WASHINGTON/NEW YORK - US REGULATORS on Friday changed a Federal Deposit Insurance Corp (FDIC) debt guarantee programme to help unfreeze credit markets by encouraging American banks to issue hundreds of billions of dollars in new debt.

The market could see roughly US$50 billion (S$76.4 billion) in new debt issued each month through June 30 because of lower fees and other technical changes, according to a Bank of America report.

The FDIC board agreed to modify the agency's Temporary Liquidity Guarantee (TLG) programme, which was initially put in place last month to reduce banks' funding costs and increase their liquidity. The programme is expected to fill a financing gap for banks shut out of the corporate bond market by skyrocketing yields.

'The goal of the TLG programme is to bolster our economy by placing banks on a strong, stable liquidity footing so that they can maximise their capability to engage in prudent lending,' FDIC Chairman Sheila Bair said at the FDIC meeting.

The FDIC added three tiers of pricing for guarantee programme fees charged to banks, based on the debt's maturity. It also created a prompt payment mechanism in case of a payment default, and excluded short-term debt with a maturity of 30 days or less from the programme.

The two changes could promote wider use of the programme.

More than US$600 billion of dollar-denominated US financial debt is set to mature through the end of 2009, Morgan Stanley has estimated. Without the FDIC guarantee programme, banks may have been forced to pay some of the highest yields in decades to help refinance the debt.

The FDIC programme is intended to insure a pool of about US$1.4 trillion in new senior unsecured debt and also up to US$500 billion in transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.

Lower fees
All FDIC-insured institutions are now covered in the programme at no cost, but they must start paying a sliding scale of fees for the guarantees after Dec 5.

Debt maturity of 180 days or less will have an annualised assessment rate of 50 basis points, while debt of 181 to 364 days maturity will cost 75 basis points. Debt with a maturity of 365 days or greater will cost 100 basis points.

The FDIC originally planned to charge a standard fee of 75 basis points to guarantee eligible debt.

US banks balked at the proposed rate. A group including JPMorgan Chase, Citigroup and Bank of America sent a letter to the FDIC, saying the high cost could drive banks away from the overnight federal funds market.

'Such an outcome would not achieve the FDIC's goal of improving short-term unsecured interbank funding markets,' the letter said.

The FDIC also altered the guarantee programme to exclude any overnight borrowing, or short-term borrowing of 30 days or less, after US banks said that could disrupt the market.

Another big change makes it easier for investors to get repaid in case of default by a bank.

The FDIC's guarantee will now be triggered by payment default rather than a receivership or bankruptcy which would have forced investors to work through a legal process to obtain their principal if a bank got into trouble, according to the Bank of America report.

Citigroup said the change in default terms 'makes the guarantee very robust' for investors and it intends to participate in the programme. 'We have an integrated liability and funding programme and the TLGP is a very useful enhancement to that programme, particularly after the enhancement to the guarantee to provide timely payment,' Citi said in a statement.

The FDIC guarantee programme was created to complement the Treasury Department's US$250 billion capital injection plan for US banks and the Federal Reserve's commercial paper funding facility. The measures came at a time when interbank lending had almost ground to a halt.

Ms Bair said the coordinated actions have meant lower interest banks for interbank lending and for short-term commercial paper.

'While it is clearly too early to declare the end of the financial crisis, we are making steady progress in returning money and credit markets to a more normal state,' she said.

The FDIC guarantee for bank debt applies to senior unsecured debt issued between Oct 14, 2008, and June 30, 2009.

The guarantee will last for three years. -- REUTERS