[Federal Register: January 14, 2008 (Volume 73, Number 9)] [Proposed Rules] [Page 2363-2401] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr14ja08-28] [[Page 2363]] ----------------------------------------------------------------------- Part IV Federal Deposit Insurance Corporation ----------------------------------------------------------------------- 12 CFR Part 360 Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure and Large-Bank Deposit Insurance Determination Modernization; Proposed Rule [[Page 2364]] ----------------------------------------------------------------------- FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 360 RIN 3064-AD26 Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure and Large-Bank Deposit Insurance Determination Modernization AGENCY: Federal Deposit Insurance Corporation (``FDIC''). ACTION: Notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: The FDIC is seeking comment on a proposed rule composed of two parts. The first part would establish the FDIC's practice for determining deposit account balances at a failed insured depository institution. The second part would require 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 customer information; and allow the FDIC to place and release holds on liability accounts, including deposits. The first part of the proposal would apply to all insured depository institutions. The second part of the proposal would apply only to insured depository institutions having at least $2 billion in domestic deposits and either: more than 250,000 deposit accounts (currently 152 institutions); or total assets over $20 billion, regardless of the number of deposit accounts (currently 7 institutions). The FDIC is seeking comment on all aspects of the proposed rule. DATES: Comments must be submitted on or before April 14, 2008. ADDRESSES: You may submit comments by any of the following methods: Agency Web site: http://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web Site. E-mail: Comments@FDIC.gov. Include ``Processing of Deposit Accounts and Insurance Determination Modernization'' in the subject line of the message. Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7 a.m. and 5 p.m. (EST). Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. Public Inspection: All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal including any personal information provided. Comments may be inspected and photocopied in the FDIC Public Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m. (EST) on business days. Paper copies of public comments may be ordered from the Public Information Center by telephone at (877) 275-3342 or (703) 562-2200. 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, Christopher L. Hencke, Counsel, Legal Division, (202) 898-8839 or chencke@fdic.gov or Catherine Ribnick, Counsel, Legal Division, (703) 562-2407 or cribnick@fdic.gov. SUPPLEMENTARY INFORMATION: The proposed rule comprises two parts. The first part would establish the FDIC's practice for determining deposit account balances at a failed insured depository institution.\1\ The second part would require the largest insured depository institutions to adopt systems that would, in the event of the institution's failure: (1) Provide the FDIC with standard deposit account and customer information; and (2) allow the FDIC to place and release holds on liability accounts, including deposits. --------------------------------------------------------------------------- \1\ Part one imposes no requirements on insured depository institutions, rather it only establishes the FDIC's practices for determining deposit account balances in the event of failure. --------------------------------------------------------------------------- I. Determining Deposit Account Balances at a Failed Insured Depository Institution A. Background Upon the failure of an FDIC-insured depository institution, the FDIC must determine the total insured amount for each depositor. 12 U.S.C. 1821(f). To make this determination, the FDIC must ascertain the balances of all deposit accounts owned by the same depositor in the same ownership capacity at a failed institution as of the day of failure. The second part of this proposed rule, among other things, would require certain large depository institutions to place holds on liability accounts, including deposits, in the event of failure. The amount held would vary depending on the account balance, the nature of the liability (whether it is a deposit or non-deposit for insurance purposes) and the expected losses resulting from the failure. In order to calculate these hold amounts, the rules used by the FDIC to determine account balances as of the day of failure must be clearly established. A deposit account balance can be affected by transactions \2\ presented during the day. A customer, a third party or the depository institution can initiate a deposit account transaction. All depository institutions process and post these deposit account transactions according to a predetermined set of rules to determine whether to include a deposit account transaction either in that day's close-of- business balances or in the next day's close-of-business balances. These rules establish cutoff times that vary by institution and by type of deposit account transaction--for example, check clearing, Fedwire, ATM, and teller transactions. Institutions post transactions initiated before the respective cutoff time as part of that day's business and generally post transactions initiated after the cutoff time the following business day. Further, institutions automatically execute prearranged ``sweep'' instructions affecting deposit balances at various points throughout the day. The cutoff rules for posting deposit account transactions and the prearranged automated instructions define the close-of-business balance for each deposit account on any given business day.\3\ --------------------------------------------------------------------------- \2\ A deposit account transaction, such as deposits, withdrawals, transfers and payments, causes funds to be debited from or credited to the account. \3\ Some depository institutions operate ``real-time'' deposit systems in which some deposit account transactions are posted throughout the business day. Most depository institutions, however, process deposits in a ``batch mode,'' where deposit account transactions presented before the cutoff time are posted that evening or in the early morning hours of the following day. With either system--batch or real-time--the institution calculates a close-of-business deposit balance for each deposit account on each business day. --------------------------------------------------------------------------- In the past, the FDIC usually took over an institution as receiver after it had closed on a Friday. For institutions with a few branches in one state, deposit account transactions for the day were completed and determining account balances on that day was relatively straightforward. The growth of interstate banking and branching over the past two decades and the increasing complexity of bank products and practices (such as sweep