[Federal Register: July 17, 2008 (Volume 73, Number 138)] [Rules and Regulations] [Page 41180-41211] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr17jy08-18] ----------------------------------------------------------------------- FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 360 RIN 3064-AD26 Large-Bank Deposit Insurance Determination Modernization AGENCY: Federal Deposit Insurance Corporation (``FDIC''). ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: The FDIC is adopting a final rule requiring the largest insured depository institutions to adopt mechanisms that would, in the event of the institution's failure: provide the FDIC with standard deposit account and other customer information; and allow the placement and release of holds on liability accounts, including deposits. The final rule applies only to insured depository institutions having at least $2 billion in domestic deposits and either: more than 250,000 deposit accounts (currently estimated to be 152 institutions); or total assets over $20 billion, regardless of the number of deposit accounts (currently estimated to be 7 institutions). The FDIC is adopting the final rule concurrently with its adoption of an interim rule establishing practices for determining deposit and other liability account balances at a failed insured depository institution. With exceptions indicated in the final rule, institutions subject to this final rule will have eighteen months from the effective date of the final rule to implement its requirements. EFFECTIVE DATE: August 18, 2008. FOR FURTHER INFORMATION CONTACT: James Marino, Project Manager, Division of Resolutions and Receiverships, (202) 898-7151 or jmarino@fdic.gov, Joseph A. DiNuzzo, Counsel, Legal Division, (202) 898-7349 or jdinuzzo@fdic.gov; or Christopher L. Hencke, Counsel, Legal Division, (202) 898-8839 or chencke@fdic.gov. SUPPLEMENTARY INFORMATION: I. Introduction The final rule requires the largest insured depository institutions to adopt mechanisms that would, in the event of the institution's failure: (1) Provide the FDIC with standard deposit account and other customer information; and (2) allow the placement and release of holds on liability accounts, including deposits. These requirements were addressed in two advance notices of proposed rulemaking issued in 2005 and 2006, respectively the ``2005 ANPR'' and the ``2006 ANPR''.\1\ Also, in January of this year the FDIC published a proposed rule composed of two parts, addressing in part two the issues involved in the final rule and addressing in part one issues involving the FDIC's practices for determining deposit and other liability account balances at a failed insured depository institution (``proposed rule'').\2\ --------------------------------------------------------------------------- \1\ 70 FR 73652 (Dec. 13, 2005) and 71 FR 74857 (Dec. 13, 2006). \2\ 73 FR 2364 (January 14, 2008). --------------------------------------------------------------------------- The FDIC received twenty-one comments on the proposed rule. (The comment letters may be viewed on the FDIC's Web site at http:// www.fdic.gov/regulations/laws/federal/2008/08comAD26.html.) Based in part on those comments, the FDIC has decided to finalize the proposed rule by issuing two separate rulemakings--(1) the final rule, covering part two of the proposed rule and (2) a separate interim rule, covering part one of the proposed rule (``Interim Rule on Processing Deposit Accounts''). Throughout the preamble the terms ``deposit'' (or ``domestic deposit''), ``foreign deposit'' and ``international banking facility deposit'' identify liabilities having different meanings for deposit insurance purposes. A ``deposit'' is used as defined in section 3(l) of the Federal Deposit Insurance Act (12 U.S.C. 1813(l)) (``Section 3(l)''). A deposit includes only deposit liabilities payable in the United States, typically those deposits maintained in a domestic office of an insured depository institution. Only deposits meeting these criteria are eligible for insurance coverage. Insured depository institutions may maintain deposit liabilities in a foreign branch (``foreign deposits''), but these liabilities are not deposits in the statutory sense (for insurance or depositor preference purposes) for the time that they are payable solely at a foreign branch or branches. Insured depository institutions also may maintain liabilities in an international banking facility (IBF). An ``international banking facility deposit,'' as defined by the Board of Governors of the Federal Reserve System in Regulation D (12 CFR 204.8(a)(2)), also is excluded from the definition of ``deposit'' in Section 3(l) and the depositor preference statute (12 U.S.C. 1821(d)(11)). The FDIC anticipates questions regarding implementation of the functionality required by this rule. Questions and requests for telephonic meetings may be submitted via e-mail to depositclaims@fdic.gov. [[Page 41181]] II. Overview The final rule applies to large FDIC-insured institutions, defined as ``Covered Institutions.'' The definition includes insured depository institutions having at least $2 billion in domestic deposits and at least either: (1) 250,000 deposit accounts; or (2) $20 billion in total assets, regardless of the number of deposit accounts. In summary, Covered Institutions are required to adopt mechanisms that would, in the event of the institution's failure: Allow automatic posting of provisional holds on large liability accounts in any percentage specified by the FDIC on the day of failure. Provide the FDIC with deposit and customer account data in a standard format. Allow automatic removal of the provisional holds and posting of the results of insurance determinations as specified by the FDIC. III. The Proposed Rule Definition of Institutions Covered Under the proposed rule a Covered Institution was defined as any insured depository institution having at least $2 billion in domestic deposits and at least either: (1) 250,000 deposit accounts; or (2) $20 billion in total assets, regardless of the number of deposit accounts.\3\ All other insured depository institutions were designated as Non-Covered Institutions and, thus, were not subject to this part of the proposed rule.\4\ --------------------------------------------------------------------------- \3\ For the purposes of the criteria in the text, an ``insured depository institution'' includes all institutions defined as such in the FDI Act. 12 U.S.C. 1813(c)(2). Other applicable terms would be as defined in the Reports of Condition and Income (Call Report) instructions (for insured banks) and Thrift Financial Reports (TFR) instructions (for insured savings associations): ``deposit accounts'' mean the total number of deposit accounts (including retirement accounts), ``domestic deposits'' mean total deposits held in domestic offices (for insured banks) or deposits (for insured savings associations), and ``total assets'' means the reported amount of total assets. \4\ The criteria for a Covered Institution apply to separately chartered insured depository institutions. Commonly owned depository institutions are not aggregated for the purposes of these criteria. Furthermore, a holding company may own insured depository institutions that are both Covered and Non-Covered. --------------------------------------------------------------------------- Continuation of Business Operations As discussed in the proposed rule, in the event of failure a Covered Institution's legal entity status will terminate. In most cases, however, it is expected that a new entity will carry on the Covered Institution's business operations.