US bank regulators eye options to end debt guarantee

September 9, 2009

By Karey Wutkowski
WASHINGTON, Sept 9 (Reuters) – U.S. regulators on Wednesday proposed two alternatives to phase out a government program that guarantees certain debt issued by banks.

The Federal Deposit Insurance Corp voted to put out for public comment one approach that would have the program expire on Oct. 31, as planned. It also proposed to have the program expire on that date but to establish a limited six-month emergency guarantee program that would be available to institutions suffering from market disruptions beyond their control.

The FDIC established the Temporary Liquidity Guarantee Program, or TLGP, in October to boost confidence in the banking industry, add more liquidity and reduce the risk of bank runs.

It provides a government guarantee on certain senior unsecured debt, mandatory convertible debt, and on banks’ transaction deposit accounts.

Regulators are now trying to phase out the program because conditions in the credit markets have eased, and officials do not want to promote reliance on the government aid.

“It has been a successful program but we would like to end it,” FDIC Chairman Sheila Bair said.

The agency started to phase out the program in March by extending the deadline to issue guaranteed debt by four months to Oct. 31, but also making it more expensive to participate in the program.

Under that deadline, the actual guarantee on the debt will expire no later than Dec. 31, 2012.

Bair said at the meeting on Wednesday that the agency wants feedback on whether to end the program “cold turkey” or to add in the six-month emergency facility. She said she does not expect that institutions would have to use the emergency guarantee facility, but it could be a wise safeguard.

The proposals are subject to a 15-day comment period.

As of Sept. 4, there was $304.1 billion in FDIC-guaranteed debt outstanding.

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