A plan proposed by the FDIC was made public on October 14th that focuses on guarantees for bank debt and deposits. Approximately $1.9 trillion is being offered to as coverage to US banks for any new debt and additional deposits.
According to FDIC Chairman Sheila Bair, the so-called temporary liquidity guarantee program is a “profound and unprecedented action” that will provide needed strength to weakened US credit markets.
Broken down, the guarantee plan will extend coverage to a senior unsecured debt pool of $1.4 trillion while including an additional $400 to $500 billion to protect transaction deposit accounts. These later accounts are the main sources that businesses use to pay for vendors, operating expenses, and payroll.
This measure by the FDIC is but a portion of the US Treasury Department’s plan. The guarantee program will be operating in concern with the department’s planned injection of $250 billion in capital, which is also meant to shore up US banks.
Chairman Bair also stated that providing extra security to businesses’ transaction accounts is vitally important because most have regular balances about the insurance limited of $250,000. The source of the problem was in the actions of many business owners. Companies were transferring deposits from smaller banks to larger ones. The perception was that larger banks were safer than smaller establishments. Of course, this created a liquidity issue with smaller institutions that were otherwise sound.
The FDIC deposit guarantees, which have been effect for a few days now, apply to non-interest-bearing transaction deposit accounts. These terms expire at year-end in 2009.
FDIC debt guarantees are applicable to senior unsecured debts that have been issued after October 14, 2008 and are in effect until June 30, 2009. The guarantee on that debt will last for three years.
The issue is characterized as a temporary one; therefore, as Bair suggests, the guarantee measures are by nature temporary as well.
Bair further stated that, “For insured depositary institutions, we’re dealing a confidence issue, not a capital solvency issue.”
Related Articles
- Consumer Reports Magazine Plans Credit Card Debt Education Article Consumer Reports magazine has received some new coverage recently regarding its plans to release a public education program meant to provide consumers with valuable information about credit card debt. In
- DebtFreeLeague.com Unveils Its National Debt Relief Stimulus Plan Since the latest economic recession began in December of 2007, the US economy has shown job losses numbering approximately 5.7 million. The result of this staggering depletion in the
- What’s The Better Choice To Deal With Debt: Consolidation Or Negotiation Many people are asking themselves, “How can I get rid of my debt?” For some, it is a cry of desperation because they are drowning in credit card debt.
- Latest Estimates On Performance Of U.S. Debt Issuers Ratings agency, Standard & Poor, has released its latest estimate on the performance of global debt issuers. Based on its rating system, the agency has stated that those issuers
- Financial Experts Recommend Lowering Interest Rates If you are like many Americans, you have thousands of dollars in credit card debt. Such debt is considered “bad debt” because it is unsecured and it can only worsen