\5\ The new legal entity under which business operations will be continued is the Successor Institution, which could include an established or new insured depository institution or a bridge bank operated by the FDIC. Through the proposed rule the FDIC intended to provide a means to facilitate access to deposit funds and maintain the franchise value of the failed Covered Institution or a Successor Institution. Thus, in most cases, core business operations would continue post failure, although some operations might be suspended temporarily. --------------------------------------------------------------------------- \5\ The provisional hold functionality and other requirements of the proposed rule were to be developed in this context. It is possible a Covered Institution may be liquidated in the event of failure. The decision to liquidate or continue the deposit operations of a Covered Institution would be made on a case-by-case basis depending on the individual circumstances at the time. --------------------------------------------------------------------------- Process Overview As discussed in part one of the proposed rule, in the event of failure, the FDIC would complete daily account processing to generate the end-of-day deposit ledger balances used by the FDIC for insurance purposes. Under part two of the proposed rule, after completion of the failed Covered Institution's final daily processing, the Successor Institution would place provisional holds on selected \6\ deposit accounts, foreign deposit accounts and certain other liability accounts subject to a sweep arrangement. Provisional holds, once posted, would allow depositors access to the remaining balance in their accounts the day following failure, yet guard against the possibility of an uninsured depositor or unsecured general creditor receiving more than allowed under deposit insurance rules or the depositor preference statute.\7\ The FDIC would use a standard set of depositor and customer data to make deposit insurance determinations. These determinations would be provided to the Successor Institution, probably several days after failure. The Successor Institution would then remove the provisional holds as specified by the FDIC and, if necessary, replace them with additional holds or debits based upon the deposit insurance determinations. The FDIC would continue to notify the Successor Institution to remove additional holds as information is received from depositors to complete the insurance determination. --------------------------------------------------------------------------- \6\ The FDIC will supply the business rules upon which a provisional hold will be placed. These business rules will be based upon current balance and account product types. \7\ Uninsured depositors are entitled to a pro rata distribution of the receivership proceeds with respect to their claim. The FDIC-- at its discretion-may immediately distribute receivership proceeds in the form of advance dividends at failure. Advance dividends are based on the expected recovery to uninsured depositors. --------------------------------------------------------------------------- Provisional Holds General description. The proposed rule would have required Covered Institutions to have in place an automated process for implementing provisional holds concurrent with or immediately following the daily deposit account processing on the day of failure. After the placement of provisional holds, all other holds previously placed by the institution would still remain in effect.\8\ The proposal did not require development of mechanisms to stop or alter interest accrual for the affected accounts. --------------------------------------------------------------------------- \8\ Provisional holds could overlap preexisting holds if the entire account is held or the unheld account balance before posting the provisional hold is less than the amount of the provisional hold. In such cases posting the provisional hold would have to be constructed so that it did not cause the account to become ``overdrawn'' and trigger service fees against the account. --------------------------------------------------------------------------- Account-by-account application. Provisional holds would be applied to individual accounts in an automated fashion. Commonly owned accounts would not have been aggregated by ownership for the purposes of calculating or placing provisional holds. Provisional holds would extend to all non-closed deposit accounts held in domestic and foreign offices, as well as certain sweep account arrangements.\9\ --------------------------------------------------------------------------- \9\ Non-closed deposit accounts include those that are open, dormant, inactive, abandoned, restricted, frozen or blocked, in the process of closing or subject to escheatment. --------------------------------------------------------------------------- The nature of a provisional hold. As explained in the proposed rule, the provisional hold is intended to bar access to some or all of a customer's account pending the results of the insurance determination. The proposed rule offered for comment the following three options for implementing provisional holds. Persistent hold. A ``persistent'' provisional hold would be applied once (on or immediately after the day of failure) and stay on the deposit account until it is removed at the order of the FDIC. Once applied, the persistent hold would reduce the customer's available balance. Memo hold. A memo-type provisional hold remains effective only intra-day and does not affect the batch deposit posting process. The memo type provisional hold amount is calculated immediately after end-of-day balances are available on the day of failure and the same amount is applied on a daily basis until changed or removed at the instruction of the FDIC. Once applied, a memo-type provisional hold would [[Page 41182]] reduce the customer's available intra-day balance. Holding balances in an alternate account. Rather than placing an account hold, balances could be removed from the account to which a provisional hold is to be applied and otherwise ``held'' in a work in progress (WIP) or suspense account. Since balances are removed from the affected account, they would not be available to the customer until the provisional hold was removed and the balance restored to the original account. Provisional holds for deposit accounts. Under the proposed rule, on the day of failure the FDIC would specify a deposit account balance (the ``account balance threshold'') that would determine whether a provisional hold would be placed on a particular deposit account.\10\ No provisional hold would be placed on a deposit account with a balance less than or equal to the account balance threshold. For a deposit account above the account balance threshold, the FDIC would specify, again on the day of failure, a percentage (the ``provisional hold percentage'') that would be multiplied by the account balance in excess of the account balance threshold.\11\ The product of this multiplication would equal the dollar amount of the provisional hold. The proposed rule would have required a Covered Institution to adopt systems allowing the hold to be calculated and placed. The account balance threshold as well as the provisional hold percentage could vary for the following four categories, as the Covered Institution customarily defines them: --------------------------------------------------------------------------- \10\ The account balance threshold could be any dollar amount specified by the FDIC, including zero. \11\ The provisional hold percentage could be any percentage specified by the FDIC, from 0 to 100 percent. --------------------------------------------------------------------------- 1. Consumer demand deposit, negotiable order of withdrawal (``NOW'') and money market deposit accounts (``MMDA''). 2. Other consumer deposit accounts (time deposit and savings accounts, excluding NOW accounts and MMDAs). 3. Non-consumer demand deposit, NOW accounts and MMDAs. 4. Other non-consumer deposit accounts (time deposit and savings accounts, excluding NOW accounts and MMDAs). Provisional holds for foreign deposits. For foreign deposits the provisional hold methodology was proposed to be the same as for deposit accounts, except that the account balance thresholds and the provisional hold percentages could have varied based on the country in which the account is located. Provisional holds for IBF deposits. For IBF deposits the provisional hold methodology was proposed to be the same as for deposit accounts, except that the account balance thresholds and the provisional hold percentages could have been different. Provisional holds for deposit accounts with prearranged, automated sweep features. As discussed in part one of the proposed rule, certain deposit accounts have a feature to ``sweep'' funds periodically according to predefined rules into another deposit account, a foreign deposit or an alternative investment vehicle.