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FDIC Federal Register Citations

From: Andrew Wang []
Sent: Wednesday, November 12, 2008 6:56 PM
To: Comments
Cc: Cynthia Tseng; Robert Sweeney; Rick Copeland; Fred Tsai; Eileen Lyon
Subject: FDIC RIN 3064-AD37

November 12, 2008

Robert E. Feldman, Secretary
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429
Re: RIN # 3064-AD37
Dear Mr. Feldman:
The following comment letter is submitted on behalf of Far East National Bank, a national banking association headquartered in Los Angeles, California.
First, we support the Temporary Liquidity Guarantee Program (TLGP) to enhance the liquidity of financial institutions and address the concerns of depositors. However, we recommend several clarifications and modifications to the interim rule issued on October 23, 2008 (Interim Rule), as set forth below.
Debt Guarantee Program:
1. The Interim Rule should clarify that deposits and borrowings in overseas branches of US Banks are not included as “senior unsecured debt” under the TLGP.
Section 370.2(e)(1) defines “senior unsecured debt” to include “bank deposits in an international banking facility (IBF) of an insured depository institution.” However, the definition does not specifically indicate whether or not overseas branches of US banks are intended to be included in the program. We don’t believe overseas branches of US Banks are intended to be covered under the program, since the domestic (overseas) deposits of such branches are not FDIC insured. The FDIC’s intention should be clarified in this regard.
As a result of the Federal Reserve’s effort to inject liquidity into global markets, the LIBOR rate has dropped significantly, demonstrating that banks with excess liquidity are more willing to lend to other financial institutions. If the FDIC surcharge is imposed on domestic deposits of overseas branches of US banks, US banks will be at a competitive disadvantage with foreign banks borrowing US dollars from foreign institutions, which will not be subject to the 75 basis point surcharge.
2. The borrowing limitation under Interim Rule should be modified to use an average of Overnight Fed Fund Purchases with Correspondent Banks.
The borrowing limitation under the Debt Guarantee Program is determined by calculating an institution’s outstanding senior unsecured debt as of a single day, September 30, 2008. While this may be convenient for purposes of calculating the amount since it is shown in banks’ call reports, it misrepresents the amount of overnight Fed Fund activities for community banks. We suggest that the FDIC base the borrowing limitation on the average amount of senior unsecured debt for the quarter ending September 30, 2008.
3. The fees charged for overnight Federal Funds should be lower than 75 basis points and should be charged only after a bank exceeds the baseline amount, determined with respect to an average borrowing base.
As drafted, the Interim Rule does not recognize the important function that overnight Fed Fund activities play to facilitate the Federal Reserve’s monetary policy and acknowledge the correspondent relationships that well managed banks have built through time and trust.
The Federal Funds market is the medium through which excess reserves are able to flow. Federal Funds accounts are analogous to interest bearing transaction accounts for banks which utilize them to manage daily liquidity. The Federal Reserve pays interest on excess funds deposited at the Federal Reserve. Banks also may lend their excess Federal Funds through their correspondent banking relationships. Strong community banks can access this liquidity source without the need of an FDIC guarantee and at rates far lower than other borrowings.
Financially sound banks which might otherwise opt out of the guarantee program due to the high cost of the FDIC assessments may be unwilling to do so because of the potential stigma associated with doing so, and thereby penalizing stronger, well-managed banks.
By subjecting Federal Funds purchase activities to a 75 basis point fee assessment and paying interest on excess reserves, it is foreseeable that market liquidity will be damaged, as banks hold their excess reserves rather than lending them through the Fed Funds market.
Accordingly, it is our view that overnight Federal Funds purchases should be subject to a fee assessment based on the additional liquidity needed over and above a baseline amount, determined with reference to an institution’s average borrowings over the last quarter.
Additionally, we recommend that the FDIC differentiate between short term and longer term borrowings in determining the fee assessment. Federal Funds borrowings are typically overnight purchases, and should have a much lower assessment than 75 basis points, which is designed for “term borrowing up to 3 years”.
Transaction Account Guarantee Program:
4. The fee assessed on banks that do not opt out of the Transaction Account Guarantee Program should be based on the quarterly average balances of such accounts rather than the quarter-end balance.
Section 370.7(c) of the Interim Rule provides: “Any eligible entity that does not opt out of the transaction account guarantee program shall pay quarterly an annualized 10 basis point assessment on any deposit amounts exceeding the existing deposit insurance limit of $250,000, as reported on its quarterly Reports of Condition and Income.”
Transaction accounts serve depositors’ daily business needs and therefore, balances in these accounts tends to be highly volatile. Accordingly, it would be more accurate to calculate the assessment on the quarterly average balances on transaction accounts rather than quarter end balance.
It is not clear that how the call report format may be amended but it is implied that banks shall report covered deposit balance over $250,000 on depositor’s basis. For example, depositor A has $250,000 TCD and $50,000 in DDA, shall the bank report $0 or $50,000 for the requirement of this Section. To satisfy the spirit of the Interim Rule, $50,000 is more reasonable, but it is not easily achieved at a minimal cost.
5. Certain interest-bearing accounts, such as NOW accounts and IOLTA accounts, should be covered by the Transaction Account Guarantee Program.
During the technical briefing, FDIC representatives indicated that the purpose in excluding such accounts was an intention not to insure the investments of depositors above the regular FDIC guarantee amount, but to ensure the stability of the banking system and to avoid rapid and substantial outflows of uninsured deposits from institutions that are perceived as stressed.
However, NOW accounts, though interest bearing, are a low cost source of funds for community banks. Banks with higher percentage of DDA and NOW accounts are usually financially sound and pose little risk to FDIC.
Furthermore, IOLTA accounts are not investments that inure to the benefit of the depositor or the bank. In California, the law requires California lawyers to place IOLTA accounts only at financial institutions that pay dividend or interest rates to IOLTA customers comparable to rates paid to similarly situated non-IOLTA customers, and that meet other requirements. Client funds that are nominal in amount or are on deposit for such a short period of time that the funds cannot earn net income (income over costs) for the client, must be deposited or invested by attorneys into pooled IOLTA (Interest on Lawyers’ Trust Accounts) on which the interest or dividends are paid to the State Bar.
However, from the standpoint of the depositors, many of which are nonprofit organizations in the case of NOW accounts, or attorneys holding clients’ funds in trust in the case of IOLTA accounts, it is less risky to keep those funds in an institution perceived as “too big to fail.” This is likely to lead to the withdrawal of such deposits from smaller, community banks.
For these reasons, we urge the FDIC to include NOW and IOLTA accounts in the Transaction Account Guarantee Program.
We appreciate the opportunity to comment on the Temporary Liquidity Guarantee Program, and will be happy to respond to any questions regarding these comments.

Cynthia Tseng
Chief Financial Officer


Last Updated 11/13/2008

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