Recently, the FDIC finalized the Temporary Liquidity Guarantee Program, or TLGP, providing banks with a chance to issue government-guaranteed debt. This opportunity is a narrow window that can be used to ease the strains on financial institutions, particularly when they are refinancing maturing debt of several months’ time. By using the TLGP, many banks will be better equipped to lend to both consumers and businesses.
Many investors and analysts consider the FDIC guarantee to be equal to the full faith and credit of the United States. This makes it a stronger guarantee of debt than those offered by Fannie Mae and Freddie Mac.
Some experts are expressing favorable reviews of the TLGP. More to the point, it will be measure of trust that banks and other financial institutions put in this new program that will help to persuade consumers and businesses to buy up the guarantees.
Until the plan was on the table, US banks trying to defray the exorbitant costs of issuing debt have had to rely on the Federal Reserve’s Commercial Paper Funding Facility to refinance maturing debt. The only problem with this approach was the fact that the program had limitations on what debt could be adjusted. Only short-term debts were applicable. Once the commercial paper matured a few months later, the debt problem cropped back up for most banks.
The intervention of the FDIC via the TLGP has allowed for a sound means to guarantee timely principal and interest payments in the event a bank must default on its debt. In order to take advantage of the program, banks, thrifts, and other financial institutions will be required to pay a set fee.
The only downside the to the FDIC guarantee program is that it has managed to create problems in the area of agency debt. A new form of security is put in place to create competition for the same investors searching for government-backed bonds, yet producing better yields than the Treasury.
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