\12\ The deposit account through which the customer has primary access to deposited funds-- usually a demand deposit account--is the ``base sweep account.'' The investable or excess account balance is swept periodically into a ``sweep investment vehicle.'' Sweep investment vehicles may include, but are not limited to: (1) A deposit account at the same institution or an affiliated insured depository institution, (2) a foreign or IBF deposit, (3) repurchase agreements, (4) federal funds, (5) commercial paper and (6) a proprietary or third-party money market mutual fund. --------------------------------------------------------------------------- \12\ Sweep accounts as described here do not include zero balance account (ZBA) arrangements that move funds to and from a master (or concentration) deposit account and one or more subsidiary deposit accounts at the same bank. Such deposit account arrangements are not intended to provide a yield on excess deposit balances nor do they change the customer's insurance status. ZBAs would be subject to the provisional hold methodology for deposit accounts described above. --------------------------------------------------------------------------- The proposed rule would have subjected some sweep accounts to the same provisional hold requirements as a deposit account. These were defined as ``Class A'' sweep accounts and included: Base sweep accounts where the sweep investment vehicle is another deposit account in an office of the same institution. Both the base sweep account and the sweep investment vehicle are deposits that would have been subject to the provisional hold requirements of a deposit account. Base sweep accounts where funds are wired from the Covered Institution to a separate legal entity other than the Covered Institution (e.g., a proprietary or third-party money market mutual fund). In this case, funds residing in the base sweep account (if any) would have been subject to a provisional hold as any other deposit account held in a domestic office. No provisional hold would have been required for funds residing outside the Covered Institution in the sweep investment vehicle. The proposed rule defined all other sweep accounts as ``Class B'' sweep accounts requiring a dual provisional hold methodology. For the fund balance remaining in the base sweep account as of the institution's customary end-of-day on the day of failure, the provisional hold methodology would have been the same as applied to other deposit accounts. For the funds residing in the sweep investment vehicle as of the institution's customary end-of-day, the provisional hold methodology would have had a separate account balance threshold and provisional hold percentage.\13\ The proposed rule would have required the balance threshold as well as the provisional hold percentage to vary for different types of sweep investment vehicles.\14\ --------------------------------------------------------------------------- \13\ Some Covered Institutions may allow a single base sweep account to be associated with multiple investment vehicles. In this case a separate provisional hold methodology would have been developed for each investment vehicle. \14\ Some alternative investment vehicles are deposits held in foreign offices. These foreign deposits would be subject only to the provisional hold methodology for the sweep alternative investment. Such foreign deposits would be excluded from the provisional hold methodology designed for non-sweep deposits held in the same foreign office. --------------------------------------------------------------------------- The proposed rule would not have required mechanisms to stop the processing of any prearranged deposit account sweep transactions in the event of failure. The provisional holds process described above would have allowed for the transfer of balances from a deposit account to a sweep investment vehicle. The provisional holds would have applied to liability accounts as they were designated on the books and records of the institution at its customary end-of-day. Provisional holds for deposit accounts which accept automated credits from funds invested within the Covered Institution. Certain customers may provide the depository institution with instructions each day or periodically to invest funds in a non-deposit investment vehicle within the institution (e.g., an overnight time account at the Cayman Island branch), whereby such funds are automatically credited to the customer's deposit account the following day (``automated credit account''). The proposed rule would have required a dual provisional hold methodology for automated credit accounts. For the fund balance remaining in the automated credit account as of the institution's customary end-of-day the provisional hold methodology would have been the same as applied to other deposit accounts. For the funds residing in the investment vehicle as of the institution's customary end-of-day, the provisional hold methodology would have had the [[Page 41183]] capability of a separate account balance threshold and provisional hold percentage.\15\ The account balance threshold, as well as the provisional hold percentage, would have been required to vary for different types of investment vehicles. These account balance thresholds and provisional hold percentages could be different from those applied to: (1) Funds automatically swept into a similar or identical investment vehicle or (2) funds held in a similar or identical investment vehicle that does not provide for an automated crediting of funds.\16\ --------------------------------------------------------------------------- \15\ Some automated credit accounts may also be a base sweep account. In this case a separate provisional hold methodology must be developed for each investment vehicle. It is possible, for example, for a customer to each day provide the institution with instructions to invest a certain amount of funds in a Cayman Island branch time account where the funds would be returned to the customer's demand deposit account the following morning. Further, the customer may also have provided prearranged instructions to have excess balances residing in the same demand deposit account swept to a Cayman Island branch account where such funds also are returned to the demand account the following morning. In this case the Covered Institution must have a provisional hold methodology that: (1) Treats funds residing in the demand deposit account as of the institution's end-of-day consistent with other deposit accounts, (2) treats funds residing in the Cayman Island branch account as a result of the prearranged sweep consistent with other Cayman Island sweep investment vehicles and (3) treats funds residing in the Cayman Island branch account as a result of the daily investment instructions using a separate account balance threshold and provisional hold percentage. \16\ Some investment vehicles are foreign deposits. These funds would be subject only to the provisional hold methodology for the automated credit account. Such accounts would be excluded from the provisional hold methodology designed for non-sweep foreign deposits held in the same office. --------------------------------------------------------------------------- Account balance used for provisional hold calculation. The proposed rule would have required the account balance threshold and provisional hold percentage to be applied against the end-of-day ledger balance as calculated by the institution, in the event of failure. Provisional hold duration. Under the proposed rule, the methodology for implementing a provisional hold process was required to hold funds until removed by the Successor Institution as instructed by the FDIC. Provisional holds would have been removed when the results