accounts) has made the determination of account balances on the day of closing much more complicated. Financial institutions are much larger and the industry is more concentrated than in the past, factors further complicating the determination. [[Page 2365]] B. The proposed rule Overview In general. The FDIC makes deposit insurance determinations based upon deposit account balances at a failed institution on the day of failure. The proposed rule would define what is meant by a deposit account balance on the day an insured depository institution fails and, thus, would define the deposit account balances on which the FDIC would make insurance determinations. A deposit account balance on the day of failure would be defined as the end-of-day ledger balance of the deposit on the day of failure. Whether a deposit account transaction would be included in the end-of-day ledger balance on the day of failure would depend generally upon how it normally would be treated using the institution's ordinary cutoff time on that day. As mentioned above, many institutions have different cutoff times for different kinds of transactions, such as check clearing, Fed wire, ATM and teller transactions. Under the proposed rule, the FDIC would establish the FDIC Cutoff Point, defined as a point in time after it takes control of the failed institution as receiver. If the institution's ordinary cutoff time on the day of failure for any particular kind of transaction preceded the FDIC Cutoff Point, the institution's ordinary cutoff time would be used. Otherwise, the institution's ordinary cutoff time for an individual kind of transaction would be replaced by the FDIC Cutoff Point. The ``Applicable Cutoff Time'' used for any kind of transaction thus would be the earlier of the institution's ordinary cutoff time or the FDIC Cutoff Point. In practice, there might be several Applicable Cutoff Times for a given failed institution, since different kinds of transactions could have different cutoff times. No Applicable Cutoff Time would be later than the FDIC Cutoff Point established by the FDIC, though some could be earlier. Transactions occurring after the Applicable Cutoff Time would be posted to the next day's business, if the operations of the failed institution were carried on by a successor institution. In a depository institution failure where deposit operations are not continued by a successor institution, account transactions on the day of failure would be posted to the applicable deposit accounts until the FDIC takes control of the institution as receiver. This practice would be consistent with the FDIC's current practice in handling deposit account transactions in deposit insurance payout situations.\4\ --------------------------------------------------------------------------- \4\ This is when the FDIC handles the resolution of a failed depository institutions by making payments to insured depositors. More commonly, the FDIC handles a failed institution by arranging a purchase-and-assumption transaction with a healthy depository institution. In those cases, insured depositors' funds are transferred to the assuming institution and available at that institution to depositors. --------------------------------------------------------------------------- Upon taking control of a failed institution as receiver, the FDIC would take steps necessary to limit additional transactions to ensure, to the extent practicable, that funds would not be received by or removed from the failed institution. These steps might include the suspension of wire activities and new deposit account transactions. For example, wire transactions not yet executed by the FDIC Cutoff Point would not be allowed to occur. For a failed institution operating in several time zones, the FDIC Cutoff Point, which would set the latest possible time for any particular transaction's Applicable Cutoff Time, would be translated into local time. For example, a 6 p.m. Eastern Time FDIC Cutoff Point on the day an institution was closed would mean a 5 p.m. FDIC Cutoff Point in the Central Time zone. As receiver, the FDIC would attempt, as it has customarily done in the past, to close all offices of the failed institution as soon as practicable after taking over as receiver. To illustrate the Applicable Cutoff Time, consider an institution whose normal cutoff time for teller transactions is 3 p.m. local time. Assume that the institution has branches in both the Eastern and Pacific Time zones. Assume also that the FDIC designates 5 p.m. Eastern Time as the FDIC Cutoff Point. The Applicable Cutoff Time for teller transactions would then be 3 p.m. Eastern Time for branches in the east and 2 p.m. Pacific Time for branches in the west. Thus, a deposit made at a teller station at a branch in the west at 1 p.m. local time would be posted to (and included in) the end-of-day ledger balance on the day of failure. A deposit made at a teller station at a branch in the west at 2:30 p.m. local time (assuming that the FDIC could not immediately close the branch) would not be posted to (or included in) the end-of- day ledger balance on the day of failure. Instead, the deposit would be included in the next day's business, unless no successor institution continued the operations of the failed institution, in which case it would either be included in the day-of-failure's business or returned. The deposit insurance implications of including or not including the deposit in the end-of-day ledger balance on the day of failure are discussed below. Prearranged instructions to ``sweep'' funds after the posting process. Certain account agreements, such as those applying to zero balance accounts \5\ and other internal sweep accounts,\6\ provide for the automated transfer from one account at an institution to another account at the institution after transactions are posted for the day, but before the end-of-day balance is established. Applicable contracts and business rules governing these accounts determine the amount to be transferred. Under the proposed rule, any automated internal sweep transaction from one account at the failed institution to another account at the failed institution would be completed on the day of failure.