FDIC to Insure New Bank Debt, as Bailout Net Widens

President Bush said Tuesday the Federal Deposit Insurance Corporation will temporarily insure new bank debts and non-interest-bearing deposits as part of an increasingly expanding plan to bolster the ailing U.S. banking system. The move is the latest attempt by regulators and administration officials to get money to flow more freely between banks. “This will address one of the central problems plaguing our financial system — banks have been unable to borrow money, and that has restricted their ability to lend to consumers and businesses,” Bush said in a press conference Tuesday morning. The so-called Temporary Liquidity Guarantee Plan will guarantee, for a fee, certain newly issued senior unsecured debt issued before June 30, 2009. Such debt will be fully protected in the event the issuing institution fails, or its holding company files for bankruptcy; the plan includes promissory notes, commercial paper, inter-bank funding and any unsecured portion of secured debt. (In other words, everything on the debt side of the balance sheet). “The FDIC is taking this unprecedented action because we have faith in our economy, our country, and our banking system,” said FDIC chairman Sheila C. Bair, in a press statement. Government officials hope this guarantee will remove the fear of lending amongst financial institutions, and in turn, lower the short-term lending rates. Coverage will intiially be limited to June 30, 2012 — or so they tell us now. More than a few government programs that begun under the auspices of “temporary” have ended up being anything but, as the increase in conforming lending limits illustrates. In addition to debt coverage, the FDIC is offering banks unlimited deposit insurance for non-interest bearing bank accounts, much like several European countries do. Often, these accounts, generally used by small businesses, exceed the current maximum limit of $250,000. “By insuring every dollar in these accounts, we will give small business owners peace of mind…and bring greater stability to the banking system,” Bush said. The program will be funded through special fees, and will “not rely on taxpayer funding,” said Bair. The FDIC, however, now has an unlimited line of credit via the U.S. Treasury via recently passed bailout legislation. “The overwhelming majority of banks are strong, safe and sound,” Bair said.  “A lack of confidence is driving the current turmoil, and it is this lack of confidence that these guarantees are designed to address.” As reported by the Wall Street Journal, the FDIC’s fundamental role in the plans announced today is consistent with its presence during historical banking crises like the Great Depression and the savings and loan crisis. Each crisis ignited a “major boost” in the agency’s power — just like today. “When money flows more freely between banks, it will make it easier for Americans to borrow for cars, and homes, and for small businesses to expand,” Bush said. Editor’s note: To contact the reporter on this story, email [email protected].