Large-Bank Deposit Insurance Determination Modernization Proposal, 74857-74873 [E6-21143]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 71, Number 239 (Wednesday, December 13, 2006)]
[Proposed Rules]
[Pages 74857-74873]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-21143]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

RIN 3064-AC98


Large-Bank Deposit Insurance Determination Modernization Proposal

AGENCY: Federal Deposit Insurance Corporation (``FDIC'').

ACTION: Advance notice of proposed rulemaking (``ANPR'').

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SUMMARY: The FDIC is seeking comment on whether and how the largest 
insured depository institutions should be required to modify their 
deposit account systems to speed depositor access to funds in the event 
of a failure. Today, insured institutions do not track the insured 
status of their depositors yet the FDIC must make deposit insurance 
coverage determinations in the event of failure. The current process 
might result in unacceptable delays if used for an FDIC-insured 
institution with a large volume of deposit accounts. Such delays would 
have an impact on depositors' ability to access their funds and are 
likely to result in a resolution (of the failed institution) 
significantly more costly to the Deposit Insurance Fund. As currently 
contemplated, the options discussed in the ANPR would apply only to the 
152 insured depository institutions with more than 250,000 deposit 
accounts and more than $2 billion in domestic deposits, as well as 
seven additional institutions with total assets over $20 billion, less 
than 250,000 deposit accounts and at least $2 billion in domestic 
deposits. In December 2005 the FDIC issued a prior advance notice of 
proposed rulemaking on this subject (``2005 ANPR'').\1\ This ANPR is a 
follow-up to that issuance. The FDIC is seeking comment on all aspects 
of the ANPR.
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    \1\ ``Large-Bank Deposit Insurance Determination Modernization 
Proposal, Advance Notice of Proposed Rulemaking,'' 70 FR 73652, 
December 13, 2005.

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DATES: Comments must be submitted on or before March 13, 2007.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web site: https://www.FDIC.gov/regulations/laws/
federal/propose.html. Follow the instructions for submitting comments.
     E-mail: comments@FDIC.gov.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street, NW., Washington, DC 20429.
     Hand Delivered/Courier: The 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.
     Public Inspection: Comments may be inspected and 
photocopied in the FDIC Public Information Center, Room E-1002, 3501 
North Fairfax Drive, Arlington, Virginia, between 9 a.m. and 5 p.m. on 
business days.
     Internet Posting: Comments received will be posted without 
change to https://www.FDIC.gov/regulations/laws/federal/propose.html, 
including any personal information provided.

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 Catherine Ribnick, Counsel, Legal 
Division, (202) 898-3728 or cribnick@fdic.gov.

SUPPLEMENTARY INFORMATION: 

I. Background

    When handling a depository institution failure the FDIC is required 
to structure the least costly of all possible resolution transactions, 
except in the event of systemic risk.\2\ In addition, the FDIC is 
required to pay insured deposits ``as soon as possible'' after an 
institution fails \3\ and places a high priority on providing access to 
insured deposits promptly.\4\ In view of the significant industry 
consolidation in recent years, the FDIC is exploring new methods to 
modernize the process to determine the insurance status of each 
depositor in the event of a depository institution failure. The FDIC's 
current procedures to determine deposit

[[Page 74858]]

insurance coverage may result in unacceptable delays if used for an 
FDIC-insured institution with a large volume of deposit accounts. In 
developing a new system to determine insurance coverage in a large-bank 
failure, the FDIC's goals are to minimize disruption to depositors and 
communities and to minimize costs to the Deposit Insurance Fund.
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    \2\ Section 13(c)(4)(A)(ii) of the Federal Deposit Insurance Act 
(``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).
    \3\ Section 11(f)(1) of the FDI, 12 U.S.C. 1821(f)(1).
    \4\ 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, such as returned checks, 
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).
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    The ANPR's focus is on FDIC-insured institutions with complex 
deposit systems. These include those institutions with the largest 
volume of deposit accounts, currently expected to include 152 insured 
institutions with over 250,000 deposit accounts and total domestic 
deposits of at least $2 billion, as well as seven additional 
institutions with total assets over $20 billion, with less than 250,000 
deposit accounts and total domestic deposits of at least $2 billion 
(``Covered Institutions''). One of the assumptions underlying this ANPR 
is that no institution would be required to submit detailed customer 
deposit data to the FDIC unless the institution was in danger of 
failing.

