The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception

In the fall of 2008, short-term credit markets were all but frozen, creating liquidity issues for banks and bank holding companies that could not rollover their debt at reasonable rates. Fearing that the situation would worsen if something was not done, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board invoked, and the Secretary of the Treasury approved, the use of the "systemic risk exception" (SRE) under the Federal Deposit Insurance Corporation Improvement Act of 1991, to provide unprecedented broad-based relief to struggling banks. The SRE permitted the FDIC to depart from its "least-cost" requirement when addressing failing banks. Under the auspices of the SRE, the FDIC implemented two programs: (1) the Debt Guarantee Program (DGP), which extended the FDIC's guarantee to newly issued debt instruments of FDIC-insured institutions, their holding companies, and their eligible affiliates; and (2) the Transaction Account Guarantee Program (TAGP), which provided unlimited deposit insurance coverage of non-interest-bearing transaction accounts. The DGP and TAGP were integral parts of a broad government response to systemic risk in the banking system and are considered successful elements thereof. Under the DGP, at peak usage, the FDIC guaranteed approximately $350 billion in newly issued bank debt. Under the TAGP, at peak usage, the FDIC guaranteed approximately $800 billion in non-interest-bearing transaction accounts at participating banks, offering for the first-time insurance over the statutory amount. The fees collected for the programs exceeded any losses covered by the government.