\7\ In effect, the FDIC, as receiver would recognize the transfer, pursuant to the account agreement, in determining the end-of- day balance for deposit insurance and depositor preference purposes. The completion of prearranged internal sweep transactions results in the calculation of end-of-day deposit balances for insurance purposes consistent with how such funds currently are treated for Call Report and assessment purposes. --------------------------------------------------------------------------- \5\ In the case of a zero balance account ordinarily a customer has a master account tied to one or more subsidiary accounts. The institution's agreement with the customer calls for the subsidiary account to have a zero balance at the end of each day. For example, if funds need to be transferred from the master account to cover checks presented against the subsidiary account, this will be done during the nightly processing cycle. Alternatively, if there are excess funds in the subsidiary account they will be transferred to the master account prior to the end of the day. \6\ Insured depository institutions maintain two types of sweep accounts. Internal sweep arrangements--such as those where the investment vehicle is a ``deposit'' in a foreign branch of the institution or its international banking facility--sweep funds only within the institution itself by accounting or bookkeeping entries. External sweep arrangements--such as those connected to investments in money market mutual funds--move funds (usually by wire transfer) outside the institution and, hence, off its books altogether. \7\ The FDIC as receiver would not, however, complete an external sweep--a sweep in which funds leave the institution and another entity assumes liability to the customer--if funds have not already left the failed institution by the FDIC general cutoff time. An external sweep includes, for example, an account where funds are swept from a deposit account at the institution and wired to a third party money market mutual fund every evening. External sweeps also would include an arrangement where funds are swept from a deposit account at a depository institution to an account or product at an affiliate of the institution, even if the transfer is accomplished through a book-entry at the depository institution. In some cases it would not be practicable to stop an external sweep from occurring after the FDIC general cutoff time. In these cases the FDIC would use the pre-sweep deposit balance for insurance purposes. --------------------------------------------------------------------------- [[Page 2366]] For example, assume an agreement between a depository institution and its customer provides that, at the close of every business day, the funds in excess of a designated amount are to be transferred from the customer's checking account at the institution's domestic branch to a Eurodollar account at the institution's foreign branch. Under the proposed rule, the transfer of funds to the foreign branch would be deemed to have been completed on the day of failure, regardless of the FDIC Cutoff Point, because the transfer was authorized as of that day as part of the agreement between the institution and its customer. The proposed treatment of internal zero balance and other sweep accounts has important implications for a customer's depositor and creditor status and chances of recovery from the receivership estate. The implications are discussed below. Post-closing adjustments. Under the proposed rule, the FDIC, as receiver, would be able to correct errors and omissions after the day of failure and reflect them in the day-of-closing deposit account balances. No requirements proposed. The proposed rule would not require insured institutions to have in place computer systems capable of applying the FDIC Cutoff Point to determine deposit account balances upon an institution's day of failure. The FDIC requests comments on whether such a requirement should be imposed for either all institutions or, alternatively, for ``Covered Institutions''--defined in the second part of the proposed rule as institutions having at least $2 billion in domestic deposits and either: more than 250,000 deposit accounts; or total assets over $20 billion, regardless of the number of deposit accounts. Treatment of Uncollected Deposited Checks Under the proposed rule, in determining deposit account balances at a failed insured depository institution, the FDIC would deem all checks deposited into and posted to a deposit account by the Applicable Cutoff Time as part of the deposit account balance for insurance purposes. This approach means that the FDIC would use the ``ledger balance'' of the account for purposes of its deposit insurance determination, in contrast to using either ``available funds'' or ``collected funds'' account balances. The FDIC proposes to use deposit account ledger balances for deposit insurance purposes for several reasons: Depository institutions use and calculate the ledger balance in a more consistent way than other balances. It is consistent with the way that depository institutions report deposits on Call Reports and Thrift Financial Reports and it is the balance the FDIC uses to determine an institution's deposit base for calculating the institution's deposit insurance assessments.\8\ --------------------------------------------------------------------------- \8\ The FDIC's recent revisions to the FDIC's risk-based assessment system have made an institution's assessment base, which is used to determine its deposit insurance assessment, virtually identical with an institution's deposits as defined in the Federal Deposit Insurance Act. The revisions eliminated the ``float'' deductions previously used to compute an institution's assessment base; hence, deposits posted to a deposit account but not yet collected are now part of the assessment base. The stated rationale for eliminating the float deduction from the calculation of an institution's assessment base was that such deductions were small and decreasing as a result of legal, technological and system payment changes. 71 FR 69720 (Nov. 30, 2006). --------------------------------------------------------------------------- It is the easiest balance for depositors to understand, and it is the most frequently used balance on financial statements provided to customers. Using ledger balances also is consistent with the definition of ``deposit'' in the Federal Deposit Insurance Act (``FDI Act''), which includes balances both ``conditionally'' or ``unconditionally'' credited to a deposit account. 12 U.S.C. 1813(l). Further, especially in a large depository institution failure, using ledger balances may be the only operationally feasible means for the FDIC to make deposit insurance determinations timely and expeditiously. As discussed in more detail in the second part of this rulemaking, the FDIC is statutorily obligated to pay insured deposits ``as soon as possible'' after an insured depository institution fails. 12 U.S.C. 1821(f)(1). The FDIC places a high priority on providing access to insured deposits promptly and, in the past, has usually been able to allow most depositors access to their deposits on the business day following closing. The largest insured institutions are much bigger than any institution has been in the past and are growing increasingly complex. Providing prompt access to depositors if one of these institutions were to fail would prove difficult if adjustments for uncollected funds were necessary. The proposed rule differs from the FDIC's past and current practice in an important way. In the past, for a check that was posted to an account but not yet collected at the time of failure--including a check already forwarded by the failed institution for collection but not yet collected--the FDIC acted as agent or trustee for the depositor and remitted or credited payments received on these checks to the depositor in full. These checks were not included in deposits on the day of failure for insurance purposes and were not subject to deposit insurance limits.