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From: Amanda Swoverland [mailto:firstname.lastname@example.org]
This e-mail is to comment on the unsecured debt guaranty program proposed under the Temporary Liquidity Guaranty Program.
While our bank recognizes the intent and purpose behind the program is good, the major concern with the program is that it will cause banks that were not having liquidity issues, to have liquidity issues. This is best illustrated through an example.
Lets assume our bank has arrangements with three different banks that we can draw on at any time to purchase Fed Funds. The amount we have available, unsecured, is $15 million dollars. At this time we pay the current market rate for what we borrow. Our banks have not cited any issues with us continuing to buy and sell funds with them.
However, based on the proposal, as of 9/30/2008 we only had $4million outstanding unsecured debt. Therefore, the FDIC guaranty would only apply to $5 million dollars. We are concerned that the banks we currently work with may say they only want to borrow to the amount of the guaranty, thus capping our ability to borrow at $5 million dollars. We understand that we can contact the FDIC to request a higher cap, but this still may not be as high as the $15,000,000 we currently have available. Not only will this potentially reduce the amount of Fed Funds we can purchase by $10 million dollars, our cost to borrow has just increased by 75 basis points. Both liquidity and earnings will suffer. It is our hope that the banks we currently have arrangements with will continue to work with us as they have in the past; however, the reality is this program will probably impact how we do business today.
In addition, the date banks must give notice to opt-out of the program is too close to the end of the comment period. The costs (reputational and financial) associated with these programs are significant and bank management should have more than a few days to consider their options before deciding to participate in the program.
The final guidance the FDIC issues regarding these programs is critical. Since information on who is and is not participating will be public based on the proposed rule, we believe the FDIC should take steps to educate the public and other banks on why a bank may choose not to participate so that it is not perceived as negative. The FDIC should encourage financial institutions to maintain their current standards for lending and use the guaranty program as a way to further offer their programs to banks they may have not otherwise worked with. The intent of these programs should be to help those banks who are struggling and need the guarantees, not punish those banks who have not had issues.
Finally, as it relates to deposit insurance. A major issue banks are dealing with right now relates to insurance companies offering excess insurance bonds. This product has almost disappeared and was something many banks relied upon for their public and non-profit customers. We would like the FDIC to consider offering an excess insurance bond that banks can purchase. This would be a very non-complex way for a bank to provide excess insurance and not require customers to be in a certain type of account (non-interest bearing) or having banks start getting into programs that are considered brokered deposits just to get the extra insurance.
Amanda Swoverland, CRCM
|Last Updated 10/29/2008