
November 3, 2008
Robert E. Feldman
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D.C. 20429
RE: RIN 3064AD37 Temporary Liquidity Guarantee Program
Dear Mr. Feldman:
Thank you for allowing Arkansas Bankers' Bank to comment on the FDICs
new Temporary Liquidity Guarantee Program.
Arkansas Bankers' Bank (ABB) is one of 20 or so bankers banks in the
country, founded in 1990. Some 83 Arkansas community banks are the
stockholders of ABB. ABB serves approximately 120 of the 140 commercial
banks in Arkansas. The services ABB provides its customer banks include such
things as cash letter settlement, investment purchases/sales, safekeeping,
and cash management to specifically include a managed agency Fed Funds
While ABB is appreciative of what FDIC and other government entities have
done and are doing to stabilize the world financial crisis, I would be
remiss if I did not say that ABB and its stockholder/customer banks did not
cause this debacle. Nevertheless, ABB realizes that all banks will help pay
to resolve these issues.
What ABB would like to discuss in this comment is specifically the Fed
Funds aspect of the guaranteed debt component of the TLGP.
Limiting Covered Debt (Fed Funds) to 125% of 9/30 Debt Guarantee ALL
Statements such as the following were made in the Federal Register:
In light of the unprecedented disruption in the nations credit
taken steps to preserve the nations confidence in its financial
institutions and in the American and global economy.
the nations entire financial system appears to be at risk.
In view of the apparent seriousness in these and other similar
statements, and what certainly appears to be a resulting highly complex
program for guaranteed Fed Funds purchases, would it not be appropriate to
guarantee the entire Fed Funds market? Surely the program would be far
easier to manage without the convoluted 125% calculation. Taking into
consideration that any overnight Fed Funds guarantee ends in eight months,
would the extra risk not be more than offset by the stability created, a
goal expressly stated by FDIC?
75 Basis Point Fee
ABBs customer and stockholder banks that have commented to us say the 75
basis point fee for the debt guarantee program is cost prohibitive,
punitive, and excessive. Couple this with what ABB hears from its
customer banks that because of the excess fee, they will likely opt out of
the program, the income received by FDIC will be less than anticipated.
However, a significantly lower fee, 20 basis points as opposed to 75, for
example, coupled with the suggestion above to guarantee all Fed Funds
purchases, would lead to a significantly higher participation rate, and
correspondingly, a higher amount of income. While it might be argued that a
net higher risk level exists with a lower fee, I query how many times in
history have Fed Funds not been returned the next day? Furthermore, the
systemic risk regulations say that this program cannot be paid for from
the Deposit Insurance Fund, and that any deficit would require an additional
and separate assessment on banks. Thus, if the fee ultimately proves to be
too low to pay any losses, then banks have to pay anyway.
Written Instrument Requirement
In reviewing the Interim Rule for the TLG Program adopted by the FDIC
board on October 23 and published in the Federal Register on October 29, it
states that in order for a bank that remains in the senior debt guarantee
program to purchase Fed Funds and have these funds guaranteed for the
benefit of the Fed Funds selling banks, the debt must be evidenced by a
written instrument and on its face it must state guaranteed by the FDIC.
Specifically, the Interim Rule adopted on October 23 states as follows:
In order for the newly-issued senior unsecured debt to be guaranteed, the
debt instrument must be clearly identified in writing in a commercially
reasonable manner on the face of any documentation as guaranteed by the
FDIC, and this fact must be properly disclosed to the creditors.
And, § 370.5(h)(2) as published in the Federal Register states:
If an eligible entity does not opt out of the debt guarantee program, it
must clearly identify, in writing and in a commercially reasonable manner,
to any interested lender or creditor whether the newly issued debt it is
offering is guaranteed or not.
ABBs experience with Fed Funds is there is no written agreement. So, how
can the guaranteed by the FDIC statement (or any of the other required
written information) be placed on a written agreement that does not exist?
In a teleconference on October 27 between FDIC and the Bankers Banks
Council (consisting of a representative of each bankers bank), the FDIC
participants acknowledged they were unaware that Fed Funds were not
evidenced by a written document. They offered no viable suggestions on a
solution to the technical issue.
Also, many Fed Funds transactions occur in a Pool environment (as
opposed to a bank-to-bank direct scenario). This is what ABB does for its
stockholder/customer banks. In a Pool environment, sellers of funds place
their funds in the Pool and the Pool agency administrator (i.e., ABB) sells
these funds as agent and on behalf of the selling banks, on a prorata basis,
to the purchasing Pool banks. In many cases, the number of banks purchasing
funds from the ABB Pool on a given day are over 30, and the number of
selling banks may be over 50. Thus, each seller of funds is selling some of
its funds, prorata, to every purchaser in the Pool. This provides
diversification to the selling banks, a prudent safety and soundness
procedure. Assuming all purchasing banks in the Pool remain in the senior
debt guarantee program, does this mean that each purchasing/guaranteeing
bank must issue a written debt agreement to every selling bank in the Pool
(with the FDIC guarantee language as well as other required information)?
(For clarification, the Pool does not purchase any Fed Funds; it only puts
buyers and sellers together.) Since Fed Funds are almost always overnight,
must this be done each and every day? The Rule seems to say as much. Using
the information above as to 30 purchasing banks and 50 selling banks on a
daily basis, this would require some 1,500 daily written instruments
containing the requisite information (amount, maturity, special guarantee
Another point to consider is that most of ABBs Pool banks do not know
what their respective Fed Funds positions are (either selling or purchasing)
until very late in the day. Plus, the funds from the purchasing banks are
returned first thing the next morning. So, logically, if a written
instrument of some kind was required, most likely it would be issued the
next day after the funds have been returned. In that case, it seems the
guarantee is pretty much moot.