\9\ In contrast, under the proposed rule, when a check is posted to an account at the failed institution as provided by the Applicable Cutoff Time, the check would be included in the end-of-day balance and would be subject to deposit insurance limits, even if uncollected.\10\ --------------------------------------------------------------------------- \9\ FDIC Adv. Op. 95-2 (Jan. 23, 1995). \10\ If the check ultimately proved to be uncollectible, the ledger balance would be adjusted accordingly. --------------------------------------------------------------------------- To illustrate, assume again that the FDIC Cutoff Point for teller transactions at a failed institution is 2 p.m. Pacific Time for branches in the west. In the past, the receiver, as agent or trustee, would collect any deposit made to the account (whether before or after 2 p.m. local time) that was uncollected on the day of failure and credit or remit the proceeds to the depositor without regard to insurance limits. The amount of the checks would not have counted against the depositor's deposit total for insurance purposes. Under the proposed rule, however, any deposit made at a teller station at a branch in the west up to 2 p.m. local time (possibly including deposits made in previous days) would be included in the end-of-day ledger balance on the day of failure (unless previously withdrawn by the depositor). If such a deposit caused the depositor's total deposits to exceed the maximum deposit insurance amount for that ownership capacity, the depositor would have uninsured deposits. Some depositors may receive less favorable treatment under the proposed rule than if the FDIC were to continue to use its current approach to handling uncollected deposited checks. The increasing speed with which checks are processed as a result of electronic check processing, the use of checking account debit cards and other developments, however, should limit the effect of the proposed rule in this regard. Moreover, the current approach would not be feasible in a larger bank failure, and the FDIC must plan for all contingencies. Treatment of Internal Sweep Accounts in General Background. In a prearranged, internal sweep arrangement, the nature of an institution's liability to its customer changes automatically and repeatedly (usually once or twice every [[Page 2367]] day). Usually, some or all of the funds in an obligation denominated a deposit account (typically, a checking account) are transferred to a non-deposit liability account within the same depository institution (an ``internal sweep''). For many such internal sweeps (such as sweeps to Eurodollar accounts, discussed below), funds do not usually transfer; rather, a ledger or accounting entry is used to record that the obligation has moved to another type of account. Most agreements between sweep customers and a depository institution expressly provide that the institution's liability, once the sweep occurs, is not a deposit (as defined in section 3(l) of the FDI Act) and that the institution will pay interest (typically overnight) while the liability remains a non-deposit liability. These sweep agreements allow an institution to pay interest without violating the statutory prohibition on the payment of interest on demand deposits.\11\ These sweep agreements also relieve insured institutions from having to maintain reserve requirements for the swept liabilities under the regulations issued by the Board of Governors of the Federal Reserve System.\12\ In addition, the agreements relieve institutions from having to pay deposit insurance assessments (or premiums) on the swept liabilities, since only deposits are included in the base upon which institutions pay assessments.\13\ --------------------------------------------------------------------------- \11\ In general, insured depository institutions are prohibited from paying interest on commercial demand deposits. See 12 U.S.C. 371a; 12 U.S.C. 1828(g); 12 CFR part 217; 12 CFR part 329. \12\ 12 CFR Part 204. \13\ 12 CFR 327.5. --------------------------------------------------------------------------- The Adagio decision. The need for a rule to govern the treatment of internal sweep accounts in an institution failure is motivated, in part, by a recent court decision involving the treatment of sweep accounts. In Adagio Investment Holding Ltd. v. FDIC, 338 F. Supp. 2d 71 (D.D.C. 2004), the FDIC was appointed as the receiver of the failed Connecticut Bank of Commerce. On the night of the bank's failure, in accordance with its customary practice, the FDIC ``completed the day's business'' which involved processing pending transactions, including approximately $20.2 million which had been authorized to be swept from a demand deposit account in the bank to a non-insured non-deposit account in the bank's international banking facility (``IBF''). Because ``deposits'' in an IBF are not deposits for purposes of section 3(l) of the FDI Act, the FDIC issued (pursuant to the national deposit preference statute, described below) the holders of these ``deposits'' receivership certificates as general creditors rather than according them priority status as depositors. The creditors, claiming that the receiver did not have authority to permit the sweeps, sued the FDIC. In the Adagio case, the court concluded that the sweep should not have been performed in light of the lack of ``any provision in either the statute or regulations that would permit the sweep that occurred.* * *'' 338 F. Supp. 2d at 81. Operation of the proposed rule as to sweeps. Under the proposed rule, the FDIC would complete a prearranged internal sweep transaction on the day of the institution's failure if the applicable sweep account agreement provides for the automated sweep after transactions are posted for the day, but before the final deposit account balance is established. As in the Adagio situation, a sweep that resulted in a non-deposit liability would leave the creditor with an unsecured general creditor claim against the receivership. This is because under the national deposit preference statute (section 11(d)(11) of the FDI Act, 12 U.S.C. 1821(d)(11)), unsecured general creditor claims receive payment from the receivership estate only after all deposit claims, including uninsured deposits and the FDIC's claim as the subrogee of all insured deposits, have been paid in full. As a result, general creditors often receive little or no recovery in the receivership of a failed depository institution, while uninsured depositors have historically recovered at least part of their funds. Thus, the sweep of a liability from a deposit account to a non-deposit account (on the day of the institution's failure) could significantly reduce the accountholder's recovery from the receivership estate. Customers could either lose or gain from having internal sweeps completed. Eurodollar sweeps and sweeps to IBF accounts are two examples of internal sweep arrangements that would result in customers losing due to the sweep being completed. The Eurodollar and IBF sweep arrangement typically begins each business day with balances only in a domestic deposit