The encyclopedia · Finance & Accounting · Financial decision · 2008–2012
The FDIC guaranteed new bank debt and enrolled banks automatically, not on request.
The FDIC backstopped banks' new senior debt and made participation the default, so no bank was singled out and the funding run stopped.
Federal Deposit Insurance Corporation · U.S. banks and bank holding companies
the move
In the weeks after Lehman Brothers collapsed, banks were stuck with a self-fulfilling fear: each worried that borrowing would reveal weakness, so none would lend, and even healthy firms could not roll over their debts.
On October 14, 2008 the FDIC created the Debt Guarantee Program under a systemic-risk exception, guaranteeing new senior unsecured debt of participating banks and holding companies for up to about three years. It automatically enrolled eligible institutions and allowed only a one-time, irreversible opt-out.
Because participation was the default, no institution was singled out, and the FDIC charged a maturity-based fee. The guarantee let banks borrow with essentially public backing, calming the funding panic. The program ultimately stood behind 122 institutions and about $618 billion of debt, collected $10.4 billion in fees and paid out just $153 million on six defaults.
why it works
- A visible bailout choice stigmatizes whoever signs up
- Automatic enrollment made healthy banks participate too
- Maturity-based fees covered the program's expected losses
- The guarantee bypassed the least-cost rule via the systemic-risk clause
what transfers
A backstop that requires individual sign-up drives away the very institutions that need it; make the rescue the default and let the healthy quietly walk away.
what came after
The guarantee, along with capital injections and the commercial-paper facility, reopened unsecured funding. The program cost the insurance fund almost nothing because fees exceeded the tiny default losses, but its expansive use of the systemic-risk exception led Dodd-Frank to tighten the FDIC's emergency authority afterward.
references
- Temporary Liquidity Guarantee Program
- The United States' Debt Guarantee Program of the Temporary Liquidity Guarantee Program
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