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Nutter Bank Report, October 2008

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1.  FDIC’s Temporary Liquidity Guarantee Program Explained
2.  Federal Reserve Will Purchase Commercial Paper
3.  SEC Issues Guidance on Mark-to-Market Accounting Rule
4.  Amendments to Massachusetts 18-65 Law Take Effect in November
5.  Other Developments:  Deposit Insurance and Bank Governance

Full Reports

1.  FDIC’s Temporary Liquidity Guarantee Program Explained

The FDIC on October 14 initiated the Temporary Liquidity Guarantee Program, under which the FDIC will temporarily guarantee two different types of bank liabilities.  First, the transaction account guarantee program provides full deposit insurance coverage for non-interest bearing transaction accounts, regardless of dollar amount.  This would cover accounts such as payroll accounts, which often exceed the current maximum insurance limit of $250,000.  Second, the debt guarantee program guarantees the payment of principal and interest on senior unsecured debt issued by eligible institutions from October 14, 2008 through June 30, 2009.  Coverage includes federal funds, promissory notes, commercial paper and inter-bank funding, and will expire on the earlier of the maturity of the debt or June 30, 2012.  The amount of debt covered is limited to 125% of the amount of debt outstanding as of September 30, 2008 that was scheduled to mature before June 30, 2009, although the FDIC may grant exceptions to the limit on a case-by-case basis.  An institution that had no outstanding debt on September 30, 2008 may apply to the FDIC to have some amount of debt covered by the guarantee program.  The Temporary Liquidity Guarantee Program will be funded through special fees assessed to participating institutions.

  • Coverage for both parts of the program will be automatic for all FDIC-insured institutions for the first 30 days starting on October 14 without any charge.
  • After November 12, eligible institutions that do not opt-out of the programs will be charged a 75-basis point fee for the debt guarantee and a 10-basis point surcharge on current insurance assessments for the additional coverage on non-interest bearing transaction accounts.
  • Institutions that do not wish to participate in the Temporary Liquidity Guarantee Program must inform the FDIC of the decision to opt out not later than 11:59 p.m. EST on November 12.
  • An institution may choose to opt out of either or both programs.  The choice to opt out is irrevocable.
  • Coverage under the program ends as of the date that the institution opts out, even if it is prior to the end of the initial 30-day period.
  • The FDIC will publish on its website, for both programs, a list of eligible institutions that have chosen to opt out.

Nutter Notes:  Eligible institutions include all insured U.S. depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies with at least one operating insured depository institution, and affiliates of insured depository institutions approved by the FDIC.  Each eligible institution must disclose to interested parties, in a commercially reasonable manner, whether or not its obligations are covered by the programs.  Effective as of December 1, 2008, an institution that does not opt out of the debt guarantee program must disclose in writing to any interested lender or creditor whether or not its newly issued debt is guaranteed under the program, and must post a notice in the lobby of its main office and each branch indicating whether the institution is participating in the transaction account guarantee program.  Issuers who do not opt out of the debt guarantee program after the program’s first 30 days will not be subject to the unsecured credit surcharge for commercial paper sold to the Federal Reserve under the Commercial Paper Funding Facility described below.

2.  Federal Reserve Will Purchase Commercial Paper

The Federal Reserve on October 7 announced the creation of the Commercial Paper Funding Facility (CPFF) under which the Federal Reserve will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.  A special purpose vehicle (SPV) funded by the CPFF began purchasing commercial paper from eligible issuers through the Federal Reserve Bank of New York’s primary dealers on October 27.  In the case of commercial paper that is not asset-backed commercial paper, issuers may be required to pay fees to secure the Federal Reserve’s financing or provide other forms of security acceptable to the Federal Reserve in consultation with market participants.  The SPV will hold the commercial paper until maturity and will use the proceeds from maturing commercial paper and other assets to repay the Federal Reserve Bank of New York.  The CPFF will finance only the purchase of highly rated, U.S. dollar-denominated, three-month commercial paper.  The maximum amount of a single issuer’s commercial paper that the SPV may own at any time will be the largest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between January 1 and August 31, 2008.  The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds that limit.