Insurance Coverage and Insurance Coverage Determination Procedures

    The basic FDIC insurance limit is $100,000 per depositor, per 
insured institution.\5\ Deposits maintained by a person or entity in 
different ownership rights and capacities at one institution are 
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. The FDIC 
generally relies upon the deposit account records of a failed 
institution in making deposit insurance determination.
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    \5\ The coverage for Individual Retirement Accounts and other 
specific types of retirement accounts was recently increased to 
$250,000. 71 FR 14629, March 23, 2006. The FDIC's rules and 
regulations for deposit insurance coverage described the categories 
of ownership rights and capacities eligible for separate insurance 
coverage. FDIC refers to these as ``ownership categories.'' There is 
a description of the primary ownership categories in Appendix A.
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    To achieve accurate deposit insurance determinations, the FDIC uses 
a specialized system to analyze depositor data and apply insurance 
rules. As part of its normal practice, the FDIC obtains depositor data 
only at the time an insured institution is in danger of failing. These 
data are received in the weeks or months prior to failure, and the FDIC 
uses them to determine the insurance status of their depositors and to 
estimate the total amount of insured funds in the institution. The 
current FDIC deposit insurance determination process has several steps. 
Each step varies in time and complexity, depending on the institution's 
characteristics (primarily the number of deposit accounts and type of 
deposit account system). The following is a summary of the usual steps 
involved in the insurance coverage determination process where deposits 
are passed to an acquiring institution:
     Closing out the day's business. In the event of failure, 
it is the FDIC's practice to close out the insured institution's daily 
business prior to obtaining the account balances upon which the 
insurance determination is based. Generally, this process is completed 
according to the bank's existing procedures. All of the day's check 
processing and deposit transactions are completed, and end-of-day 
account balances are determined. This process can require varying 
lengths of time, across Covered Institutions. For larger institutions 
this process can run into the early morning hours.
     Obtain deposit data. A data file is obtained from the 
institution or its servicer. Obtaining usable data from the institution 
or its servicer frequently is a time-consuming process. The FDIC will 
provide the institution or its servicer with a standard data request. 
The standard data request requires the institution to provide 
approximately 45 data fields for each deposit account along with 
electronic copies of trial balances and deposit application 
reconciliations. FDIC technical staff works with the insured 
institution until the standard data set requirements are met and the 
files provided the FDIC can be processed properly. Generally, the FDIC 
has at least 30 days advance warning to plan and prepare for a failure. 
Data are requested in advance to test delivery capabilities, prove the 
balancing and reconciliation processes and make certain that all 
required data fields have been included.
     Process deposit data. Data are received and validated 
(including reconciliation to supporting subsidiary systems). Using its 
Receivership Liability System (``RLS''), the FDIC determines which 
accounts are fully insured, which are definitely uninsured and which 
are possibly uninsured (pending the collection of further information). 
The RLS automatically groups accounts based on the ownership category 
and the name(s), address, and tax identification number for each 
account. This process is part of the insurance determination performed 
on the depositor data received from a failed institution.
     FDIC holds/debits based on insurance determination 
results. Funds deemed insured are passed in full to the acquiring 
institution. Accounts definitely uninsured are debited for the 
uninsured amount and a receivership certificate (``RC'') is issued for 
the debited amount.\6\ Holds are placed on accounts deemed potentially 
uninsured for amounts over the insurance limit, and the account owner 
is contacted. If additional information is required from the depositor, 
a meeting is scheduled. These meetings afford the opportunity to 
collect information necessary to finalize the insurance determination 
on the possibly uninsured depositors. The typical institution resolved 
by the FDIC does not have the capability to post a large volume of 
holds electronically by batch. However, this is an essential 
requirement for an effective depositor claims process for larger 
institutions.
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    \6\ The receivership certificate entitles the depositor to a pro 
rata distribution of the receivership proceeds with respect to their 
claim.
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Least-Cost Resolution Requirements

    As noted above, when handling a depository institution failure the 
FDIC is required by statute to structure the least costly of all 
possible resolution transactions, except in the event of systemic risk. 
Even with systemic-risk failures, the FDIC must conserve costs. Since 
the introduction of the systemic risk exception in 1991, no exceptions 
to the least-cost requirement have been made. The FDIC's least-cost 
requirement was intended to reduce resolution cost and instill a 
greater degree of market discipline by requiring losses to be borne by 
uninsured depositors and non-deposit creditors.
    When an insured institution fails the FDIC may pay insured 
depositors up to the insurance limit (a ``pay-off'') or the FDIC may 
sell the failed institution to another FDIC-insured institution (a 
``purchase and assumption transaction''). Another option is to 
establish a bridge bank or a conservatorship and transfer deposits to 
that institution.\7\ Preservation of the deposit franchise of a failed 
institution

[[Page 74859]]

is an important facet of minimizing resolution costs.
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    \7\ A bridge bank is a national bank chartered for the purpose 
of temporarily carrying on the banking operations of a failed 
institution until a permanent solution can be crafted. See 12 U.S.C. 
1821(n). The FDIC's bridge bank authority applies only to the 
failure of a bank. In the event of the failure of an insured savings 
association the FDIC could seek a federal thrift charter that would 
be operated as a conservatorship. As with a bridge bank, the new 
thrift institution would be a temporary mechanism to facilitate a 
permanent resolution structure.
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Complexities Caused by Industry Consolidation

    Historically, most insured institution closures occur on a Friday. 
In almost all cases, the FDIC has made funds available to the majority 
of insured depositors by the next business day, usually the Monday 
following a Friday closing. All of the insured institution failures of 
the past ten years have been of modest size, the largest being Superior 
Bank, FSB with total deposits at the time of closure of about $2 
billion and roughly 90,000 deposit accounts.
    Industry consolidation raises practical concerns about the FDIC's 
current business model for handling institution failures. 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 recently 
engaged in merger activity. Implications of industry consolidation over 
the past ten years can be seen in Table 1. If such trends continue, 
deposits will become even more concentrated in the foreseeable future.

      Table 1.--Top Ten Institutions, by Number of Deposit Accounts
                              [In millions]
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                     Rank                        1996     2001     2006
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1............................................     11.3     33.7     50.6
2............................................     10.4     12.3     30.4
3............................................      5.0     11.6     22.7
4............................................      4.1     10.1     18.7
5............................................      4.0      9.1     17.7
6............................................      3.8      8.3     13.9
7............................................      3.7      8.0      9.0
8............................................      3.7      6.5      8.8
9............................................      3.6      6.2      6.2
10...........................................      3.2      5.6      5.9
                                              --------------------------
    Total....................................     52.7    111.5    183.9
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    The single most important facet determining the complexity of the 
claims process for depositors of a failed institution is the number of 
deposit accounts. Other factors are important as well, including the 
volume of daily transactions, the amount of uninsured funds, the number 
of separate computer systems or ``platforms'' on which deposit accounts 
are maintained, the speed at which the institution's deposit operations 
must be resumed following failure and the potential spillover 
implications of the failure. The FDIC's analysis of these factors as 
applied to larger banks indicates that the industry can be divided into 
two segments as shown in Table 2.

