Echtermeyer Sent: Monday, November 10, 2008 5:48 PM To: Comments Cc: Bill Mitchell; Dale Utley; Jim Williams Subject: RIN 3064-AD37 - Temporary Liquidity Guarantee Program
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:
Bankers' Bank of the
West (BBW) appreciates the opportunity to comment on the FDIC's TLGP. BBW
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.
BBW is a bankers' bank
that acts as a fed funds agent for roughly 300 community banks. On average,
140 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 the guarantee?
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 expoure, 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. BBW 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.
BBW 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 this issue.
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
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 125% cap?
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?