WASHINGTON — The Federal Deposit Insurance Corp. is moving forward with a plan to force big banks to keep better track of their insured deposits.
After unveiling a preliminary inquiry in April, the FDIC board on Wednesday released a proposal that would force large banks to be able to produce detailed data on their insured deposits within 24 hours of a failure.
"Timely access to insured deposits when a bank fails is critical to maintaining public confidence in the banking system," said FDIC Chairman Martin Gruenberg. "Today's proposal would bolster the FDIC's ability to provide depositors at large banks with at least 2 million accounts the same rapid access to their insured funds as the FDIC does when a smaller institution fails."
Banking industry representatives quickly objected to the plan, which would apply to 36 institutions — including JPMorgan Chase, Bank of America and Citigroup.
"This whole thing is ultimately a farce," said Bert Ely, a banking consultant based in Alexandria, Va. "Big banks don't fail suddenly."
If one of the larger banks were to fail, the FDIC likely would resolve the institution through an acquisition in which all or most of its insured deposits were covered.
Liquidation of a bank at the hands of the FDIC happens "so seldom that I don't think it's worth the expense for the industry," Ely said.
If implemented, the proposal could impose significant costs on targeted institutions, as it will involve an overhaul of their information technology systems to support tighter tracking requirements and estimate depositors' insurance levels, a task that's traditionally fallen to the FDIC.
The FDIC estimates the change will cost the industry a little under $320 million.
Rob Strand, a senior economist at the American Bankers Association, said he could not provide industry estimates because even running tests on such measures was too costly.
In a joint letter with The Clearing House and the Consumer Bankers Association, the ABA asked the FDIC to give banks four years to comply, instead of two as the proposal suggests.
The plan would also impose a burden on brokered deposits, trusts and other set-ups that rely on pass-through accounts. The process of gathering information on those accounts is "labor-intensive," and even more so in the case of institutions with many accounts, the FDIC has argued.
At the moment, a pass-through account owner's identity is held by intermediaries and not typically by banks. The proposal would require banks themselves to collect this data.
That is "going to be extraordinarily expensive and in many, many cases practically impossible to be complied with," said Paul Clark, a partner at Seward & Kissell who advises broker-dealers.
Clark said a large set of brokered deposits change balances day to day, making it difficult to pin down the information. The data, he added, is also highly decentralized.
"There's no single repository in the securities industry or the banking industry where all these names can be downloaded from," Clark said.
The proposal does offer banks the opportunity to apply for an exemption on these types of accounts.
But industry representatives view this option as yet another compliance burden.
"We asked that they maintained that flexibility and they have, but they've formalized the process," Strand said.
Another concern, Strand said, is that the proposal would require banks to notify the owners of exempt accounts that they could experience a delay in receiving their insurance.
"Now, 36 banks will have to make a special notification to their customers that these accounts will be treated differently should the bank fail," Strand said.
To demonstrate compliance, banks would have to undergo occasional exams and be required to file yearly deposit insurance reports, along with attestations signed by a board of directors.
"That's asking quite a lot," said Strand, noting that the requirement would increase liability and demand higher expertise levels of board members.
The FDIC also released another proposal Wednesday jointly with the Securities and Exchange Commission that details how brokers and dealers would be liquidated under FDIC receivership. The plan is required by Title II of the Dodd-Frank Act.