                                         Table 2.--Industry Segmentation
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                                                                                     Total
                                                                                    domestic
            Segment                   Definition           Number     % of Total    deposits       % of Total
                                                                                   (Billions)
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Covered.......................  Total number of                 159          1.8       $4,445               69.1
                                 deposit accounts over
                                 250,000 and total
                                 domestic deposits
                                 over $2 billion or
                                 total assets over $20
                                 billion regardless of
                                 the number of deposit
                                 accounts and total
                                 domestic deposits
                                 over $2 billion.
Non-Covered...................  All insured                   8,619         98.2        1,992               30.9
                                 institutions not
                                 covered.
�������������������������������
    Total.....................  ......................        8,778        100.0        6,437              100.0
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Note: Data are as of June 30, 2006.

    Large institutions typically have more accounts, more complex 
deposit systems and require a rapid resumption of deposit operations in 
the event of failure to protect the institution's franchise value. With 
Covered Institutions the speed of the claims process could be greatly 
enhanced by the FDIC obtaining a timely data download and by improving 
the institution's capability to automatically post holds or debit 
uninsured funds.
    Covered Institutions are more likely to fail due to liquidity 
reasons prior to becoming critically undercapitalized under prompt 
corrective action.\8\ Most likely, this will be a more rapid and less 
orderly event. Institutions more susceptible to a liquidity insolvency 
pose greater problems for the FDIC. Such institutions have a less 
predictable failure date. The failure could occur on any day of the 
week, and pre-failure access to the institution may be limited because 
liquidity insolvency oftentimes is difficult to anticipate, and because 
liquidity insolvency can occur in a very compressed period of time.
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    \8\ 12 U.S.C. 1831o.
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    Covered Institutions present unique challenges in the event of 
failure. For the smaller, less-complex Covered Institutions these 
challenges may be only modest; for the larger, more complex members of 
the group they are more severe. As noted, the FDIC is concerned about 
both the size and complexity of the deposit operations of Covered 
Institutions and the necessary speed of the claims process to make 
funds available quickly to depositors and maximize the institution's 
franchise (or re-sale) value.

II. The 2005 ANPR

    The 2005 ANPR \9\ requested comment on three options for enhancing 
the speed at which depositors of the larger, more complex insured 
institutions would receive access to their funds in the event of 
failure.\10\ All of the options entailed modifications to the deposit 
account systems of Covered Institutions to facilitate the insurance 
determination process. Option 1 was to require the institution to 
install on its deposit system a capability that, in the event of 
failure, would place a temporary hold on a portion of the balances of 
large deposit accounts. The percentage hold amount would be determined 
by the FDIC at the time of failure, depending mainly on estimated 
losses to uninsured depositors.\11\ Such provisional holds

[[Page 74860]]

would be placed immediately prior to the day the institution reopens 
for business (generally expected to be the next business day) as a 
bridge bank (discussed above). The institution also would need to be 
able to automatically remove these holds and replace them with the 
results of the deposit insurance determination when they become 
available. The insurance determination would be facilitated by certain 
depositor data (such as the depositor's name, address, and tax 
identification number) maintained by the institution in a standard 
format. The data would include a unique identifier for each depositor 
and the insurance ownership category of each account.
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    \9\ 70 FR 73652 (Dec. 13, 2005).
    \10\ 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.
    \11\ 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 the time 
the bridge bank is opened. Advance dividends are based on the 
expected recovery to uninsured depositors.
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    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.
    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 to uninsured depositors in the event of failure.

Comments on the 2005 ANPR

    The FDIC received 28 comments on the 2005 ANPR.\12\ Six were from 
trade organizations, fourteen from large institutions, four from 
community banks and four from others. Most commenters expressed an 
appreciation of the objectives set forth in the 2005 ANPR. The letter 
submitted jointly by American Bankers Association, America's Community 
Bankers and The Financial Services Roundtable ``recognize[d] that the 
Federal deposit insurance system's viability depends on the principle 
that no financial institution is either too big or too small to fail. 
The development of prudent systems to prepare for and respond to the 
failure of any size institution is an important component of the 
Corporation's receivership functions.'' \13\ Nevertheless, the majority 
of commenters generally opposed implementation of any of the options 
offered in the 2005 ANPR. Eighteen of the twenty-eight comment letters 
(sixty-four percent) indicated opposition to the 2005 ANPR, citing high 
costs and regulatory burden. The aforementioned joint comment letter 
from three trade associations ``urge[d] the Corporation to reconsider 
its program to implement the 2005 ANPR.'' \14\ A complete summary of 
the comments received on the 2005 ANPR is provided in Appendix B.
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    \12\ The 2005 ANPR comment letters are available at: https://
www.fdic.gov/regulations/laws/federal/2005/05comlargebank.html.
    \13\ Comment letter provided by American Bankers Association, 
America's Community Bankers and The Financial Services Roundtable 
dated March 13, 2006 in response to the 2005 ANPR, page 3.
    \14\ American Bankers Association, America's Community Bankers 
and The Financial Services Roundtable, page 4.
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III. The Revised ANPR

Process Overview

    Under the process discussed in the ANPR, in the event of failure a 
Covered Institution would complete its nightly processing cycle 
according to the institution's normal practices. After completion of 
this nightly processing cycle provisional holds would be placed on 
large deposit accounts through the institution's deposit systems as 
specified by the FDIC. The placement of provisional holds will allow 
the opening of a bridge bank the day following failure, yet guard 
against the loss of uninsured deposit funds subject to loss. A standard 
set of data files reconciled to the institution's supporting subsidiary 
systems will then be provided to the FDIC, to be used as the basis for 
making deposit insurance determinations. The results of the insurance 
determination will be returned to the bridge bank, likely within 
several days. At this point the provisional holds will be removed en 
masse to be replaced with the results of the deposit insurance 
determination. The FDIC requests comment on all aspects of this 
contemplated approach, including cost/benefit issues and alternative 
approaches that would allow the FDIC to accomplish its objectives of 
affording a timely deposit insurance determination and a prompt release 
of funds to depositors.

