Q: What’s not a government bond or cash but has a zero-per cent risk capital weighting?
A: A bond sold as part of the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program.
(A big hat tip to Reuters columnist Rolfe Winkler for spotting the below).
A new question and answer was recently added to FDIC’s FAQ section on its TLGP:
Q: What is the risk weight for risk-based capital purposes for a bank’s holding of bank or bank holding company debt guaranteed by the FDIC under the Temporary Liquidity Guarantee Program (TLGP)?
A: The preamble to the final TLGP rule states that TLGP-guaranteed debt may be risk weighted at 20 percent. After reviewing the legislative history of the U.S. government’s full faith and credit backing of the FDIC, the FDIC has determined that TLGP-guaranteed debt may be risk weighted at 0 percent. This risk weight is effective as of September 29, 2009. At a bank’s option, it may elect to apply this risk-based capital treatment for purposes of the regulatory reporting period ending on September 30, 2009.
Which basically means that, unlike other bonds, banks will not have to hold any capital against TLGP-guaranteed bonds. As Winkler notes, FDIC-backed debt is now the “functional equivalent of Treasuries”: it’s risk-free, at least in terms of regulatory risk. The implication is that banks will be able to hold more of the debt — or keep their existing TLGP-guaranteed debt without using up as much capital.
The TLGP, started in October 2008, has two primary components: the Debt Guarantee Program, in which the FDIC guarantees the payment of certain newly issued senior unsecured debt, and the Transaction Account Guarantee Program, where it guarantees certain non-interest-bearing transaction accounts.
The DGP issuance portion of the TLGP came to an end on October 31 — banks are no longer allowed to issue FDIC-guaranteed short-term debt. But the FDIC debt guarantee will continue until the end of 2012 — which is presumably, why banks will now be allowed to hold such debt with a risk weighting of zero.
SeekingAlpha had a good post on the subject of the TLGP:
One of the most successful government programs to stabilize the financial system has been the FDIC’s Temporary Liquidity Guarantee Program (TLGP). It allowed banks to issue short-term notes that are backed by the FDIC. The media generally focuses on the fact that the guaranteed paper was significantly cheaper for banks than issuing notes on their own. This is correct - once investors realized that this is truly a government program, it started trading much closer to treasuries (although people felt that there was some political risk associated with the guarantee) . . .
A total of $329.5 billion of notes have been guaranteed by the FDIC . The question of course is who has been most active in utilizing this program. The usual suspects are there: C, BAC, JPM, etc. But the largest user (and the entity to which the FDIC has the most risk) has been GE Capital (GE) (close to $90 billion). “We bring good things to life” means we bring lots of FDIC guaranteed paper to the market. Next time you screw in a light bulb, just remember your tax dollars have kept the lights on, literally.
That’s the biggest banks in terms of issuing TLGP-backed debt.
If anyone, by any chance, has the data for who holds the most TLGP-guaranteed debt, we’d be interested to see it.
Related links:
Introduction to capital - FDIC
JP Morgan raises $3 billion without FDIC guarantee - Bloomberg
Citi still using FDIC TLGP - CalculatedRisk
