Resolution: Deposit Insurance—Burden Shifts to Bank

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On April 21st, the FDIC proposed new requirements for its largest supervised banks (37 institutions) to improve the record keeping of their deposit accounts. Issued via an Advanced Notice of Proposed Rulemaking (“ANPR”), the proposal shifts the obligation of calculating FDIC deposit insurance payouts from the FDIC to the banks.

The agency has for some time been concerned about its ability to accurately calculate deposit insurance payouts during a short window following the failure of a large bank. These concerns are in part fueled by the current trend of deposit concentration at the largest banks, and the banks’ (and perhaps the FDIC’s) inadequate technological capability to timely process significant volumes of data.

We expect meeting these proposed requirements to be challenging for banks, especially with respect to obtaining necessary account information that is not currently collected. In addition, banks will need to significantly invest in their data systems to be able to maintain and process this (and other) information in a standardized format, and to calculate insurance payouts at the end of each business day.

This record keeping proposal is the FDIC’s latest to improve the resolvability of financial institutions. [1] Accurate estimates of deposit payouts play a central role in the FDIC’s choice of strategy to resolve a failed bank (e.g., liquidation versus sale to other banks), especially with respect to the decision to establish a bridge bank and transfer some or all deposits to it, as noted in last year’s resolution planning guidance. [2] Since an unsuccessful resolution would reflect poorly on the agency, we expect a substantial increase in the level of the FDIC’s scrutiny of banks in this area, including more frequent and detailed FDIC examinations.

This post offers relevant background, and our view of the proposal’s key challenges and of what’s next.

Background

The Federal Deposit Insurance Act requires the FDIC to pay out deposit insurance to eligible depositors “as soon as possible” following a bank failure. [3] Although the law does not prescribe a specific timeframe, the FDIC has traditionally aimed to make payouts within one business day (usually by the Monday after a Friday failure), largely to maintain public confidence in the banking system. The FDIC’s ability to act promptly in this regard depends on the agency’s ability to calculate the amount owed to each depositor in an accurate and timely manner.

To facilitate this process, in 2008 the FDIC issued requirements for larger banks [4] to maintain the technological capability to provide the agency with basic account information (e.g., account-type and owner’s name/address) at the close of each business day. In addition, to prevent deposit insurance overpayment, the 2008 rule requires banks to have an automated process for placing holds on account balances that exceed certain thresholds. [5]

Industry developments since 2008 have contributed to the FDIC’s concerns about its ability to quickly and accurately calculate deposit insurance payouts following a failure at a large bank. Most notably, despite efforts to increase resolvability of the so-called “Too Big To Fail” institutions, the largest US banks have become larger and more complex. As part of this trend, deposits have become increasingly concentrated in these institutions.

Key challenges

Technological capabilities to generate and process the necessary data to determine deposit payouts have lagged. FDIC examinations (and recent bank closures) reveal that the industry’s efforts to meet current requirements fall short of expectations (e.g., due to missing or inconsistent data). Furthermore, the FDIC’s current systems are likely not able to receive and timely process the necessary volume of data following a large bank’s failure.

Therefore, the proposal requires that the largest FDIC-supervised banks maintain more accurate and complete data on deposit accounts and, more importantly, be able to calculate insurance payouts to each depositor at the end of each business day for “closing night deposits.” This large subset of deposits includes those that customers have the greatest need to immediately access, such as checking and money market accounts. Concurrently, banks must be able to place automatic holds on other deposits (i.e., “post-closing deposits”), [6] pending calculation of their payout amounts. [7]

To be able to meet these proposed requirements, banks will have to maintain substantially more accurate and complete data than they currently do. In some instances, this effort will mean collecting information that has not been traditionally collected, such as each individual’s ownership interest in a brokered deposit account. In other cases, banks will have to enhance their data processing capabilities to, as examples, identify and aggregate amounts owned by the same person in separate deposit accounts under slightly different names or addresses.

What’s next?

As an ANPR, the FDIC issuance is not highly prescriptive. It poses many questions for public comment, particularly regarding (a) to which institutions the requirements should apply, (b) the ability to leverage compliance efforts in other areas (e.g., anti-money laundering), and (c) the appropriate implementation timeline.

The breadth of questions, in our view, indicates the FDIC’s flexibility to develop solutions that consider the industry’s limitations. However, when the dust settles, we expect the final rule to include far more details, which will likely be challenging to implement and will require significant changes to data systems and processes. Firms should specifically expect more details regarding the classification of deposit accounts (i.e., as closing night or post-closing), and around the types and format of data that banks must collect and maintain for each account. [8]

Endnotes:

[1] See PwC’s Regulatory brief, Resolution preparedness: Do you know where your QFCs are? (March 2015, discussed on the Forum here) for an analysis of recently proposed record keeping requirements for qualified financial contracts.
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[2] See PwC’s First take: Resolution planning guidance for CIDIs (December 2014).
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[3] The payout is currently capped at $250,000 per category of account owned by a depositor.
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[4] Banks with at least $2 billion in domestic deposits, and a minimum of (a) 250,000 deposit accounts or (b) $20 billion in total assets.
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[5] This threshold is different from the $250,000 payout cap and could be as low as $30,000 per account. This difference in amount is due to applicability of the payout cap to the aggregate amount of all accounts of the same category owned by a depositor (e.g., all individually owned accounts).
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[6] These include funds that depositors do not typically need immediate access to (e.g., brokered deposits and trust accounts).
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[7] The payout calculation for these post-closing deposits would be prioritized based on the immediacy of depositor need, with some (e.g., pass-through coverage account) given priority over others (e.g., trusts).
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[8] We expect the final rule’s level of specificity to be similar to the record keeping requirements for qualified financial contracts. See note 1.
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