Continuation of Business Operations

    For the purposes of implementing the possible requirements 
explained in the ANPR, Covered Institutions should assume that their 
deposit operations would continue post failure in a bridge bank or a 
federally chartered mutual association. In the event of failure the 
bank would complete the nightly deposit processing cycle according to 
the institution's normal practices. For insurance determination 
purposes, the FDIC would use the deposit account balance generated at 
the end of the nightly processing cycle. This is the account balance 
against which provisional holds would be calculated.

Tiered Approach

    Based on the comments received on the 2005 ANPR and additional 
analysis, the FDIC has refined its thinking in terms of how to approach 
the issues discussed in the 2005 ANPR. The FDIC is putting forward for 
comment an approach under which each insured depository institution 
would fall into one of three categories: Tier 1 Covered Institutions, 
Tier 2 Covered Institutions and Non-Covered Institutions. Tier 1 
Institutions would include the largest, most complex institutions among 
those having at least 250,000 deposit accounts and more than $2 billion 
in domestic deposits. Tier 2 Institutions would include institutions of 
lesser complexity among those having at least 250,000 deposit accounts 
and more than $2 billion in domestic deposits, and those with at least 
$20 billion in domestic assets and $2 billion in domestic deposits not 
falling under the definition of a Tier 1 Institution. Non-Covered 
Institutions would be any insured depository institution not meeting 
the definition of a Tier 1 or 2 Covered Institution. Non-Covered 
Institutions would be exempt from the requirements discussed in the 
ANPR.\15\
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    \15\ As part of its claims-process modernization effort, the 
FDIC is streamlining the business processes it uses to facilitate a 
deposit insurance determination. This involves replacing the current 
Receivership Liability System (noted above) with a new system 
incorporating more advanced technologies to enhance automation. 
These changes will improve the FDIC's ability to process efficiently 
a large number of accounts and provide timely customer support to 
uninsured depositors. Enhancements to the FDIC's claims system would 
be facilitated by a closer interaction with a Covered Institution's 
deposit systems.
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    Compared to the 2005 ANPR, the definition of a Covered Institution 
has been expanded to include insured institutions with at least $20 
billion in domestic assets and $2 billion in domestic deposits, 
regardless of the number of accounts. While some such institutions may 
have far fewer than 250,000 deposit accounts, the FDIC is concerned 
that--for such institutions--a Friday closure date cannot be expected, 
a bridge institution will need to be established quickly and that a 
high percentage of deposit accounts may involve uninsured funds. The 
FDIC is interested in comments on the challenges presented by such 
institutions in the event of failure compared to other institutions 
with a comparable number of deposit accounts. Should the definition of 
Covered Institutions be expanded to include institutions with fewer 
than 250,000 deposit accounts?

[[Page 74861]]

