Bank debt: FDIC covers failure to pay
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Bank debt: FDIC covers failure to pay

Government provides a bridge for primary market funding.

On Friday, November 21, the Federal Deposit Insurance Corp bowed to the demands of the US banking industry and improved the terms of the guarantee of newly issued senior unsecured bank debt that it first proposed amid the systemic panic of October.

FDIC chairman Sheila Bair

Sheila Bair hopes banks will draw down heavily on the re-worked temporary liquidity guarantee programme

"We are confident that the changes our board approved today will create significant investor demand, and dramatically reduce funding costs for eligible banks and bank holding companies," said FDIC chairman Sheila Bair. "I expect that the industry will take full advantage of this guarantee." The programme is designed to be self-funding out of fees charged to banks using it, with no recourse to taxpayers. However it is, potentially, a vast extension of the federal government guarantee. The volume of guaranteed debt will depend on how many banks sign up to the programme before the deadline to opt in or out of December 5 but it could amount to 35% of the entire US corporate bond market, or up to $1.4 trillion.

Jeffrey Rosenberg, credit strategist at Bank of America, sums it up thus: "The government is providing a bridge in funding capacity to see banks through the process of deleveraging their balance sheets and through the economic downturn."

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