The Federal Deposit Insurance Corporation (FDIC) may offer a six-month emergency extension to its debt-guarantee component of the Temporary Liquidity Guarantee Program (TLGP) that guarantees more than $270 billion of debt sold by U.S. banks.

The FDIC is considering two alternatives. Under the first, as planned, the program would expire October 31st with the FDIC’s guarantee for such debt issued through the program expiring before December 31, 2012. According to the second, the debt guarantee program will end October 31, but for an emergency, the FDIC would extend the guarantee facility by six months. The proposed extension is intended to address emergency circumstances for insured depository institutions and some other entities participating in the program.

Institutions would have to apply to the FDIC for approval to participate in the extended program and show that they were unable to issue non-guaranteed debt due to market disruptions or other emergency circumstances.

According to the proposal, the emergency extension would cover debt issued through April 30, 2010, for any banks that get agency approval.

According to the FDIC Chairman, the TLGP has been very effective at helping financial institutions fight against the uncertainty that weighed down on the credit markets at the height of the financial crisis. As domestic credit markets are recovering and the number of entities utilizing the Debt Guarantee Program has decreased, FDIC does not expect institutions to need further access to the program, and thus intends to end it.

The program was started last October at the height of the financial crisis to help unfreeze bank-to-bank lending. Under the program, the FDIC has provided temporary insurance for inter-banks loans, guaranteeing the new debt in the event of payment default by the borrowing bank. As of September 4th, $304.1 billion in debt was outstanding under the program and 94 financial institutions have used it to issue debt.

As of July the FDIC guaranteed on more than $270 billion of debt sold by companies including General Electric (GE), Citigroup (C), Bank of America (BAC), J.P. Morgan Chase (JPM), Morgan Stanley (MS) and Goldman Sachs (GS).

In our view, though the domestic credit and liquidity markets appear to be normalizing, an extension of the debt guarantee facility will be helpful to speed up the complete recovery process.
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