FDIC Debt Guarantees Extended - What Are the Fed's Options?

by: Zubin Jelveh

In discussing the recent federal funds oddities, there was some discussion of when the FDIC would start to charge banks for insuring fed funds transactions.

It turns out that the effective date is no longer Nov. 13, but Dec. 5. Via Wrightson-ICAP:

The FDIC has extended the free coverage period for overnight maturities for an extra three weeks while it decides how best to handle guarantees in that sector. We don't think any final decisions have been made

There are three things the FDIC could conceivably do: 1) scrap the fee altogether 2) lower it 3) keep it the same. Most market participants would probably prefer the first two, and the fact that the FDIC pushed back the date hints they might be leaning in that direction as well. The main issue is that assessing a fee on fed funds transactions (for those institutions that opt to stay in the FDICs temporary program), counteracts the benefits of paying interest on excess reserves.

And now a correction: In the comments to a previous post I said that the FDIC fee on fed funds would be charged to the issuer. That is not the case, the fee -- if the FDIC does not scrap it --  will be assessed on the purchaser.

Speaking of fed funds, the effective rate has crept higher over the last two sessions though is still far below the one percent target rate, and this situation will likely continue as the Libor continues its descent.