Alert January 15, 2008

FDIC Issues Notice of Proposed Rulemaking Regarding Determination of Insured Deposit Balances of Failed Insured Depository Institutions; Special Provisions Address Large Bank Failures

The FDIC issued a notice of proposed rulemaking (the “NPR”) with two parts.  Part 1 proposes a rule, applicable to all insured depository institutions (“DIs” and each a “DI”), that would govern how and at what point in time deposit account balances would be determined when a DI fails.  Part 2 of the NPR proposes requirements to help determine the insurance status of depositors of large DIs that fail.  The NPR defines a “Large DI” as one that has at least $2 billion in domestic deposits and either (1) more than 250,000 deposit accounts or (2) total assets that exceed $20 billion, without regard to the number of deposit accounts.  The NPR is the third FDIC issuance on this subject.  The FDIC issued advanced notices of proposed rulemaking (the “ANPRs”) in 2005 and 2006, and the NPR reflects certain of the comments that the FDIC received in response to the ANPRs.

Part 1.  Part 1 of the NPR defines deposit account balance on the day a DI fails as the end-of-day ledger balance of the deposit on the day of failure.  This is the amount on which the FDIC would make insurance determinations.  In determining whether a deposit account transaction is on the DI’s ledger at the end of the day, the FDIC will establish an FDIC Cutoff Point (a point of time after the FDIC takes control of the DI as receiver).  The FDIC Cutoff Point will be used to determine ledger balances unless the DI’s ordinary cutoff time on the date of failure for a specific type of transaction is earlier than the FDIC Cutoff Point--in that event, for that category of transactions, the DI’s cutoff time will be used.

Under the NPR, the FDIC will take steps to prevent funds from being received by or removed from the failed DI.  These steps can include suspension of wire activities and preventing the establishment of new deposit accounts at the DI.

With respect to sweep accounts, the NPR provides that the FDIC, in determining the insured deposit account balance, will complete a prearranged “internal sweep” on the day of failure of a DI, 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.  Internal sweeps are those that sweep funds within the DI by accounting or bookkeeping entries.  For external sweeps (those where funds are moved outside of the DI, such as to a money market mutual fund), the status of the swept amount on the day the DI fails depends upon whether the funds left the DI by wire or otherwise before the FDIC Cutoff Point.  If at the time of the FDIC Cutoff Point the funds had not been swept outside of the customer’s deposit account at the DI (or were being held by the DI temporarily in an omnibus account at the DI), then the funds would be counted as insured deposits.  If the funds had been swept into the external sweep investment vehicle at the time of the FDIC Cutoff Point, they would not be insured deposits, but would be an investment that “typically would not be subject to loss in the event of [the Di’s] failure.”

Part 2.  The provisions of Part 2 of the NPR are intended to allow the deposit operations of a failed Large DI to be continued on the day following the failure.  The FDIC states that as of June 30, 2007, there were 159 Large DIs.

The NPR requires a Large DI to modify its deposit systems and adopt and implement procedures that would, in the event it fails, (1) allow automatic posting of provisional holds on large deposit accounts in any percentage specified by the FDIC on the day the DI fails; (2) provide deposit account data to the FDIC in a standard format; and (3) allow automatic removal of the provisional holds and posting of the results of insurance determinations as specified by the FDIC.

The FDIC states that implementation of Part 2 of the NPR will provide prompt liquidity to depositors of failed Large DIs, enhance market discipline, ensure equitable treatment of depositors at different Large DIs and help preserve the franchise value of a failed Large DI (reducing FDIC costs).

Public comments on the NPR are due to the FDIC by April 14, 2008.