Earlier this week, the Federal Deposit Insurance Corporation (FDIC) adopted an interim final rule extending its Transaction Account Guarantee Program (TAGP) through December 31, 2010, and providing for possible further extensions through December 31, 2011, without additional rulemaking.  Institutions that are currently participating in the TAGP and do not want to participate in the latest extension have until April 30, 2010, to opt out.

The TAGP was adopted in October 2008 as part of the FDIC’s Temporary Liquidity Program, which was the FDIC’s response to the significant disruption in financial markets that existed at the time.  The TAGP facilitated the ability of insured institutions to retain transaction accounts by providing an unlimited guarantee of such funds should the institution fail.  The TAGP covered both noninterest-bearing transaction accounts and Negotiable Order of Withdrawal (NOW) accounts with interest rates of .50% or less, provided the institution committed to maintain that rate through the end of the program.  The TAGP’s was originally set to expire on December 31, 2009, but was extended by the FDIC through June 30, 2010, given continuing economic turmoil.

The TAGP was and is optional for insured institutions.  Participating institutions were originally charged a flat rate of 10 basis points annually on eligible TAGP amounts exceeding coverage by regular deposit insurance.  In conjunction with the extension of the TAGP through June 30, 2010, the fee was raised to 15 to 25 basis points, depending upon the particular institution’s risk profile.

The FDIC has now extended the TAGP through December 31, 2010.  The FDIC concluded that many institutions continue to face difficult economic conditions and financial markets.  In particular, the FDIC expressed concern that community banks and thrifts could suffer significant withdrawals of transaction accounts should the program end.  The FDIC views the extension as maintaining stability for insured institutions and promoting economic recovery.  Along the same lines, the FDIC incorporated authority for a further extension of the TAGP through December 31, 2011, if deemed necessary, without an additional rulemaking.  Any such extension would be issued no later than October 29, 2010. 

The FDIC is retaining the existing 15 to 25 basis point fee structure, depending upon risk profile, for participation in the TAGP.  The FDIC did, however, make two changes to the program.  After June 30, 2010, the eligibility requirement for NOW accounts is that rates be maintained at or below .25%, through December 31, 2010, and through any further extension period.  The FDIC attributed that revision to declines in market rates for such accounts since the creation of the TAGP.  Also, the FDIC changed the reporting for TAGP-qualifying accounts from an end-of-the-quarter total to average daily balances.  That revision would take effect for the September 30, 2010, Call or Thrift Financial Report (covering July 1, 2010, through September 30, 2010).  The FDIC believes that the reporting change will better measure TAGP-eligible accounts for assessment purposes given their inherent volatility.

As with prior involvement with the TAGP, participation in the latest extension will be voluntary.  Existing TAGP participants, which, according to the FDIC amount to about 80 percent of the industry, have until April 30, 2010 to opt out of the newest extension.  Opting out requires submission of an e-mail to the FDIC containing the information specified in the interim final rule.  An opt out is irrevocable.  A decision to remain in the TAGP through the December 31, 2010 extension obligates the institution to continue in any further extensions.  Institutions that opt out must post notice in the lobby of its main office and domestic branches and on its website (if it offers internet deposit services) that funds held in noninterest-bearing transaction accounts will not be guaranteed in excess of the $250,000 maximum deposit insurance limit after June 30, 2010.  Institutions that do remain in the program must update required disclosures on or before May 20, 2010, to reference December 31, 2010, as the termination date.  Further extensions may require additional updates.

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