FDIC Shores Up Bank Liquidity

This morning the Federal Deposit Insurance Corp. unveiled details of a plan that aims to free up lending between banks and greatly reduce the risk of runs on deposits.

The temporary liquidity guarantee program guarantees new senior unsecured debt issued by financial institutions and provides unlimited deposit insurance coverage on all non-interest bearing transaction deposit accounts, even those exceeding the FDIC's $250,000 individual insurance limits.

The moves are part of a sweeping plan to shore up confidence in the banking system, which has dried up lending and sent equities into a tailspin. Federal officials Tuesday morning said they would use $250 billion of the $700 billion bailout package recently approved by Congress to buy preferred stock in a number of banks. Treasury Secretary Henry Paulson said nine financial institutions have agreed to the plan and published reports have identified Goldman Sachs (GS Quote), Morgan Stanley (MS Quote), JPMorgan Chase (JPM Quote), Bank of America (BAC Quote), Citigroup (C Quote), Wells Fargo (WFC Quote) and other large bank holding companies as among the participants.

Inter-bank Credits

Banks, thrifts or holding companies can participate in the federal program to guarantee new senior unsecured debt issued through June 2009. Debt will be guaranteed for a maximum of three years.

The program limits the guaranteed debt to 125% of debt outstanding as of Sept. 30, that was scheduled to mature by June 30, 2009.

There will be no fees for the coverage for debt issued over the first 30 days. After that, the fee will be an annualized 75 basis points on the amount of the insured debt.