of the deposit insurance determination are available, generally anticipated being several days after failure, depending on the size and complexity of the failed institution's deposit base. Provisional hold designation. The proposed rule would have required provisional holds to be labeled ``FDIC PHold''. Provisional hold customer disclosure. The proposed rule requested comment on whether the FDIC should require the provisional hold, once placed, to be apparent if the customer views account information on- line or through other means. Security level and mechanism for manual removal of provisional holds. The proposed rule would have required the Covered Institution to create policies, procedures and systems reasonably capable of preventing the alteration of FDIC provisional holds or other FDIC hold amounts except under the specific written direction of the FDIC. Timeliness of the provisional holds process. The proposed rule would have required a Covered Institution to have the capability of placing provisional holds on the applicable accounts prior to the Successor Institution opening for business the following day, but in no case later than 9 a.m. local time the day following the day of the depository institution failure. Exception for systems with a small number of accounts. The proposed rule requested comment on whether a Covered Institution having multiple account systems through which provisional holds will be placed may apply them manually in certain cases. Some account systems may service a relatively small number of accounts making the manual application of provisional holds feasible. If used, the proposed rule would have required approval by the FDIC in response to a written request, including a justification for the manual process and its relative effectiveness for posting provisional holds in the event of failure. Institutional contacts. The proposed rule would have required a Covered Institution to notify the FDIC of the person(s) responsible for producing the standard deposit data download and administering provisional holds, both while this functionality is being constructed and on an on-going basis. The Covered Institution would have been responsible for ensuring such contact information is current. Removal of Provisional Holds General process. As specified in the proposed rule, the FDIC would begin forwarding insurance determination results to the Successor Institution once a substantial number of the insurance determinations have been made, which should be within a few days after failure. These results would have been required to be incorporated into the institution's deposit systems as soon as practicable, perhaps as quickly as the day following the receipt of the standard depositor and customer data sets. The results would contain instructions for the removal of provisional holds as well as replacement transactions, which could include the placement of new holds or account debits and credits. Removal of provisional holds. As proposed, the Successor Institution would be required to remove provisional holds in batch as specified by the FDIC. On the day(s) provisional holds are to be removed, the FDIC would provide the Successor Institution with a file listing the accounts subject to removal of the provisional hold. A file format was specified and would be provided to the Successor Institution through FDICconnect or Direct Connect, depending on the size of the file. The file would be encrypted using an FDIC-supplied algorithm. Provisional Hold Replacement Transactions Debiting and crediting accounts after provisional holds are removed. As specified in the proposed rule, on the day a provisional hold removal file is provided to the Successor Institution, the FDIC also would provide a file or set of files either in ACH format or in a tab- or pipe-delimited format listing the accounts subject to debit or credit transactions, which reflect the results of the insurance determination process. A file format was specified and would be provided to the Successor Institution through FDICconnect or Direct Connect, depending on the size of the file. The file would be encrypted using an FDIC-supplied algorithm to secure data during the transport process. Posting of additional FDIC holds. As specified in the proposed rule, on the day provisional holds are to be removed the FDIC also would provide the Successor Institution with a file listing the accounts subject to a new hold to be placed after the removal of the provisional hold. A file format was specified and would be provided to the Successor Institution through FDICconnect or Direct Connect, depending on the size of the file. The file would be encrypted using an FDIC-supplied algorithm. Removal of Additional FDIC Holds Under the proposed approach, in some cases provisional holds would be replaced by a second FDIC hold. These holds would be removed over time as further information is gathered from depositors needed to complete the insurance determination. A file format was specified. The Generation of Deposit Account and Customer Data in a Standard Structure The proposed rule would have required a Covered Institution to have in [[Page 41184]] place practices and procedures to provide the FDIC with required depositor and customer data in a standard format following the close of any day's business. Covered Institutions would not have been required to collect or generate new depositor or customer information. The standard data files would have been created through a mapping of pre- existing data elements and internal institution codes into standard data formats. Data was to be provided on all non-closed deposit or foreign deposit accounts as well as Class B and automated credit accounts. Files. The proposed rule would have required these data to be provided in the following five separate files: 1. Deposit file. Data fields for each non-closed deposit or foreign deposit account, except those deposit or foreign deposit accounts serving as an investment vehicle reported in the Class B Sweep/ Automated Credit file. 2. Class B Sweep/Automated Credit file. Data fields capturing information on funds residing in investment vehicles linked to each non-closed deposit account: (1) Involved in Class B sweep activity or (2) which accept automated credits. 3. Hold file.\17\ Deposit hold data fields for each non-closed deposit account. --------------------------------------------------------------------------- \17\ The Hold file contains information on holds against each deposit account, including FDIC provisional holds. Since provisional holds may be generated after the completion of an institution's nightly deposit processing cycle, they may not be reflected fully in the Hold file generated as of the day of closing. The FDIC may require a second Hold file to be generated the day following closing to fully capture provisional holds that may not have been posted until the next deposit processing cycle. --------------------------------------------------------------------------- 4. Customer file. Data fields for each customer. 