Bankers Protest FDIC's 'Outsourcing' of Insurance Records

WASHINGTON — The Federal Deposit Insurance Corp. wants vast improvement in big banks' recordkeeping to help determine depositors' insurance status, but the industry still sees a host of problems with the undertaking.

The FDIC in April announced plans to enlist the industry's help in determining the amount of insured funds the agency needs to pay in a large failure. The "advance notice of proposed rulemaking" asked for comments on steps requiring better data on who owns deposits and that banks be able to calculate insured and uninsured amounts on all or just subsets of depositors.

In letters responding to the notice, which is expected to affect 37 banks, commenters expressed concerns over the heavy lift needed to implement enhanced recording keeping and the potential of policy changes interfering with pass-through insurance arrangements, among other issues. Although the effort is preliminary, and bankers and industry representatives indicated they could implement some version of the plan with conditions, some took issue with the perception that banks are being asked to tackle something they view as the FDIC's responsibility.

"The proposal's deposit insurance calculation requirement would represent a fundamental shift in practice and the outsourcing to insured depository institutions of a function that historically has been performed by the FDIC," Dennis Nixon, president of the $12 billion-asset International Bancshares in Laredo, Texas, wrote in a July 27 comment letter. "While it may be efficient for the FDIC to do so, it puts the onus and the costs on financial institutions to make that determination." (The FDIC posted a total of 10 comment letters.)

A joint letter by the American Bankers Association, The Clearing House and the Consumer Bankers Association said the FDIC is embarking on the initiative just as banks' systems are already taxed from complying with other requirements. The groups said covered banks estimate the system upgrades envisioned by the agency would take at least four years with possible extensions.

"Implementing these upgrades is likely to involve major information technology projects at a time when substantial resources are already committed to high-priority data security projects and to meet other significant and recently imposed regulatory requirements," the associations said in a July 27 comment letter.

The FDIC's notice said the policy, which would still have to be formally proposed, would likely affect institutions with at least two million accounts. The effort follows an earlier 2008 rule, which requires large banks to make it easier for the FDIC to obtain standard deposit insurance account information in a failure as well as be able to place holds on certain deposits.

At issue is the complexity the FDIC faces in trying to determine which funds are insured — and must be paid quickly — and which are uninsured. The ANPR said banks have gotten bigger — necessitating going beyond the 2008 rule — and that disruptions to determining insurance amounts could hinder depositor payments. A further obstacle to assessing customers' insurance status is that the true owner of certain noncore deposit accounts — such as in "pass-through" arrangements — is not always clear.

"The problem identifying the owners of deposits is exacerbated when an account at a failed bank has been opened through a deposit broker or other agent or custodian," the agency's notice said.

The notice generally asked for comment on a number of concepts. The FDIC appears prepared to define certain accounts as "closing night deposits", which would require the capability to make an insurance determination on the night of the failure. They would include funds that customers need the quickest access to, such as transaction accounts. Determinations on "post-closing deposits" — including brokered deposits and other pass-through coverage accounts — could be made later, such as during the closing weekend.

Pass-through accounts pose particular headaches in obtaining insurance information. For example, a prepaid card issuer may include funds for all customers in a single account at an insured bank. That combined account likely exceeds the federal insurance limit but the FDIC will cover each cardholder with funds below the limit as long as the bank keeps adequate records.

For pass-through accounts, the notice asked for two options to improve depositor records. Under one option, banks would have to identify pass-through accounts and place any holds for uninsured customers. In a failure, agents for the deposits would have to use a standard format to submit required information on time. Under a second option, banks would have to keep records enabling prompt insurance determinations either for all pass-through accounts, or certain pass-through accounts where funds are needed immediately.

But Paul Clark, a partner at Seward & Kissel, wrote in a comment letter that the FDIC's imposing mandates on banks to keep such records would be legally dicey.

"The FDIC lacks the statutory authority to require banks to maintain the names and interests of the beneficial owners of deposit accounts held by financial intermediaries on a pass-through basis as proposed in one of the alternative solutions set forth in the ANPR," Clark wrote in a letter dated July 27. He added, "Even modest changes to the requirements for pass-through insurance must be made carefully in order to avoid disrupting deposit relationships that have been established in reliance on long-standing FDIC regulations and interpretations."

The joint comment letter submitted by the three trade groups expressed a preference for the option requiring only holds placed on pass-through accounts. Taking issue with the more severe second option, the groups said, "Any final rule should not require covered banks to maintain current information on trust and pass-through deposit account beneficiaries."

Meanwhile, others questioned why the FDIC was considering new rules in the first place.

Mark Jacobsen, chief executive officer of Promontory Interfinancial, said the group does not "disagree" with the first option, but said that placing holds on pass-through accounts is already existing practice. "The need for a new regulation in this respect is not clear," he wrote in a July 27 letter.

Bert Ely, a banking consultant in Alexandria, Va., who did not submit a comment letter, said in an interview that placing a hold on an account as if it were uninsured before determining which accounts or portions of accounts are insured runs contrary to how such accounts are typically structured.

They "are set up so that the balance is fully insured, [so] there is relatively little in the way of uninsured brokered deposits," Ely said.

However, not all the letters submitted were critical of the ANPR. The Independent Community Bankers of America wrote in its letter that additional measures were needed to improve the capability of determining insurance status to deal with the complexity of megabanks and an uptick in pass-through coverage accounts.

"Those banks with over 2 million in deposit accounts should have to maintain up-to-date records sufficient to allow immediate or prompt insurance determinations for all pass-through accounts," wrote Christopher Cole, the ICBA's senior regulatory counsel, in a July 24 letter,

While other commenters sound wary of the cost required to implement any plan, some said certain conditions would make aspects of the proposal palatable.

For example, Donna Goodrich, a senior executive vice president of BB&T Corp., said there would be greater expenses associated with keeping better records on trust accounts. But, if the bank were presented a choice of options, she said, BB&T would prefer an option "wherein information regarding trust accounts and their owners is maintained, but not beneficiaries.

"This would provide trustees the ability to receive the greater coverage allowed, without creating a long-term reporting and recordkeeping burden for both financial institutions and the trustees," Goodrich wrote. "BB&T asks the FDIC [to] provide clarification on whether the trustee would have to provide the actual trust documents to the financial institution upon failure."

In the joint letter submitted by the three trade associations, the groups said "banks believe they can ultimately be prepared to satisfy the … intent" of the FDIC's policy under certain circumstances. The groups called on the agency to allow sufficient implementation time, offer more details about how to compute insurance determinations and work "closely with each covered bank throughout the process."

"While we understand and support the purpose of this effort, we ask the FDIC to acknowledge that requiring covered banks to assume a function for which the FDIC has ultimate responsibility represents a far greater challenge for the banks than compliance with" the 2008 rule, the groups said.