account. At the end of the day, the customer's claim is denominated a Eurodollar account (typically associated with the bank's branch in the Cayman Islands or Bahamas) or an IBF account. At the start of the next business day, the depository institution will sweep the balance back to the domestic deposit account. The cycle typically repeats itself daily. Usually the underlying contract for a Eurodollar sweep specifies that the obligation at the foreign branch is not payable in the United States and, hence, is not a deposit,\14\ for deposit insurance and depositor preference purposes. Upon an institution failure, amounts in a Eurodollar account in a non-insured branch of the failed institution would be treated as foreign deposits and would not be deposits for insurance or depositor preference purposes. The same treatment would apply to sweeps to IBFs, which by statutory definition are not deposits. Eurodollar and IBF accountholders would be accorded general creditor status in the receivership estate. Institutions do not pay deposit insurance assessments on liabilities denominated, as of an institution's close of business, as foreign deposits or IBF deposits. --------------------------------------------------------------------------- \14\ The definition of ``deposit'' in the FDI Act expressly excludes: ``any obligation of a depository institution which is carried on the books and records of an office of such bank or savings association located outside of any State, unless (i) such obligation would be a deposit if it were carried on the books and records of the depository institution, and would be payable at an office located in any State; and (ii) the contract evidencing the obligation provides by express terms, and not by implication, for payment at an office of the depository institution located in any State.'' 12 U.S.C. 1813(l)(5)(A). Also, the FDI Act defines IBF obligations as non-deposits. 12 U.S.C. 1813(l)(5)(B). --------------------------------------------------------------------------- Thus, under the proposed rule, the sweep to the IBF described in the Adagio decision would be completed by the receiver on the day of failure and the account holders, who held IBF accounts after the sweep, would be deemed to be general creditors of the receivership, rather than depositors, under the deposit preference statute.\15\ --------------------------------------------------------------------------- \15\ Rights are fixed as of the close of the day's business. Those rights would not be changed if, for example, it was impractical to reprogram the bank's computers before a liability swept to a foreign branch of an insured institution as of the day of the institution's failure was swept back to a deposit account at the bridge bank serving as the successor to the failed institution. --------------------------------------------------------------------------- Completing repurchase agreement sweeps could--if the accounts are properly structured--benefit the customer. In a repurchase sweep, the process is similar to that of a Eurodollar or IBF sweep. At the start of the business day, the customer balances reside in a deposit account. At some point during the day the obligation is changed to an interest- bearing, non-deposit liability account, and is so reported by the institution as of the close of business. In some cases, the institution sells securities to the customer (and agrees to repurchase them later). At the start of the next business day, the depository institution will repurchase the securities by re-crediting the deposit account. The cycle repeats itself daily. Under the proposed rule, internal repurchase account sweeps would be [[Page 2368]] accorded the same treatment as other pre-arranged, automated sweep arrangements. That is, the FDIC would consider sweep transactions to be completed on the day of the institution's failure if the applicable sweep account agreement provides for the automated sweep before the final deposit account balance is established. Some repurchase sweep agreements provide for an actual sale of securities by the depository institution to a customer (followed by the institution's ``repurchase'' of the securities from the customer). When the customer uses a deposit account to make the purchase, the bank's deposit liability to the customer is extinguished. In other cases, however, the so-called repurchase agreement does not provide for the actual sale and repurchase of securities. Rather, the agreement provides for the transfer of the customer's claim from a deposit account at the depository institution to another liability account, collateralized by either specific securities or a pool of securities, at the same institution. In this regard, the FDIC seeks comment on specific questions: Do some or all repurchase arrangements as actually executed: (1) Pass title to the customer in a transaction that is enforceable against the FDIC? or (2) create perfected security interests that are enforceable against the FDIC? Comments also are requested as to whether the nature of some or all repurchase sweep arrangements satisfies the definition of ``deposit'' in section 3(l) of the FDI Act. In addition, comments are requested as to what arguments may be made that repurchase arrangements in which the institution collateralizes its liability are permissible, given restrictions on collateralizing private deposits. See Texas & Pacific Railway Company v. Pottorff, 291 U.S. 245 (1934). Treatment of Sweep Accounts Involving the Transfer of Funds Outside the Depository Institution The proposed rule would apply differently to sweep accounts involving the transfer of funds outside the depository institution. In those situations, the status of the funds as of the institution's day of failure would depend on whether the funds left the institution (via wire transfer or otherwise) before the FDIC Cutoff Point. For example, assume the customer and the institution have an agreement that funds in excess of a certain amount are to be wired to a mutual fund (outside the institution) at 5 p.m. each business day. The institution fails and the FDIC Cutoff Point is set at 4 p.m. If the funds have not been wired out of the institution by 4 p.m., the FDIC would consider the funds to be part of the deposit account balance upon which the FDIC would make a deposit insurance determination. Conversely, under the same facts, except that the FDIC Cutoff Point is set at 6 p.m., the wire transfer would be executed at 5 p.m., and the wired funds would no longer be part of the deposit account balance upon which the FDIC would make a deposit insurance determination. Where funds subject to a prearranged, automated external sweep have been temporarily transferred to an intermediate deposit account (or omnibus account) at the failed institution awaiting transfer to an external source, but have not actually been transferred to the external source (for example, the mutual fund) by the FDIC Cutoff Point, those funds would still be considered part of the customer's deposit account balance for deposit insurance and receivership purposes. External sweep arrangements typically provide that