Nutter Notes:  Only U.S. issuers of commercial paper, including U.S. issuers with a foreign parent, are eligible to sell commercial paper to the SPV.  The SPV will not purchase outstanding commercial paper from investors.  Pricing will be based on the then-current three-month overnight index swap rate plus fixed spreads (lending rates will be posted on the Federal Reserve Bank of New York’s website each day at 8:00 a.m. EST).  The spread will be 300 basis points for asset-backed commercial paper and 100 basis points for unsecured commercial paper.  Each issuer of unsecured commercial paper will also be charged a 100 basis point unsecured credit surcharge unless the issuer provides a collateral arrangement for the commercial paper or obtains an indorsement or guarantee of its obligations on the commercial paper that is acceptable to the Federal Reserve Bank of New York (such as the debt guarantee under the FDIC’s Temporary Liquidity Guarantee Program).  Issuers must register with the CPFF in order to sell commercial paper to the SPV, and must pay a facility fee equal to 10 basis points of the maximum amount of each issuer’s commercial paper the SPV may own when it registers.  The registration period began on October 20 and registration materials are available on the Federal Reserve Bank of New York’s website.  The SPV will cease purchasing commercial paper on April 30, 2009, unless the Federal Reserve extends the facility.  The Federal Reserve Bank of New York will continue to fund the SPV after that date until the SPV’s underlying assets mature.

3.  SEC Issues Guidance on Mark-to-Market Accounting Rule

The U.S. Securities and Exchange Commission and the Financial Accounting Standards Board (FASB) have jointly issued an interpretation of the mark-to-market accounting rule (FASB Statement No. 157) that may ease the impact of other-than-temporary impairment of investment securities on financial results reported for the third quarter by financial institutions.  The accounting guidance announced on September 30 indicates that management’s internal assumptions, such as expected cash flows, can be used to measure the fair value of investment securities when relevant market evidence does not exist.  The interpretation says that input from different sources may collectively provide the best evidence of fair value in some cases.  The SEC and FASB advised that market prices resulting from inactive markets are not necessarily determinative of value, and the determination of whether a market is active or inactive is subjective.  Disorderly transactions and a significant increase in the spread between sellers’ asking prices and buyers’ bidding prices can be indicative of an inactive market.  In such cases, expected cash flows could be considered alongside other relevant information.

Nutter Notes:  The interpretation suggests that it might even be more appropriate to consider alternative sources of information like expected cash flows rather than market quotes to value illiquid investment securities.  The SEC and FASB advise institutions to place less reliance on broker quotes that do not reflect the results of market transactions in weighing a quote as an input to fair value.  Accounting standards have long required that financial assets be carried at their fair value, but FASB Statement No. 157, which became effective in 2006, clarified that market quotes should generally be used to determine fair value for investment securities.  Under FASB Statement No. 157, there is a three-level hierarchy of valuation inputs for investment securities, with market quotes at the top if there is an active market for a security.  If there is no such market, the value may be based on market prices of similar securities.  FASB Statement No. 157 allows an institution to use its own internal model to value a security only if a valuation cannot be reached using inputs from the first or second level (which would include quoted prices in markets in which there are few transactions for the asset or liability).  The Emergency Economic Stabilization Act of 2008 (EESA) authorized the SEC to suspend the mark-to-market accounting rule.  The accounting guidance on FASB Statement No. 157 was issued before the EESA was approved by Congress and the SEC has not invoked its authority to suspend the existing rule.