Requirements for Different Tiers/Explanation of Requirements

    As explained more fully below, under the approach being put forward 
for comment, a Tier 1 Covered Institution would be required to have in 
place systems that could: (1) Provide a unique depositor identification 
(``ID'') for each depositor; (2) implement automated provisional holds 
against deposit accounts; (3) supply a standard data framework (where 
the form and content of this data structure will be developed in 
cooperation with insured institutions); (4) remove provisional holds; 
(5) supply an agreed upon standardized data structure to compute a 
trial balance; and (6) post holds and debits in batch mode resulting 
from the deposit insurance determination results. A Tier 2 Covered 
Institution would be subject to the same requirements as a Tier 1 
Covered Institution except it would not have to provide a unique 
depositor ID for each depositor.\16\ Each of these requirements is 
described below, along with specific questions on which the FDIC 
requests comment.
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    \16\ Each institution in Tiers 1 and 2 would be required to 
provide the FDIC with the names of the individuals responsible for 
the deposit data file(s), provisional holds, communications, 
customer service and the removal the provisions holds and 
implementation of the results of the deposit insurance 
determination.
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(a) Unique Depositor ID
    Tier 1 Covered Institutions would be required to uniquely identify 
each depositor. The FDIC requests comments on all aspects of this 
possible requirement. In particular:
     To what extent can Covered Institutions uniquely identify 
depositors using current systems and procedures?
     What would be the best method(s) to use for depositor 
identification? Should the FDIC specify the format to be used for 
depositor identification, or should this be left to the Covered 
Institution to determine?
     How expensive would it be for Covered Institutions to 
supply a unique identifier for each depositor? Is this something that 
Covered Institutions are considering for internal business purposes? If 
not, how do Covered Institutions determine common ownership for 
relationship management, cross-selling, risk management or other 
purposes? How long would it take to implement a unique depositor 
identification process? To what extent is the answer to that question a 
function of running deposit accounts on more than one platform?
     How reliable would the data be in identifying each 
depositor? To what extent are Covered Institutions able to identify 
account owners (as opposed to trustees, managers, beneficiaries, etc.) 
from source files being supplied to the FDIC for insurance 
determination purposes? Does this differ by types of accounts; for 
example, checking accounts versus (brokered) CDs?
     Could Covered Institutions uniquely identify depositors 
within a single legacy data system? Is there an accompanying Customer 
Information File (``CIF'') available for each legacy data system? Could 
the Covered Institutions provide instructions or rules to assist the 
FDIC to integrate depositor records across these legacy data sources?
(b) Provisional Holds Against Deposit Accounts
    Under the suggested approach, Tier 1 and 2 Covered Institutions 
would be required to have in place an automated process for 
implementing a one-time FDIC provisional hold immediately following the 
completion of the nightly deposit processing cycle following a failure. 
The contemplated provisional hold algorithm contains variables that 
would be supplied by the FDIC only on the day of failure. Provisional 
holds would be applied to individual accounts (commonly owned deposits 
are not aggregated). Provisional holds would vary by individual account 
balance and type. Under one approach: (1) Deposit accounts with 
balances below $X dollars would not be subject to a provisional hold; 
(2) deposit accounts with balances between $X and $100,000 would be 
subject to a provisional hold of Y percent; and (3) deposit accounts 
with balances above $100,000 would be subject to a provisional hold of 
Z percent.
    The FDIC would supply the values X, Y and Z to the institution on 
the day of failure. Those values could differ depending on whether the 
account is a demand deposit/NOW account, money market deposit/savings 
account or time deposit. X could be set at a higher level for DDA 
systems than for time deposit systems, for example. The values X, Y and 
Z also could differ depending on whether the institution categorizes 
the account as consumer or business. For these purposes, the account 
category would be the one normally used by the institution, rather than 
a definition more consistent with FDIC insurance rules. FDIC research 
indicates the likely value of X would fall between $30,000 and $80,000. 
Based on account-size distributions provided by a sample of insured 
institutions, this potential threshold range is expected to exclude 
over 90 percent of deposit accounts from the provisional hold process 
at most institutions. Given the historical loss experience for large 
institutions and their general liability structure, the FDIC expects 
that the values of Y and Z would be less than 15 percent.
    The FDIC requests comments on all aspects of these possible 
requirements concerning provisional holds on deposits. In particular:
     What more would Covered Institutions need to know to 
design and implement such a system?
     What would be the overall cost to a Covered Institution 
for developing the capability to automatically post provisional holds?
     The deposit systems of many Covered Institutions use 
software purchased from a small group of vendors. To what extent would 
vendor-based software changes help mitigate the overall implementation 
costs of this program?
     Some Covered Institutions use a servicer to process 
deposit accounts, and some Covered Institutions share the same deposit 
servicer. To what extent would implementation changes made by the 
servicer mitigate the costs of this program?
     A provisional hold could potentially trigger complications 
in the back office of the bridge bank due to an increase in returned 
items. This might be mitigated if a large percentage of a depositor's 
checking account balance is made available immediately. If, for 
example, fifteen percent holds were placed on transaction accounts with 
balances over $50,000, how significant would the impact be for the back 
office of the bridge bank? Would overdraft facilities already in place 
with depositors mitigate this potential impact? If the impact is 
expected to be significant, how could it be mitigated? Would there be 
any potential complications in the back office of the bridge bank due 
to holds placed on MMDA, savings accounts or time deposits? If so, what 
types of complications, and how could they be mitigated?
     The FDIC may set Y and Z to the same percentage. If the 
FDIC required institutions to be prepared for only one ratio rather 
than two, would that reduce the system development costs, the 
reliability of the algorithm or the speed of running the algorithm? If 
so, by how much? If only one ratio were used, the FDIC might choose to 
apply the ratio to the entire balance of accounts with over $X dollars, 
or it might apply the ratio to only the portion of the balance that 
exceeds $X. The FDIC does not anticipate requiring institutions to be 
prepared for both options. Would this choice influence the system

[[Page 74862]]