5. Deposit-customer join file. Data necessary to link each deposit and foreign deposit with the customers who have an interest in the account. Possible file combinations. The proposed rule provided that data could be submitted using one of each deposit, Class B sweep/automated credit, hold, customer, customer address and deposit-customer join files. Alternatively, data could be supplied using multiple files for each type. The number of files could correspond to the number of institutional systems of record, for example. File format. Under the proposed rule depositor and customer data files would have been provided in tab- or pipe-delimited format. Further, each file name would contain the institution's FDIC Certificate Number, the file type (deposit, sweep hold, customer, customer address, join or other) and the date of the extract. The FDIC would support both ASCII and EBCDIC delimited files. All EBCDIC fields must be provided in Pic(X) format. Binary, packed or signed numeric formats would not be allowed. File transmission mechanism. Under the proposed rule the data files would be provided to the FDIC in the most expeditious manner. Data which can be compressed and encrypted could be transmitted to FDIC using existing telecommunication services. Should the volume be too great to transmit in the most expeditious manner then a portable hard drive should be used and physically transported by FDIC personnel to the FDIC's data processing facilities. Reporting Requirements The proposed rule noted that the criteria defining a Covered Institution include the number of its deposit accounts, total domestic deposits and total assets. Total domestic deposits and total assets are reported quarterly on the Consolidated Reports of Condition and Income (insured bank) and the Thrift Financial Report (insured savings association). Savings associations report the number of deposit accounts quarterly, but banks report on the total number of deposit accounts only annually, as part of the June reporting cycle. The FDIC recommended quarterly reporting of the number of deposit accounts for all insured institutions with total assets over $1 billion. Testing Requirements The proposed rule indicated the FDIC would conduct an initial test at each Covered Institution sometime after the initial implementation period ends.\18\ All testing would be coordinated with the financial institution and conducted at the site of their choosing if multiple sites are available. Once the initial test is completed successfully, the FDIC anticipated that it would conduct additional tests infrequently at institutions that do not make major changes to their deposit systems \19\--perhaps only once every three-to-five years. It was noted that more frequent testing may be necessary for institutions that make major acquisitions, experience financial distress (even if the distress is unlikely to result in failure) or undertake major system conversions. --------------------------------------------------------------------------- \18\ In addition to testing, the FDIC expects to require that information contact points be validated (and updated as needed) every three-to-six months. \19\ A major change to a deposit system means a change made to a Covered Institution's data environment affecting one or more of the data elements described in attached Appendices. Changes could be the result of a merger or the streamlining of a financial institution's systems of record. --------------------------------------------------------------------------- The proposed rule would have required Covered Institutions to establish a series of test accounts on their deposit account systems that could be used for verification purposes. These accounts would be used to verify the processing of holds, debits and credits. The FDIC also contemplated development of a XML validation service which would be provided to each Covered Institution for the purpose of establishing compliance with the standard data requirements for depositor and customer records. The XML schema would read a file (which has been created in the standard format), validate the accuracy and integrity of the file content and provide a report that establishes the institution's compliance with the criteria. In addition to the XML service, the FDIC also proposed providing a more readable description of the validation process to help facilitate institutional testing. The proposed rule provided that a Covered Institution would be responsible for ensuring that a representative sample of data has been passed through the XML validation service. At a minimum the sampling strategy should cover a cross-section of different insurance categories and a cross section of account ledger balances maintained by the institution. The Covered Institution would have been required to provide the FDIC its sampling strategy along with the validation results as a part of the periodic verification process. To reduce the frequency of FDIC testing and ensure ongoing compliance, the FDIC proposed requiring Covered Institutions to conduct tests in-house on a regular basis (perhaps every year) and provide the FDIC with evidence that the test was conducted and a summary of the test results. In addition, the proposed rule would allow the FDIC to test certain other requirements inside the institution, including but not limited to the ability to place and remove provisional holds, place new holds and implement debits and credits using a data set that meets the FDIC standards. Implementation Requirements Institutions meeting the criteria of a Covered Institution upon the effective date of the regulation. The proposed rule would have required a Covered Institution to fully implement the respective requirements 18 months from the regulation's effective date. Institutions meeting the criteria of a Covered Institution after the effective date of the regulation. The proposed rule would have required that any insured institution meeting the criteria [[Page 41185]] of a Covered Institution for at least two consecutive quarters would have 18 months following the end of the two consecutive quarters in which to fully implement the respective requirements. Merger involving two Covered Institutions. Under the proposed rule, the requirements were to be fully implemented within 18 months following the completion of an acquisition, although an acquisition does not delay any implementation requirements which may already have been in place for the individual institutions involved in the merger. Merger involving a Covered and Non-Covered Institution. Under the proposed rule, the requirements were to be fully implemented within 18 months following the completion of an acquisition, although a merger does not delay any implementation requirements which may already have been in place for the individual institutions involved in the merger. Exception for troubled institutions. Under the proposed rule, on a case-by-case basis, the FDIC could accelerate the implementation timeframe of all or part of the proposed rule for a Covered Institution that either: (1) Has a composite rating of 3, 4 or 5 under the Uniform Financial Institutions Rating System (commonly referred to as CAMELS) \20\ or (2) is undercapitalized as defined for purposes of the prompt corrective action (``PCA'') rules.\21\ In determining the accelerated implementation timeframe for such institutions, the FDIC would have been required to consider such factors as the: (1) Complexity of the institution's deposit systems and operations; (2) extent of asset quality difficulties; (3) volatility of funding sources; (4) expected near-term changes in capital levels; and (5) other relevant factors appropriate for the FDIC to consider in its roles as insurer and possible receiver of the institution. The proposed rule would have required the FDIC to consult with the Covered Institution's primary federal regulator in determining whether to implement this provision of the proposed rule. --------------------------------------------------------------------------- \20\ CAMELS is an acronym drawn from the first letters of the individual components of the rating system: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk. \21\ 12 CFR Part 325. --------------------------------------------------------------------------- Applications for extension of implementation requirements. The proposed rule provided that a Covered Institution could request an extension of the 18-month deadline for implementing the requirements. An application for such an extension would be subject to the FDIC's rules of general applicability, 12 CFR 303.251. For good cause shown, the FDIC could grant the application for an extension. New Deposit Accounts The proposed rule would not have required a unique depositor ID for customer accounts, rather the FDIC would rely upon customer information already maintained by the Covered Institution to link commonly owned accounts. Nevertheless, the FDIC asked whether a unique depositor ID should be assigned by Covered Institutions when a new account is opened and the relative costs of such a requirement. IV. Comments on the Proposed Rule The FDIC received twenty-one comments on the proposed rule, the bulk of which addressed both parts of the