Bloomberg News

Bair ‘Disappointed’ Banks to Repay U.S. With Short-Term Debt

November 01, 2011

Oct. 27 (Bloomberg) -- Sheila Bair, the former Federal Deposit Insurance Corp. chairman, said she’s disappointed that banks are repaying billions of dollars from an emergency credit program instead of refinancing the longer-term debt, which may leave them more dependent on short-term financing.

Bair’s comments today at the Buttonwood Gathering in New York followed an Oct. 14 Bloomberg News report that some banks that received funding through the FDIC’s Temporary Liquidity Guarantee Program were making so few new loans that they were shrinking their balance sheets or growing them so slowly that they didn’t need the debt.

“It’s short-term thinking” for banks to let their FDIC- guaranteed bonds expire without replacing them with longer-term debt, Bair said. “One of the problems in the crisis was an over-reliance on short-term funding,” she said. With TLGP, “we wanted to encourage longer-term funding.”

Bair said she “sighed” when she heard that a couple of banks are going to let their TLGP debt expire, “as though that’s a good thing.”

The decision to guarantee bank holding companies’ debt during the 2008 financial crisis was a “tremendous risk” for the FDIC, she said.

“We want to normalize lending activity again,” Bair said in an October 2008 conference call with bankers. “We want to unlock the interbank markets and get that money going out to your customers, to your consumers and to your business borrowers.”

Thawed a Market

European leaders said in a statement that they’re considering a similar guarantee program to help lenders reduce their reliance on short-term funding.

Banks using the TLGP received an FDIC guarantee for their debt in return for a fee, allowing them to borrow at rates close to U.S. Treasuries. The program thawed a market paralyzed from the crisis. Banks issued almost $350 billion of debt under the program at its peak. As of Aug. 31, the lenders had $231 billion outstanding, with all of it coming due by the end of 2012.

The FDIC has received more than $10 billion in fees.

Bank of America Corp. and Citigroup Inc. are among firms that have said they plan to repay rather than roll over their debt.

While lawmakers have urged lenders to help create jobs, demand for loans is weak and burgeoning deposits mean banks don’t need to hang on to the cash they received when they sold the U.S.-backed debt. Total loans and leases at the end of the second quarter dropped 8.6 percent to $7.31 trillion from the same period in 2008, FDIC data show.

General Electric Capital Corp., the finance arm of Fairfield, Connecticut-based General Electric Co., is the biggest user of the guarantees with $45 billion outstanding, according to the FDIC. New York-based Citigroup is second with $44 billion. Bank of America had $27.5 billion, according to the Charlotte, North Carolina-based company.

--Editors: Peter Eichenbaum, Dan Kraut

To contact the reporter on this story: James Sterngold in New York at jsterngold2@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.


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