development costs, the reliability of the algorithm or the speed of 
running the algorithm? If so, which choice would be better, and to what 
degree would it be better?
     The FDIC may choose to set the same X, Y and Z for all 
deposit systems (as opposed to different thresholds or ratios for 
transaction account systems, MMDA/Savings systems and time deposit 
systems). If the FDIC required institutions to be prepared for only one 
set of thresholds and ratios, would that reduce the system development 
costs, the reliability of the algorithm or the speed of running the 
algorithm? If so, by how much?
     The FDIC may choose to set the same X, Y and Z for all 
account categories. If the FDIC required institutions to be prepared 
for only one set of thresholds and ratios, would that reduce the system 
development costs, the reliability of the algorithm or the speed of 
running the algorithm? If so, by how much?
     Where do individual retirement accounts (``IRAs'') reside? 
Are they clearly coded or otherwise identified on bank records in a way 
that would allow their ready identification? Are all IRAs generally 
found in time deposit systems, in other systems, or are they 
distributed across multiple systems?
     Since the FDIC would want to continue operating the 
institution on the business day after failure, the provisional hold 
process must be completed quickly. The time thresholds may be 
challenging especially if the institution does not fail on a Friday. 
Are there ways to structure the provisional hold requirements that 
would make it easier for institutions to meet the associated timing 
requirements? For example, would it be helpful if the FDIC agreed that 
$X would never fall below a predetermined amount (say $30,000 or 
$40,000)?
     How long would you expect such a program to run?
     What problems would occur if holds were placed during the 
first day (that is, before the evening check-clearing process) rather 
than before opening for business on the first day?
(c) The Generation of a Standard Data Structure Reconciled to the 
Supporting Subsidiary Systems
    A fundamental aspect of this ANPR is the development of a standard 
data framework which does not place an onerous burden on Covered 
Institutions, while ensuring that the FDIC is provided with an optimum 
set of data structures within that framework that enable a timely and 
accurate insurance determination process. The FDIC seeks industry input 
into the development of this standard data framework. Industry 
participation will be important in assuring that the FDIC specifies 
standards that are adequate for making deposit insurance determinations 
without being unduly burdensome to Covered Institutions. Consequently, 
the FDIC seeks comment on all aspects pertinent to the development of 
this standard. Appendix C provides representative standard data 
elements.
     What would be the overall cost to a Covered Institution to 
develop a capability to produce a standard data structure complete with 
associated linked data sources for information such as account 
ownership or other maintained information relationships required to 
define a deposit account, as well as provide a data structure to 
facilitate the generation of a trial balance and reconciliations of 
accounts? Could a Covered Institution develop and deploy this standard 
in 18 months? Does the Covered Institution have a standard deposit 
account data framework that they would recommend the FDIC adopt as a 
standard to support this deposit account definition process?
     The deposit systems supporting many Covered Institutions 
use software purchased from a small group of vendors and servicers. 
Could a vendor or servicer develop the standard data structure and the 
necessary processing logic to pull the data into the specified standard 
format for multiple institutions or does your institution have unique 
details that would prevent this from occurring?
     To meet the proposed standard data structure requirement, 
institutions may have to link records from the CIF with the deposit 
systems or provide a key for linking elements so data from the CIF 
could be linked to individual account owner records. This would be more 
complex than a standard data structure that only included items from 
the deposit systems, but it would enable the FDIC to make timely 
insurance determinations. Once the systems had been developed and 
tested, how much longer would it take for an institution to prepare a 
standard data structure that included CIF and deposit system items, 
compared to one that included only deposit system items?
     The FDIC would require transmitted deposit balances to 
reconcile to the actual trial balance, both principal and interest 
dollar amounts and the deposit record counts. How does reconciliation 
affect timeliness? Can the process be developed in advance and 
automated?
     The standard data set should not contain records for 
foreign deposits or international banking facility (``IBF'') accounts, 
since they are not defined as deposits for insurance purposes. Do 
foreign deposits reside on separate deposit systems? Would your 
institution have any problems creating a data set that excludes foreign 
deposits not payable in the U.S.? If so, how might these problems be 
mitigated? Would your institution have problems placing a blanket 
freeze on all foreign deposits and IBF accounts so that the funds could 
not be drawn on the bridge bank?
     Deposits held by the institution's subsidiaries and 
affiliates should be included in the standard data set. For deposit 
insurance purposes all deposits owned by the same FDIC charter, whether 
an affiliate or subsidiary, should be included in the data call if the 
account is held at the institution. Would your institution have any 
problems complying with the standard data structure described above 
that includes the full balance of deposits held by subsidiaries and 
affiliates? If so, how might these problems be mitigated?
     Would Covered Institutions have difficulty supplying 
complete and reliable data for any of the items listed in Appendix C? 
If so, which ones? Do problems arise because the data are incomplete 
(available for some accounts but not others) or for other reasons?
     One of the items envisioned in the standard data structure 
is a flag for bank-owned accounts (the institution's payroll accounts, 
for example), but not accounts owned by others and managed by the 
institution (trust accounts, for example). These accounts are not 
deposits and thus should be excluded from the deposit insurance 
determination process. How costly would it be for institutions to 
provide a reliable flag for these accounts or remove them from the 
standard data set prior to transferring it to the FDIC? If no flag were 
available, the FDIC might place provisional holds on these accounts. 
Would such an action cause problems in the back office? If so, how 
serious a problem might it cause?
     In the event of failure, depositor data may be transmitted 
to the FDIC or its designee. One method for data transfer of the 
deposit file(s) is via secure FTP, requiring financial institutions or 
their servicers to use VPN to communicate with the FDIC over the 
Internet. What are the relative costs and benefits of using a secure 
FTP? Are there more effective, less costly ways of transmitting data to 
the FDIC?
     The transmission method may depend on the number of 
accounts in the transmission data sets. For some Covered Institutions 
the FDIC may have to deploy hardware to the failed

[[Page 74863]]

institution. How would Covered Institution suggest this process be 
handled and which location would be optimum to support FDIC 
requirements?
(d) Posting the Insurance Determination Results and Removal of 
Provisional Holds
    The FDIC would forward insurance results to be incorporated into 
the institution's deposit systems as soon as possible, perhaps as 
quickly as the day following the receipt of the standard data set. The 
results would dictate debits and holds to be placed by batch in an 
automated fashion on deposit accounts. The processing stream would be 
as follows: FDIC would notify Operations/IT that results are available. 
This notification would trigger a process whereby all provisional holds 
are removed en masse. After provisional holds have been removed, the 
bridge bank would run replacement transactions. Depending on the 
depositor's insurance status, the replacements could include: (1) No 
replacement (that is, just release the provisional hold); (2) a debit 
of the account by the amount specified by the FDIC; (3) a debit and 
credit of the account (that is, debit the uninsured balance and credit 
an advance dividend); and (4) placement of a FDIC hold that might not 
be the same amount as the provisional hold. In a few cases, new FDIC 
debits or holds may be placed on accounts that did not have a 
provisional hold. Both the removal of provisional holds and the 
placement of new FDIC transactions would have to be accomplished in the 
same nightly processing schedule and the institution would have to be 
open for business as usual on the next business day.
    As to this proposed procedure, the FDIC requests responses to these 
specific questions:
     What would be the overall cost to a Covered Institution 
for developing the capability to remove provisional holds and 
automatically process account debits and holds based on the insurance 
determination results?
     Would the en masse removal of provisional holds, coupled 
with the placement of FDIC debits, credits and holds during the same 
processing schedule, raise operational issues? If so, what types of 
issues, and how might they be mitigated? Would the system development 
costs or operational risk be reduced if this process were only 
scheduled on a weekend?
     The FDIC is contemplating providing institutions with an 
ASCII/EBCDIC text file with debit, credit and hold transactions based 
on the insurance determination. Could the data contained in such a file 
be readily reformatted so that the transactions can be processed on the 
institution's deposit systems? Is there a format other than ASCII/
EBCDIC that is easier and less costly for institutions? If so, what is 
it? Would it be helpful for the FDIC to provide institutions a sample 
data set (for testing) during the implementation period?
     In some cases, all accounts with debits would also have 
credits. The FDIC anticipates that this would simplify the 
reconciliation process and the settlement process between the insurance 
fund and the bridge bank, since the debits relate to uninsured balances 
and the credits relate to advance dividends. This policy would, 
however, increase the number of required transactions. Is the larger 
number of transactions problematic? If so, what are the problems and 
how might they be mitigated?
     One possible way to reduce the number of transactions in a 
given processing schedule would be to segment the process; for example, 
release provisional holds and replace them for only one system (or for 
selected accounts) per night until they are all completed. The FDIC 
anticipates that the costs associated with segmenting this process in 
some way would exceed the associated benefits. Do you believe this 
would be the case? If not, what benefits and costs would accrue for a 
segmented process and how should it be segmented?
    Debiting time deposits may be operationally more difficult than 
transaction or savings accounts. It might not be possible to debit a 
certificate of deposit (``CD'') to reflect a loss resulting from the 
insurance determination results. Debiting a CD may require that the 
existing CD be closed and new one opened with the lesser dollar amount.
     What are the operational difficulties of requiring a 
cancellation of a large number of CDs? What is the best way to automate 
this process? Are there ways to build upon processes that are already 
in place for rolling over or paying out CDs? If so, how? The FDIC 
expects that, in the event of a large institution failure, its new 
claims system will create a file that contains the data needed by 
institutions to cancel an uninsured CD and replace it with a smaller 
CD. What information should be included in that file? What format 
should it take? Would it be helpful for the FDIC to provide 
institutions a sample data set (for testing) during the implementation 
period?