proposed rule. Four of the comments were from banking industry trade associations (including one joint letter), two from bank regulatory authorities, ten from large insured depository institutions, one from a law firm representing broker-dealers who place brokered funds in insured depository institutions, one from a member-owned electronic funds transfer network and three from individuals. The following is a summary of the comments we received on part two of the proposed rule--Large-Bank Deposit Insurance Determination Modernization. General Comments The FDIC received a joint comment letter from three banking industry trade associations. This letter summarized their sense of the second part of the proposed rule as follows: ``The Associations support the intent of the NPR to provide in a bank failure for timely deposit insurance determination, prompt release of depositor funds, and least cost resolution. Nonetheless many of the NPR's proposals would be very costly for banks to implement. We recommend adoption of elements from the NPR only where demonstrated benefits justify the cost, and request that the FDIC make every effort to limit the burdens on banks and provide flexibility to accommodate the variety of bank systems.'' Cost and Benefits Many of the large-bank and all of the bank trade association commenters expressed concern over the potential costs of implementing the provisions of the second part of the proposed rule. Several commenters also noted that the expected benefits to the FDIC are not likely to outweigh the costs, especially given the perceived extremely low likelihood of failure of any particular large bank. Commenters emphasized that the potential implementation costs are not small. ``Indeed, even small changes to information systems require hundreds of person hours both in programming and testing to ensure proper functionality and avoid disruption with ongoing operations. Several of our member banks estimate that the cost per institution of the initial implementation and testing of the Proposal's requirements is likely to exceed $10 million and involve thousands of hours of labor. As institutions begin the implementation process, based on prior experience, these costs could increase beyond these initial estimates, perhaps substantially. Moreover, significant additional costs will be incurred to maintain and test these processes in the future.'' Several large banks provided estimates of implementation costs in their comments. These cost estimates are shown in Table 1 along with their deposit assessment base and a comparison of the estimated cost with a 1 basis point deposit insurance assessment. Several commenters also cited the extremely low likelihood of the failure of a Covered Institution and that the FDIC typically is aware of financial difficulties well in advance of failure. It was noted this early warning should allow the FDIC ample time for preparation. [[Page 41186]] Table 1.--Estimated Implementation Costs ---------------------------------------------------------------------------------------------------------------- 1-Basis point Estimated Assessable annual FDIC Estimated cost as Responder implementation cost deposits ($ assessment ($ a % of 1 BP millions) millions) assessment ---------------------------------------------------------------------------------------------------------------- Bank A......................... $8-10 million......... 630,000 63.0 13-16 Bank B......................... ``total costs in the 230,000 23.0 NA millions of dollars''. Bank C......................... ``in excess of $2 29,000 2.9 70 million''. Bank D......................... $2-4 million.......... 17,000 1.7 120-235 ---------------------------------------------------------------------------------------------------------------- One banking trade association noted that the proposed requirements are likely to provide no financial benefit to the FDIC. ``The proposed rule offers no financial benefit to the FDIC because the FDIC does not pay out the full amount of an uninsured deposit's recovery from a failed institution until several years after the failed institution is closed. Hence, the FDIC has ample time after an institution is closed to properly aggregate deposit accounts to ensure that no uninsured depositor obtains an excess recovery from the FDIC. Since the deposit- account aggregation process under the proposed rule will not be foolproof, the FDIC must still conduct a post-failure review of all deposit accounts in a failed institution to ensure that they have been properly aggregated for deposit-insurance purposes. The only way the FDIC will pay out too much to an uninsured depositor is if its initial dividend payment to uninsured depositors cannot be recovered through (1) an offset against future dividend payments or (2) if offsets against subsequent dividend payments do not fully recover the overpayment, court actions or other collection procedures.'' Meeting the FDIC's Objectives A letter from a bank regulatory agency cited the importance of advance preparation in the event of a large-bank failure. The commenter noted that the proposal ``reduces the chance that policymakers will invoke the systemic risk exception of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) \22\ for technical reasons rather than true concern over spillovers. This outcome has the benefit of reducing potential resource misallocations arising from implied guarantees of large-bank creditors. I further argued [in a previous comment letter] that policymakers will not achieve this desired outcome by implementing a new determination regime only at the time when banks are in trouble.'' This commenter also provided the following five observations regarding recent financial events: --------------------------------------------------------------------------- \22\ Pub. L.102-242 (1991). --------------------------------------------------------------------------- 1. ``Several very large financial institutions (FIs) moved from reasonably strong financial positions to what observers characterized as near failure in short periods of time.'' 2. ``The market turmoil reinforced the benefits of an ex ante system that provide creditors of failed banks with ex post rapid access to their available funds.'' 3. ``Responses during the recent tumult reinforce the need for bank policymakers to actively manage the implied safety net.'' 4. ``Recent events reaffirm the need for policymakers to act before bad outcomes occur.'' 5. ``Large financial institutions have been at the epicenter of recent events, and some of their creditors benefited most directly from the policy response.'' One large-bank commenter ``supports the FDIC's continued work on this important project. The current environment reminds us that bank failures are not necessarily a phenomenon of only the past.'' Covered Institution Exemptions Several commenters recommended exemptions from the definition of a Covered Institution. Three potential exemptions were discussed. Strong financial condition. Several commenters--including a state banking agency--suggested that a Covered Institution with strong financial characteristics should be exempt from the proposed requirements. The state banking agency noted that the proposed requirements would apply to only one depository institution in its state, but that this institution has consistently demonstrated strong financial characteristics. As such, commenters recommended that the FDIC consider an exemption based on such things as CAMELS ratings, debt ratings, capital levels or other financial characteristics. Specialty institutions. Several commenters proposed an exemption for specialty institutions, specifically those primarily involved in credit card operations and bankers' banks. With regard to credit card banks, it was noted that the deposits of these banks consist largely of credit card overpayments and balances used to secure cards. In that these are typically low balances, the commenters argued the deposits attributed to credit card operations should be exempt from the criteria of a Covered Institution. Fewer than 250,000 deposit accounts. Several commenters requested