invested funds remain outside the institution on a day-to-day basis. In this regard, at the point of failure the preponderance of a customer's funds would reside in the external sweep investment vehicle and not be considered a deposit for Call Report, assessment or insurance purposes. Such external funds typically would not be subject to loss in the event of failure. The proposed rule would affect only those balances leaving the institution on the day of failure. Thus, the proposed treatment of external sweep arrangements is consistent with the FDIC's practice, upon taking control of a failed institution as receiver, to limit the removal of funds from the failed institution. Request for comment on sweeps alternative. As described above, funds subject to an internal sweep that is to take place before end-of- day balances are calculated would not be accorded treatment as deposits because they would be swept, within the depository institution, by prearrangement, before the institution's close of business, from a deposit to a non-deposit account. Under such an arrangement, no deposit insurance premiums would have been assessed against these funds since they would not have been reported as deposits by the institution. The FDIC requests comments on whether, if the swept funds in such arrangements were to be assessed insurance premiums, they also should be eligible to be treated as deposits for purposes of FDIC deposit insurance and depositor preference. The FDIC requests comment on whether or to what extent such an option would involve any operational or regulatory burden or other adverse regulatory consequences. Request for Comment on Part One of the Proposed Rule In addition to requesting responses to the specific questions posed above and requesting comments on all aspects of this part of the proposed rulemaking, the FDIC requests comments on alternative approaches for determining deposit account balances at a failed insured depository institution, including whether the FDIC should have the discretion to establish a universal cut-off time for such determinations at the time it takes control of a failed insured depository institution. II--Large-Bank Deposit Insurance Determination Modernization As mentioned above, the second part of the proposed rule would require 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 customer information and (2) allow the placement and release of holds on liability accounts, including deposits. A. Overview This part of the proposed rule applies to large FDIC-insured institutions, defined in the proposed rule as ``Covered Institutions.'' The definition would encompass 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. Currently, the combined total number of Covered Institutions would be 159.\16\ In summary, Covered Institutions would be required to adopt mechanisms that would, in the event of the institution's failure: --------------------------------------------------------------------------- \16\ Based upon Call Reports dated June 30, 2007. --------------------------------------------------------------------------- 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. B. Need for a Rule When handling a depository institution failure the FDIC is required to structure the least costly of all possible resolution transactions, except [[Page 2369]] in the event of systemic risk.\17\ In addition, the FDIC is required to pay insured deposits ``as soon as possible'' after an institution fails.\18\ The FDIC places a high priority on providing access to insured deposits promptly and, in the past, has usually been able to allow most depositors access to their deposits on the business day following closing. Doing so enables the FDIC to: (1) Maintain public confidence in the banking industry and the FDIC; (2) provide the best possible service to insured depositors by minimizing uncertainty about their status and avoiding costly disruptions that may limit their ability to meet financial obligations; (3) mitigate the spillover effects of a failure, such as risks to the payments system, problems stemming from depositor illiquidity and a substantial reduction in credit availability; and (4) retain, where feasible, the franchise value of the failed institution (and thus minimize the FDIC's resolution costs). --------------------------------------------------------------------------- \17\ Section 13(c)(4)(A)(ii) of the FDI Act, 12 U.S.C. 1823(c)(4)(A)(ii), and section 13(c)(4)(G)(i) of the FDI Act, 12 U.S.C. 1823(c)(4)(G)(i). \18\ Section 11(f)(1) of the FDI Act, 12 U.S.C. 1821(f)(1). --------------------------------------------------------------------------- The largest insured depository institutions are growing increasingly complex. The proposed rule would help facilitate an insurance determination and dramatically improve upon access to depositor funds if one of these institutions were to fail. The proposed rule is intended to allow the deposit operations of a failed institution to be continued on the day following failure. It is also intended to permit the FDIC to meet its legal mandates regarding the resolution of failed insured institutions, provide liquidity to depositors promptly, enhance market discipline, ensure equitable treatment of depositors at different institutions and reduce the FDIC's costs by preserving the franchise value of a failed institution. Limitations of current processes. Making deposit insurance determinations is inherently complex because a single depositor may have more than one account and may hold accounts in different ownership capacities, each of which may be separately insured.\19\ To make insurance determinations, the FDIC must aggregate all accounts owned by a depositor in a single ownership capacity. This process often requires reviewing detailed account agreements and other documents. --------------------------------------------------------------------------- \19\ The basic FDIC insurance limit is $100,000 per depositor, per insured institution, although the insurance limit for Individual Retirement Accounts and other specified types of retirement accounts was recently increased to $250,000. 