IV--Implementation and Testing Requirements

    The FDIC is considering an approach under which an insured 
institution meeting the definitional requirements of a given tier for 
the two quarters prior to the effective date of the requirements 
discussed in the ANPR would have eighteen months to fully implement the 
respective requirements. The FDIC asks specific comment on whether more 
time would be needed to implement Tier 1 requirements. For example, 
should the implementation period be fifteen months for Tier 2 Covered 
Institutions and eighteen months for Tier 1 Covered Institutions?
    Also, under the contemplated approach, regarding a merger of two or 
more Non-Covered Institutions resulting in Covered Institution status, 
the requirements of the new tier would have to be fully implemented 
within, for example, eighteen months following the completion of the 
merger. Would this be a reasonable way to handle the situation?
    Under the contemplated approach, the FDIC would conduct an initial 
test at each Covered Institution sometime after the initial 
implementation period ends.\17\ Once the initial test is completed 
successfully, the FDIC anticipates that it would conduct additional 
tests infrequently at healthy institutions that do not make major 
changes to their deposit systems--perhaps only once every three-to-six 
years. More frequent testing may be necessary for institutions that 
move to Tier 1 from Tier 2, make major acquisitions, experience 
financial distress (even if the distress is unlikely to result in 
failure) or undertake major system conversions.
---------------------------------------------------------------------------

    \17\ In addition to testing, the FDIC might require that 
information contact points be validated (and updated as needed) 
every three-to-six months.
---------------------------------------------------------------------------

    To reduce the frequency of FDIC testing and ensure ongoing 
compliance, the FDIC might consider requiring that Covered Institutions 
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. If the FDIC chose to do this, what type of 
protocols should be set? Should the FDIC prepare a standard report 
format for the summarized test results? Would it be less costly for 
institutions to submit test results to the FDIC regularly to reduce the 
FDIC testing frequency (say from every three years to every five-to-six 
years)? Which testing option would result in a more reliable process? 
Why?

[[Page 74864]]

    In addition, the FDIC would have to test certain other requirements 
inside the institution, including but not limited to the ability to 
remove provisional holds en masse and place new holds and debits using 
a data set that meets the FDIC standards. The testing of processes 
involving transmittal of data to or from the FDIC would use dummy or 
scrambled data.
    To protect financial privacy, the FDIC's testing process would not 
require that Covered Institutions transmit any sensitive customer data 
outside of the institution's premises. Therefore, all testing involving 
sensitive customer data would be conducted on the institution's 
premises. The FDIC does not intend to remove sensitive data from the 
institution's premises under the proposed testing process. These items 
include, but might not be limited to the completeness and reliability 
of the standard data structure, the format requirements of the standard 
data structure and the accuracy and effectiveness of the provisional 
holds.

V--New Deposit Accounts

    Covered Institutions currently are not required to know the 
insurance status of depositors or inform them of this status when a new 
account is opened. The FDIC is interested in comments on whether 
Covered Institutions should be encouraged or required to know the 
insurance status of each new deposit account and/or notify customers of 
this status when a new account is opened.
    Knowing the identity of each depositor is an important aspect of a 
deposit insurance determination. If Tier 1 Covered Institutions are not 
required to have a unique ID for each depositor, should the FDIC 
require a unique depositor ID to be assigned by Covered Institutions 
when a new account is opened? The insurance category of each account is 
necessary for the insurance determination process, but is not a 
requirement proposed in this ANPR. Should the FDIC require that Covered 
Institutions determine the insurance category of each new deposit 
account?