that the definition for a Covered Institution should include only those depository institutions with at least 250,000 deposit accounts. One large-bank commenter with fewer than 250,000 deposit accounts (that would be a Covered Institution under the criteria proposed) argued that the bank's ``insurance determination profile is no more complex than that of a small to mid-sized bank.'' It was further argued ``due to the large balances of our typical deposit accounts, the ratio of our deposit insurance coverage to our domestic assessed deposit base is substantially lower than nearly all other U.S. banks. [Our] potential exposure to the insurance fund is therefore at best modest and creates few of the complex challenges which the NPR seeks to address.'' Implementation Time Most large-banks and all bank trade association commenters argued for an extension in implementation time from the proposed 18 months to 24-to-36 months. Commenters contend the proposed requirements of the proposed rule are significantly more complex than those of the past advance notices of proposed rulemaking; particularly with regard to the provisional hold requirements on sweep accounts and foreign deposits. Several commenters also recommended an extension in implementation time for institutions recently involved in merger and assumption activities. Provisional Hold Exemptions Sunsetting deposit systems. One large bank suggested providing an exemption from requirements for deposit systems expected to be retired in the near future, as long as the replacement system is compliant. Small systems. Several commenters requested that--for a Covered Institution [[Page 41187]] with multiple deposit systems--the FDIC should provide an exemption for systems handling a small percent of overall deposit accounts at the Covered Institution. As an example, the commenters proposed that a deposit system handling five percent or fewer of the Covered Institution's deposit accounts should be exempt from the provisional holds requirements. Foreign Deposit Provisional Holds Several large-bank and all banking trade association commenters recommended changing the provisional hold requirement on foreign deposits to be uniform across all countries in which the Covered Institution has deposit accounts. Commenters noted that for individual institutions all foreign deposits frequently reside on a single deposit system and that mandating different provisional hold percentages by country would be burdensome. Provisional Hold Flexibility All banking trade association and many large bank commenters approved of the flexibility to implement provisional holds using the options of a persistent hold, a memo hold or a WIP account. The commenters noted that this flexibility could reduce significantly implementation costs. Generally the commenters believed they understood what the FDIC intended to accomplish through provisional holds and requested they be provided the flexibility to implement the holds in a manner least costly for their institution. Several commenters also requested additional flexibility regarding the placement of provisional holds on funds swept out of a deposit account into a sweep investment vehicle. It was noted that--in some cases--funds are swept into a system within the institution that does not have the capability of posting holds. In these cases commenters requested the option of placing the hold on these funds as they return to the deposit account rather than when they reside in the alternative investment vehicle. Again, the commenters argued that they understood the FDIC's intent and asked that they be allowed to implement the hold in a manner least costly for their institution. Provisional Hold Disclosure Most banking trade associations and several large-bank commenters argued it was unnecessary and unduly burdensome to require on-line or other disclosure of provisional holds. Commenters noted the FDIC has other mechanisms for distributing information to customers in the event of a bank failure that would be equally effective. Deposit Broker Requirements One commenter requested confirmation that the proposed rule would not require changes to brokered deposit recordkeeping or require brokers to develop systems to comply with the rule. The commenter noted that in addition to the more traditional brokered CD programs many brokers offer brokered money market deposit and NOW accounts. Unique Depositor ID All commenters addressing the proposal to require a unique depositor ID for newly opened accounts recommend against it. One commenter noted ``the compliance and training costs would be excessive while offsetting benefits are not apparent.'' V. The Final Rule After considering the comments on the second part of the proposed rule, the FDIC has adopted a final rule in a form similar to that proposed. While there are a number of limited changes from the proposed rule, the main changes are that the final rule will: Permit application to the FDIC for an exemption from the requirements of the final rule if an institution has a high concentration of deposits incidental to credit card operations. Expand the circumstances under which a Covered Institution may be required to accelerate implementation of the final rule requirements to include materially deteriorating financial conditions, as discussed below. Provide for a uniform provisional hold strategy for foreign deposits. Allow application to use alternatives to persistent provisional holds. Costs and Benefits Many commenters cited the potentially high implementation costs of the final rule and noted that the expected benefits might be low, especially given the low likelihood of a Covered Institution failure. One banking trade association commenter suggested there would be no benefits to the FDIC. In the proposed rule the FDIC noted that even if the likelihood of a failure among Covered Institutions is perceived to be low, it is not zero. Recent events have placed stress on the banking industry as a whole. The FDIC must have in place a credible plan for resolving the failure of an institution of any size at the least possible cost. The ability to provide depositors prompt access to funds and determine the insurance status of depositors in a failed institution in a timely manner is a critical element for ensuring a least-costly resolution and maintaining public confidence. Meeting the FDIC's legal mandates. FDICIA was one of the most important pieces of legislation affecting the FDIC's failure resolution process. Its least-cost requirement effectively requires uninsured depositors to be exposed to losses.\23\ Also, FDICIA's legislative history and the nature of the systemic risk exception provide a clear message that uninsured depositors of large institutions are to be treated on par with uninsured depositors of other institutions. The requirements being imposed in this rulemaking provide essential support for the FDIC to meet these statutory mandates--particularly given the current size and complexity of some insured depository institutions. --------------------------------------------------------------------------- \23\ 12 U.S.C. 1823(c)(4). --------------------------------------------------------------------------- Providing liquidity to depositors. The provisional hold functionality creates a mechanism for the FDIC to provide customer access to deposit accounts immediately after failure, albeit with some FDIC hold for large accounts. The ability to continue uninterrupted the deposit operations of a Covered Institution in the event of failure has significant benefits for depositors and also helps preserve the institution's franchise value. Enhancement of market discipline. The FDIC's legal mandates have direct implications for Too-Big-to-Fail and market discipline. If financial markets perceive that uninsured depositors in large institutions will be made whole in the event of failure, uninsured deposits will be directed toward these larger depository institutions, which could result in a significant misallocation of economic resources. Many market observers believe there are substantial benefits of improved market discipline that accrue even without