End of guarantee programs might just hit some banks

The headline from today’s Wall Street Journal:

The Federal Deposit Insurance Corp. is preparing to wind down an emergency program it launched last year, which could become an early test of how the banking industry will fare without extraordinary government assistance.

The FDIC’s program, which guaranteed debt issued by banks, is credited with helping to stabilize the financial system during last year’s turmoil. The agency said it was considering either letting the debt-guarantee program expire on Oct. 31, or continuing it for another six months for “emergency” purposes. The latter would require case-by-case approval from FDIC Chairman Sheila Bair and a hefty fee from participants. “As domestic credit and liquidity markets appear to be normalizing and the number of entities utilizing the Debt Guarantee Program has decreased, now is an important time to make clear our intent to end the program,” Ms. Bair said.

If anything, this could only add to the number of (small) banks seized by the FDIC.  But even with that said, I don’t believe it would have a significant impact on that given the FDIC’s flexibility to some who might need “emergency” guarantee for additional funding necessary.

The FDIC’s proposal said any company participating in the “emergency” scenario would face an annualized fee of at least 300 basis points, or 3% of the amount of debt issued, substantially more than the 75 basis points initially charged. The FDIC could increase the fee if it felt the case posed a greater risk to the agency.

The groups of JP Morgan, BofA, and Wells Fargo should have an easier time raising debt from the markets.  I doubt they even care much about this.

Read the entire WSJ report.

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