VI. Request for Comments

    The FDIC realizes that the requirements discussed in the ANPR could 
not be implemented without some regulatory and financial burden on the 
industry. The FDIC is seeking to minimize these costs while at the same 
time ensuring it can effectively carry out its mandates to make insured 
funds available quickly to depositors and provide a least-cost 
resolution for Covered Institutions. The FDIC would like comment on the 
potential industry costs and feasibility of implementing the options in 
the ANPR. The FDIC also is interested in comments on whether there are 
other ways to accomplish its goals that might be more effective or less 
costly or burdensome. In other words, what approach or combination of 
approaches (which may include new alternatives) most effectively meets 
this cost/benefit tradeoff? The FDIC seeks comments on all aspects of 
the ANPR.
    Between 2004 and 2006 the FDIC met with six would-be Covered 
Institutions and four software vendors/servicers for Covered 
Institutions. These meetings took place at various stages in the 
development process. The FDIC found these meetings to be extremely 
helpful and is requesting additional meetings with interested parties. 
FDIC staff is willing to travel to facilitate the meeting or structure 
a teleconference. Any such meetings will be documented in the FDIC's 
public files to note the institution's general views on the ANPR or 
answers to questions that have been posed. In past meetings, the 
institutions and software vendors/servicers discussed proprietary 
information. Such confidential information would not be made public. 
The record of the meeting could be prepared by the institution or the 
FDIC. Any institution or organization wishing to discuss this proposal 
in more detail or influence the way in which it is implemented should 
contact James Marino, Project Manager, Division of Resolutions and 
Receiverships, (202) 898-7151 or jmarino@fdic.gov.
    During 2006 the FDIC met with several major software vendors/
servicers to discuss an earlier version of the proposal outlined in 
this ANPR. These meetings provided useful insights into the operations 
of different deposit software and resulted in changes to the proposal. 
A previous version of the FDIC's proposal included a ``freeze'' on time 
deposits rather than the use of provisional holds against these 
accounts. The discussions with the software vendors resulted in an 
elimination of the ``freeze'' in favor of using provisional holds 
against all accounts. Further, an earlier version of the FDIC's 
proposal included three tiers for Covered Institutions rather than two. 
The third tier--to be comprised of the least complex of the Covered 
Institutions--did not include a unique depositor ID or provisional hold 
requirement. The original purpose of the three-tiered approach was to 
reduce industry implementation costs. The software vendors indicated a 
less varied set of requirements would be easier and less costly to 
implement, hence the movement to a suggested two-tiered approach.

Appendix A--Primary FDIC Deposit Insurance Categories

------------------------------------------------------------------------
      Insurance category                      Description
------------------------------------------------------------------------
1. Single Ownership..........  Funds owned by a natural person including
                                those held by an agent or custodian,
                                sole proprietorship accounts and
                                accounts that fail to qualify in any
                                other category below. Coverage extends
                                to $100,000 per depositor.
2. Joint Ownership...........  Accounts jointly owned as joint tenants
                                with the right of survivorship, as
                                tenants in common or as tenants by the
                                entirety. Coverage extends to $100,000
                                per co-owner.
                                The account title generally must
                                be in the form of a joint account
                                (``Jane Smith & John Smith'').
                                Each of the co-owners must sign
                                the account signature card. (This
                                requirement has exceptions, including
                                certificates of deposit.)
                                The withdrawal rights of the co-
                                owners must be equal.
3. Revocable Trust...........  Accounts whereby the owner evidences an
                                intention that upon his or her death the
                                funds shall belong to one or more
                                qualifying beneficiaries. For each
                                owner, coverage extends to $100,000 per
                                beneficiary.
                                The title of the account must
                                include ``POD'' (payable-on-death) or
                                ``trust'' or some similar term.
                                The beneficiaries must be
                                specifically named in the account
                                records. (This requirement applies to
                                informal ``POD'' accounts but does not
                                apply to formal `living trust'
                                accounts.)
                                The beneficiaries must be the
                                owner's spouse, children, grandchildren,
                                parents or siblings.
4. Irrevocable Trust.........  Accounts established pursuant to an
                                irrevocable trust agreement. Coverage
                                extends to $100,000 per beneficiary.
                                The account records must
                                indicate that the funds are held by the
                                trustee pursuant to a fiduciary
                                relationship.
                                The account must be supported by
                                a valid irrevocable trust agreement.
                                Under the trust agreement, the
                                grantor of the trust must retain no
                                interest in the trust funds.
                                For ``per beneficiary''
                                coverage, the interest of the
                                beneficiary must be ``non-contingent.''

[[Page 74865]]

 
5. Self-Directed Retirement..  Individual retirement accounts under 26
                                U.S.C. 408(a), eligible deferred
                                compensation plans under 26 U.S.C. 457,
                                self-directed individual account plans
                                under 29 U.S.C. 1002 and self-directed
                                Keogh plans under 26 U.S.C. 401(d).
                                Coverage extends to $250,000 per owner
                                or participant.
                                The account records must
                                indicate that the account is a
                                retirement account.
                                The account must be an actual
                                retirement account under the cited
                                sections of the Tax Code.
6. Corporation, Partnership    Accounts of a corporation, partnership or
 or Unincorporated              unincorporated association. Coverage
 Association.                   extends to $100,000 per entity.
                                The account records must
                                indicate that the entity is the owner of
                                the funds or that the nominal
                                accountholder is merely an agent or
                                custodian (with the entity's ownership
                                interest reflected by the custodian's
                                records).
                                The entity must be engaged in an
                                ``independent activity.''
                                The entity must not be a sole
                                proprietorship (which is treated as a
                                single ownership account).
7. Employee Benefit Plan.....  Deposits of an employee benefit plan as
                                defined at 29 U.S.C. 1002, including any
                                plan described at 26 U.S.C. 401(d).
                                Coverage extends to $100,000 per
                                participant.
                                The account records must
                                indicate that the funds are held by the
                                plan administrator pursuant to a
                                fiduciary relationship.
                                The account must be supported by
                                a valid employee benefit plan agreement.
                                For ``per participant'' coverage
                                the interests of the participants must
                                be a