serious industry distress or bank failures. Effective market discipline also limits the size of troubled institutions and results in a more rapid course toward failure. Both serve to mitigate overall resolution losses. Lower resolution losses benefit insured institutions through lower insurance assessments. Equity in the treatment of depositors of insured institutions. Without the provisions of the final rule, the FDIC is concerned that the resolution of a Covered Institution could be accomplished only through a significant departure from the FDIC's normal claims procedures. This departure could leave the bank closed until an insurance determination is made or require the use of shortcuts to speed the opening of the bridge institution. The use of shortcuts or other mechanisms to facilitate [[Page 41188]] depositor access to funds could result in disparate treatment among depositors within the failed institution and certainly different treatment relative to the closure of a Non-Covered Institution. Preservation of franchise value in the event of failure. The sale of the franchise of a failed institution can provide significant value to mitigate failure costs and is likely to be part of a least-cost resolution. Superior Bank, FSB, one of the largest failures over the past 10 years, generated a franchise premium of $52 million, or 17 percent of current estimated FDIC losses in the failure. An ineffective claims process--especially one deviating significantly from the FDIC's normal policies and procedures--risks reducing or destroying an important asset of the receivership. Preservation of franchise value in the event of failure of a Covered Institution will be an important benefit of the final rule. A banking trade association commenter suggested the FDIC delay implementation of the final rule ``until the FDIC evaluates how to relieve such cost and burden on the industry.'' The FDIC first proposed the elements of the final rule in its 2005 ANPR. A second ANPR was issued in 2006, roughly a year in advance of the January 2008 proposed rule leading to this final rule. As indicated in the proposed rule, based on the respective comments on the 2005 and 2006 ANPRs, the FDIC reduced the potential for industry burden relative to the requirements in the proposed rule. Several of the commenters on the proposed rule acknowledged this reduction in industry burden. Likewise, as a result of the comments on the proposed rule, the FDIC has further reduced the potential for industry burden as to the requirements of the final rule. In both ANPRs and in the proposed rule the FDIC requested comment on alternative approaches that could meet the FDIC's objectives with a lower industry burden. None of these three requests for comment yielded suggestions for a different overall approach meeting the FDIC's objectives. In consideration of the extensive public comment process covering the second part of the proposed rule, the FDIC believes no further examination of costs and benefits is necessary prior to the adoption of the final rule. Definition of Institutions Covered The final rule applies to a Covered Institution, defined as any insured depository institution having at least $2 billion in domestic deposits and at least either: (1) 250,000 deposit accounts; or (2) $20 billion in total assets, regardless of the number of deposit accounts.\24\ All other insured depository institutions are designated Non-Covered Institutions and, thus, are not subject to the final rule.\25\ --------------------------------------------------------------------------- \24\ For the purposes of the criteria in the text, an ``insured depository institution'' includes all institutions defined as such in the FDI Act. 12 U.S.C. 1813(c)(2). Other applicable terms would be as defined in the Reports of Condition and Income (Call Report) instructions (for insured banks) and Thrift Financial Reports (TFR) instructions (for insured savings associations): ``deposit accounts'' mean the total number of deposit accounts (including retirement accounts), ``domestic deposits'' mean total deposits held in domestic offices (for insured banks) or deposits (for insured savings associations), and ``total assets'' means the reported amount of total assets. \25\ As discussed previously, the criteria for a Covered Institution apply to separately chartered insured depository institutions. --------------------------------------------------------------------------- Commenters suggested exemptions for institutions: (1) With strong financial characteristics, (2) specializing in credit card operations or services to depository institutions (bankers' banks) and (3) with fewer than 250,000 deposit accounts. As discussed below, based on the comments, the final rule provides (through an application process) for an exemption from the final rule for institutions with a high concentration of deposits incidental to credit card operations. Strong financial characteristics. The financial characteristics of Covered Institutions vary considerably, as reflected in differing CAMELS ratings, capital levels and debt ratings. The recent difficulties experienced by the financial markets demonstrate the degree to which rapid financial deterioration is possible, even for some institutions only recently considered to be in strong health. The FDIC is concerned that the possible pace of financial deterioration- even among those historically showing strong financial characteristics- could expose the FDIC to undue risk, especially given the potential implementation times cited by commenters. Thus, the final rule provides no exception to the criteria of a Covered Institution based on financial characteristics. Credit card specialists and bankers' banks. Some depository institutions specialize in credit card operations. As such, the preponderance of their deposits relate to overpayments on credit cards or balances held to secure a credit card. Some credit card specialists have in excess of 250,000 deposit accounts and could also have more than $2 billion in domestic deposits. Such institutions rarely hold large deposit balances in a significant number of accounts. As discussed below, under the final rule, the FDIC will permit application for an exemption from the final rule requirements if an institution has a high concentration of deposits incidental to credit card operations. A bankers' bank specializes primarily in services to other depository institutions. Deposit balances can be large and such organizations typically have high levels of uninsured deposits. A large bankers' bank raises concerns similar to other depository institutions, perhaps to a greater extent given its stronger link to those institutions. For a bankers' bank the FDIC would be concerned about rapidly restoring deposit operations in the event of failure so that depositors can have access to their funds. Consequently, the final rule provides no exception to the criteria of a Covered Institution for a bankers' bank. Fewer than 250,000 deposit accounts. Under the proposed rule a Covered Institution could include a depository institution with fewer than 250,000 deposit accounts, as long as it has total assets in excess of $20 billion and domestic deposits over $2 billion. These criteria expand the list of Covered Institutions by roughly seven compared to a more narrow definition including depository institutions with at least 250,000 deposit accounts and over $2 billion in domestic deposits. Some large depository institutions with fewer than 250,000 deposit accounts play a significant role in the financial system, some having total assets in excess of $100 billion. In the event of failure, the FDIC would be concerned about rapidly restoring deposit operations so that depositors can have access to their funds. Hence, the final rule provides no exception to the criteria of a Covered Institution based on the number of deposit accounts. Provisional Holds General description. The final rule requires Covered Institutions to have in place an automated process for implementing provisional holds concurrent with or immediately following the daily deposit account processing on the day of f