FDIC Recordkeeping Proposal Meant to Facilitate Payments If Banks Fail

By Jeff Bater

Feb. 17 — The Federal Deposit Insurance Corporation (FDIC) proposed a rule requiring banks with more than 2 million deposit accounts to take steps that would facilitate rapid payment of insured deposits to customers if the institutions were to fail.

Since the crisis, the regulator has worked to improve its capabilities to manage the resolution of a large failed bank. The recordkeeping plan is meant to bolster the FDIC’s ability to provide depositors at large banks with the same rapid access to their insured funds that the FDIC provides when a smaller institution fails.

FDIC Chairman Martin Gruenberg said in a statement some banks offer insured accounts using complex structures and employ information technology systems that are more complex than smaller banks typically use. “The FDIC is proposing to achieve its goal by generally requiring banks with two million or more deposit accounts to improve the quality of their deposit data and make changes to their information systems so that the FDIC could make a prompt and accurate insurance determination,” he said.

Challenge to Insurance Determinations

In the crisis, the FDIC often had to resolve failing banks quickly. “In addition to these rapid failures, the financial condition of two banks with a large number of deposit accounts — Washington Mutual Bank and Wachovia — deteriorated very quickly, leaving the FDIC little time to prepare,” the agency said in the proposal. “If a large bank were to fail due to liquidity problems, the FDIC's opportunity to prepare for the bank's closing would be limited, thus further exacerbating the challenge to making prompt deposit insurance determinations.”

Currently, 36 banks with 2 million or more deposit accounts would be covered by the rule. Smaller institutions, such as community banks, will not be covered.

In the proposal, the FDIC said challenges to accurately determining and promptly paying deposit insurance become increasingly formidable as the size and complexity of the bank increases.

“Larger institutions are generally more complex, have more deposit accounts, greater geographic dispersion, multiple deposit systems, and more issues with data accuracy and completeness,” the FDIC said in its proposal. “The proposed rule would ensure that customers of both large and small failed banks receive the same prompt access to their funds, reducing disparities that might undermine market discipline or create unintended competitive advantages in the market for large deposits.”

Complete and Accurate Data

Under the proposal, the 36 banks would have to maintain complete and accurate data on each depositor. The companies would also be required to ensure their information technology systems are capable of calculating the amount of insured money for each depositor within 24 hours of a failure.

The FDIC would use the failed bank's IT system to facilitate the deposit insurance determination. The IT system would need to produce a record reflecting the amount of the deposit insurance available for each account, and be able to debit uninsured amounts from deposit accounts. The proposed rule would generally require covered institutions to build the capabilities within a two-year time frame.

The regulator recognized banks might face obstacles to collecting the required information for certain types of accounts. Because maintaining the information needed to calculate the amount of deposit insurance available on broker deposit or trust accounts might be infeasible, the proposal provides ways that a bank could obtain relief from the recordkeeping requirements under such circumstances.

Relief for Banks

A bank could apply for exemption from the rule if it will not take any deposits which would exceed the deposit insurance limits, the FDIC said. Furthermore, a bank could apply to the FDIC for an extension of the two-year implementation time frame if it has been unable to collect depositor information or complete development of its IT system's capabilities within that time.

The FDIC issued an advance notice of proposed rulemaking in April 2015 to solicit feedback on the recordkeeping plan . Banks have 90 days to comment on the latest proposal. An industry group said that making necessary enhancements will require a lot of effort on the part of banks. “Clearly, enhancing their internal systems to be responsible for determining what is and isn’t insured will involve significant staff time and cost for banks subject to the final rule,” Rob Strand, a senior economist at the American Bankers Association, said in an e-mail to Bloomberg BNA. “At the same time, these banks fully expect to meet the new requirements if given reasonable time to implement system upgrades.”

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Mike Ferullo in Washington at mferullo@bna.com

For More Information

The FDIC news release and proposal can be found at http://src.bna.com/cGq.