4.  Amendments to Massachusetts 18-65 Law Take Effect in November

A recent amendment to Chapter 167D, Section 2(1) of the General Laws of Massachusetts (the 18-65 Law) will allow banks in Massachusetts to charge certain fees to eligible depositors that are currently prohibited by the 18-65 Law.  The amended law, which becomes effective on November 4, also includes some new requirements and additional clarifications about the types of covered accounts and impermissible fees.  The current 18-65 Law prohibits Massachusetts banks from imposing any fee against a savings account or demand deposit account of any person aged 65 or older or 18 or younger (an “eligible depositor”).  The amended 18-65 Law will affirmatively require all banks to make available a demand deposit account and savings account to eligible depositors, and to make each such account available as a joint account for the spouse of the eligible depositor, regardless of age.  The amendment also adopts the interpretation in Massachusetts Division of Banks Regulatory Bulletin 3.3-101 (Guidelines for “18-65” Accounts) that the term “savings account” includes a regular passbook, statement savings or regular NOW account.  The amended 18-65 Law will continue to prohibit banks in Massachusetts from imposing a service, maintenance or other similar charge on a savings or demand deposit account held by an eligible depositor.  Such accounts also may not be subject to a minimum balance requirement, and may not impose a charge for a check, deposit or withdrawal, or a fee for the bank’s basic line of checks.  The amended law will continue to allow banks to charge an insufficient funds fee determined by the Commissioner of Banks.

Nutter Notes:  The amended law will allow banks to assess fees (in accordance with a published service charge schedule) for services not directly associated with the deposit, withdrawal or transfer of funds from accounts as determined by the Commissioner and fees for stop payment orders, wire transfers, certified or bank checks, money orders, deposit items returned, ATM transactions, and other electronic transactions.  Regulatory Bulletin 3.3-101 interprets the current 18-65 Law to prohibit all of the aforementioned fees except fees for ATM transactions and other electronic transactions if the use of an ATM or other electronic access is an optional account feature.  Any change in the fees applicable to a deposit account may be subject to the 30-day advance notice requirement under the Federal Reserve’s Regulation DD.  (Compliance with Regulation DD is deemed to be compliance with the Massachusetts consumer account disclosure law under the Commissioner’s regulations.)  The amended 18-65 Law also requires banks to post a notice in each branch in a manner to be prescribed by the Commissioner informing consumers of the availability of accounts for eligible depositors.  The Commissioner has not yet issued the regulatory guidance required by the new law and has not yet updated or revised interpretations of the current 18-65 Law in Regulatory Bulletin 3.3-101 that are inconsistent with the amendments.

5.  Other Developments: Deposit Insurance and Bank Governance

  • FDIC Proposes Assessment Increases and Changes Mortgage Coverage

The FDIC published a proposed rule on October 16 that would uniformly increase the rates banks pay for deposit insurance by 7 basis points and adjust the system that determines what rates banks pay to require riskier institutions to pay at higher rates.  The FDIC also approved a final rule effective as of October 10 that simplifies deposit insurance coverage for mortgage servicers’ accounts to avoid uncertainty about the extent of deposit insurance coverage and enable the FDIC to pay deposit insurance more quickly.

Nutter Notes:  The FDIC deposit insurance premium increase would become effective for the first quarter of 2009 under the proposal.  The coverage for lenders and investors on a mortgage servicing account will now be based on each borrower’s payments of principal and interest, up to $250,000 per borrower, which prompted Fannie Mae to reverse a decision to require some institutions to deliver funds collected from borrowers immediately to Fannie Mae.

  • Massachusetts Bank Governance Statutes Amended

Chapter 252 of the Acts of 2008, which becomes effective on November 2, makes certain amendments to corporate governance provisions pertaining to Massachusetts-chartered savings banks, cooperative banks and trust companies.  The new law revises some governance changes made by Chapter 221 of the Acts of 2006.

Nutter Notes:  Amendments include a requirement that reports by the treasurer of each mutual savings bank to the bank’s board of investment be quarterly, rather than monthly, and a provision raising the threshold for loans that must be included in the treasurer’s report of savings banks, cooperative banks and trust companies.  A separate rule for trust companies clarifies the role of the executive committee.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP.  Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation in the 2007 Chambers and Partners U.S. rankings.  The “well known and well-versed” Nutter team “excels” at corporate and regulatory banking advice, according to the 2007 Chambers Guide.  Visit the 2007 U.S. rankings at  The Nutter Bank Report is edited by Matthew D. Hanaghan.  Assistance in the preparation of this issue was provided by Rena Marie Strand and Lisa M. Jentzen.  The information in this publication is not legal advice.  For further information, contact the practice co-chairs:

Kenneth F. Ehrlich 
Tel: (617) 439-2989 

Michael K. Krebs
Tel: (617) 439-2288


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