71 FR 14629, March 23, 2006. Deposits maintained by a person or entity in different ownership rights and capacities at one institution are aggregated and separately insured up to the insurance limit. All types of deposits (for example, checking accounts, savings accounts, certificates of deposit, interest checks and cashier's checks) held by a depositor in the same ownership category at an institution are added together before the FDIC applies the insurance limit for that category. Today the FDIC generally relies upon the deposit account records of a failed institution in making a deposit insurance determination. The FDIC's rules and regulations for deposit insurance coverage describe the categories of ownership rights and capacities eligible for separate insurance coverage. FDIC refers to these as ``ownership categories.'' Addendum 1 describes the main ownership categories. --------------------------------------------------------------------------- The larger the number of deposit accounts at an institution, the more complex and difficult the insurance determination becomes. Complexity also depends upon the volume of transactions, the amount of uninsured funds, the number of separate computer systems or ``platforms'' on which deposit accounts are maintained and the speed at which the institution's deposit operations must be resumed following failure. These factors all present significant challenges in a large- bank failure. All of the insured institution failures using the FDIC's current processes and procedures have been of modest size, the largest being NetBank (2007) with total deposits at the time of closure of $1.9 billion and roughly 175,000 deposit accounts. With this proposed rule, the FDIC's processes and procedures for determining deposit insurance coverage would be improved to avoid delays. Table 1 reflects the increasing number of deposit accounts at the largest insured institutions over the past 10 years. If this trend continues, the largest institutions will hold even more deposit accounts in the future. Table 1.--Top Ten Institutions, By Number of Deposit Accounts (In Millions) ------------------------------------------------------------------------ Rank 1997 2002 2007 ------------------------------------------------------------------------ 1............................................... 11.3 27.9 54.0 2............................................... 10.4 17.3 33.9 3............................................... 5.0 11.1 24.1 4............................................... 4.1 10.7 20.5 5............................................... 4.0 10.4 19.4 6............................................... 3.8 10.0 16.2 7............................................... 3.7 9.0 12.7 8............................................... 3.7 6.8 9.5 9............................................... 3.6 6.0 9.4 10.............................................. 3.2 5.1 7.2 ----------------------- Total....................................... 52.7 114.3 206.8 ------------------------------------------------------------------------ In most instances, larger institutions are considerably more complex, have more deposit accounts, are more geographically dispersed and have more diverse systems and data-integration issues than small institutions. This is especially true of large institutions that have engaged in merger activity. Table 2 shows some of the differences between Covered Institutions under the proposed rule, and all other institutions (Non-Covered Institutions). By definition, Covered Institutions typically have more accounts than other institutions. Covered Institutions also usually have more complex deposit systems and require a rapid resumption of deposit operations in the event of failure to protect the institution's franchise value. Table 2.--Industry Segmentation ---------------------------------------------------------------------------------------------------------------- Total domestic Segment Definition Number % of Total deposits % of Total (billions) ---------------------------------------------------------------------------------------------------------------- Covered.......................... Total domestic deposits 159 1.8 4,612 68.9 of at least $2 billion with: (1) over 250,000 deposit accounts or (2) total assets over $20 billion but less than 250,000 deposit accounts. Non-Covered...................... All insured institutions 8,466 98.2 2,086 31.1 not Covered. ------------------------------------------------------------------------------ Total........................ ......................... 8,625 100.0 6,698 100.0 ---------------------------------------------------------------------------------------------------------------- Note: Data are as of June 30, 2007. [[Page 2370]] Even when a smaller institution fails, making insurance determinations is a time consuming process. The FDIC typically needs several months of advance planning to make deposits available to insured depositors on the next business day. In the past, insured institution closures typically have occurred on a Friday, which has allowed the FDIC two days to prepare for the next business day. But Friday closures are not always the case and the FDIC must be prepared for all contingencies. Previous ANPRs. In 2005, the FDIC published an advance notice of proposed rulemaking (the 2005 ANPR),\20\ which requested comment on three options for enhancing the speed at which depositors at larger, more complex insured institutions would receive access to their funds in the event of failure.\21\ All of the options would have required that Covered Institutions modify their deposit account systems. Option 1 would have imposed requirements very similar to those in this proposed rule, except that, in addition, institutions would have been required to maintain a unique identifier for each depositor and for the insurance ownership category of each account. --------------------------------------------------------------------------- \20\ 70 FR 73652 (Dec. 13, 2005). \21\ In the 2005 ANPR Covered Institutions were defined to include all insured institutions with total number of deposit accounts over 250,000 and total domestic deposits over $2 billion. A full description of the three options is provided in the 2005 ANPR. --------------------------------------------------------------------------- Option 2 was similar to Option 1 except that the standard data set would have included only information that institutions currently possessed. The option would not have required institutions to create a unique identifier for each depositor or to classify each account by ownership category, similar to the requirements in this proposed rule. Option 3 was to require the largest ten or twenty insured institutions (in terms of the number of deposit accounts) to know the insurance status of their depositors and to be able to deduct expected losses from uninsured deposit accounts in the event of failure. Sixty-four percent of the 28 comment letters on the 2005 ANPR opposed the proposal, citing high costs and regulatory burden.\22\ --------------------------------------------------------------------------- \22\ The 2005 ANPR comment letters are available at: http://www.fdic.gov/regulations/laws/federal/2005/05comlargebank.html. Addendum 2 provides a more complete discussion of comments. --------------------------------------------------------------------------- In response, the FDIC published a second advance notice of proposed rulemaking (the 2006 ANPR) \23\ focusing on the less costly and burdensome alternatives. The 2006 ANPR proposed dividing Covered Institutions into two tiers. Tier 1 institutions would comprise the largest, most complex Covered Institutions. The Tier 1 proposed requirements were the same as the Option 1 requirements under the 2005 ANPR, except that the deposit insurance category would not be required for each deposit account. Tier 2 institutions--the remainder of Covered Institutions--would have the same requirements as Tier 1, except that there would not be a unique depositor ID requirement. --------------------------------------------------------------------------- \23\ 71 FR 74857 (Dec. 13, 2006). --------------------------------------------------------------------------- The comment letters from the trade associations nevertheless still cited high costs and regulatory burden and argued that the benefits to the FDIC would be low and might never materialize.