In the most prominent sign yet that policymakers are creating an exit strategy for government intervention in the banking business, the Federal Deposit Insurance Corp. (FDIC) on Wednesday set in motion the end of its debt guarantee plan.
The agency's board unanimously issued a proposal that generally would stop banks and their holding companies from issuing FDIC-protected debt after Oct. 31.
The plan laid out two options for winding down the debt coverage nearly a year after it was launched as part of the FDIC's Temporary Liquidity Guarantee Program. Under one option, all participants would have to cease issuing debt on that date. The other option would end the main program but establish an additional six-month window for institutions in dire straits to apply for an emergency guarantee.
"It has been a successful program, but we would like to end it," FDIC Chairman Sheila Bair said at the board meeting.
The proposal, which gives the industry 15 days to comment, comes as officials throughout the government consider ways to disentangle Washington from the industry one year after unprecedented action was taken to avoid a meltdown.
Federal Open Market Committee (FOMC) officials at the Federal Reserve Board, for example, spent much of their August meeting debating how best to wind down the central bank's long list of liquidity programs, according to minutes of the meeting released last week.
At the FDIC meeting Wednesday, Vice Chairman Martin Gruenberg said it was important to stress the government's support is temporary. "Just in case anybody forgot, I thought there was some virtue in signaling it and making sure there is broad public attention to it, by issuing this notice of rulemaking to remind the markets and the public that the program is scheduled to come to a conclusion," he said.
Interest in the program appears to be waning. Participation and the amount of debt covered had risen steadily since the launch, hitting a peak in May of 101 issuers and $346 billion in debt outstanding. But June was the first month in which issuers decreased, dropping to 97. As of June 30, the FDIC guaranteed $339 billion worth of debt. That was only a slight increase, of $6 billion, from the first quarter. By the end of July, debt outstanding dropped to $320 billion, and the number of issuers had decreased to 94.
But by offering a way for the FDIC to back bank debt in emergency situations, it was clear the agency sees a risk in removing the guarantee from entities still not able to issue debt on their own.
Under that option, the application process would be open to all insured institutions, as well as holding companies that had already issued guaranteed debt through the program.
The agency said it would review applications "on a limited, case-by-case basis." Bair, after consulting with the board, would have to sign off on any emergency approval. Applicants would have to provide evidence of their inability to issue debt on their own, and if approved, would owe the FDIC an annualized fee of $3 for every $100 guaranteed.
"Staff envisions that the fees and restrictions … will make sure that the emergency guarantee facility is only used by institutions under the most severe circumstances — those that truly cannot issue nonguaranteed debt when their guaranteed debt matures," said Ann Johnson, an FDIC counsel.
The debt protection program was launched in October 2008 along with the Treasury Department's broader measure to infuse banks with capital. As part of the FDIC's liquidity guarantee program, the agency also committed to guaranteeing all zero-interest checking deposits for institutions that wanted such protection.
Wednesday's proposal avoided the type of guarantee extension approved in March. The debt guarantee program had originally been set to end in June, but entities were given four more months to issue, and six additional months of coverage to the end of 2012. The agency raised fees for those using the extended program. Last month, the FDIC also extended the extra deposit coverage for six months through 2010.