\24\ These letters suggested that the FDIC should conduct more research on the costs of the options and the potential benefits. It was recommended that the FDIC focus on troubled institutions or abandon the initiative altogether.\25\ --------------------------------------------------------------------------- \24\ See comment letters provided by American Bankers Association (March 13, 2007), America's Community Bankers (March 13, 2007) and The Financial Services Roundtable (March 7, 2007). \25\ In total, the FDIC received 13 comments on the 2006 ANPR. The 2006 comment letters are available at: http://www.fdic.gov/regulations/laws/federal/2006/06comAC98.html. Addendum 2 provides a more complete discussion of comments. --------------------------------------------------------------------------- In response, the FDIC has further reduced the potential costs and burdens in this NPR by dropping the requirement that the largest, most complex Covered Institutions provide a unique identifier for each depositor. The FDIC's has striven to limit costs and burdens as much as possible while still maintaining the proposed capability for resolving failed institutions at the least cost and providing depositors prompt access to funds. In each ANPR the FDIC requested comment on other alternatives allowing it to meet its objectives in a less costly or burdensome manner. No alternative strategies have been proposed. Some trade organizations proposed delaying implementation of these requirements until a Covered Institution becomes troubled. Given the technological complexity of making funds available quickly and the risk that a Covered Institution could fail with limited warning, this proposal is not compatible with the FDIC's obligation to be prepared for a large- bank failure. In response to the 2006 ANPR, the Board of Governors of the Federal Reserve System noted that the options reduced the likelihood of a too- big-to-fail resolution structure, promoted market discipline, lowered resolution costs and should be in place and tested before a large institution becomes troubled. The Federal Reserve Bank of Minneapolis also argued that the FDIC must revamp its systems for determining insurance at large institutions, should work with the industry to minimize the costs of the proposed options (but still ensure they meet the FDIC's objectives) and should not wait to implement the options until a bank becomes troubled.\26\ The FDIC agrees. --------------------------------------------------------------------------- \26\ Board of Governors of the Federal Reserve System (February 27, 2007) and Federal Reserve Bank of Minneapolis (January 17, 2007). --------------------------------------------------------------------------- C. The Proposed Rule Use of the terms ``deposit,'' ``foreign deposit'' and ``international banking facility deposit.'' In this part of the proposed rule, the term ``deposit'' continues to be used as defined in section 3(l) of the Federal Deposit Insurance Act (12 U.S.C. 1813(l)). A deposit--also called a ``domestic deposit''--includes only deposit liabilities payable in the United States, typically those deposits maintained in a domestic office of an insured depository institution. 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 deposit 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 not a deposit for insurance purposes under section 3(l) or depositor preference purposes. Definition of Institutions Covered This part of the proposed rule would apply to a Covered Institution, which would be 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.\27\ Any other insured depository institution would be a Non-Covered Institution, [[Page 2371]] and would not be subject to this part of the proposed rule.\28\ The FDIC requests specific comment on the proposed definition. --------------------------------------------------------------------------- \27\ 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. --------------------------------------------------------------------------- Continuation of Business Operations 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.\29\ 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. The proposed rule is 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 will continue post failure, although some operations may be suspended temporarily. --------------------------------------------------------------------------- \28\ 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. \29\ The provisional hold functionality and other requirements of the proposed rule should 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 will 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 deposit 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 \30\ 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.\31\ 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. Figure 1 presents a hypothetical timeline of this process using local time at the Successor Institution's headquarters. --------------------------------------------------------------------------- \30\ 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. \31\ 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. --------------------------------------------------------------------------- The FDIC requests comment on all aspects of this proposed approach, including costs, benefits and alternative approaches that would allow the FDIC to accomplish its objectives of affording a timely deposit insurance determination, a prompt release of funds to depositors, while preventing depositors and creditors from receiving more than they are entitled to under applicable law. BILLING CODE 6714-01-P [[Page 2372]] [GRAPHIC] [TIFF OMITTED] TP14JA08.004 [[Page 2373]] Provisional Holds General description. Under the proposed rule, Covered Institutions would be required 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.\32\ The proposal would not require development of mechanisms to stop or alter interest accrual for the affected accounts. --------------------------------------------------------------------------- \32\ 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 be 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.\33\ --------------------------------------------------------------------------- \33\ 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. The provisional hold is intended to bar access to some or all of a customer's account pending the results of the insurance determination. Preventing access could be accomplished using various methods, each of which have different implications for customer access and implementation costs. As described in the previous ANPRs, the FDIC contemplated the use of a persistent or hard hold. But other hold types or mechanisms may also accomplish the FDIC's objectives. Possible options include: 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 remov