[Federal Register: July 17, 2008 (Volume 73, Number 138)]
[Rules and Regulations]
[Page 41180-41211]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jy08-18]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 360
RIN 3064-AD26
Large-Bank Deposit Insurance Determination Modernization
AGENCY: Federal Deposit Insurance Corporation (``FDIC'').
ACTION: Final rule.
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SUMMARY: The FDIC is adopting a final rule requiring the largest
insured depository institutions to adopt mechanisms that would, in the
event of the institution's failure: provide the FDIC with standard
deposit account and other customer information; and allow the placement
and release of holds on liability accounts, including deposits. The
final rule applies only to insured depository institutions having at
least $2 billion in domestic deposits and either: more than 250,000
deposit accounts (currently estimated to be 152 institutions); or total
assets over $20 billion, regardless of the number of deposit accounts
(currently estimated to be 7 institutions).
The FDIC is adopting the final rule concurrently with its adoption
of an interim rule establishing practices for determining deposit and
other liability account balances at a failed insured depository
institution. With exceptions indicated in the final rule, institutions
subject to this final rule will have eighteen months from the effective
date of the final rule to implement its requirements.
EFFECTIVE DATE: August 18, 2008.
FOR FURTHER INFORMATION CONTACT: James Marino, Project Manager,
Division of Resolutions and Receiverships, (202) 898-7151 or
jmarino@fdic.gov, Joseph A. DiNuzzo, Counsel, Legal Division, (202)
898-7349 or jdinuzzo@fdic.gov; or Christopher L. Hencke, Counsel, Legal
Division, (202) 898-8839 or chencke@fdic.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction
The final rule requires the largest insured depository institutions
to adopt mechanisms that would, in the event of the institution's
failure: (1) Provide the FDIC with standard deposit account and other
customer information; and (2) allow the placement and release of holds
on liability accounts, including deposits. These requirements were
addressed in two advance notices of proposed rulemaking issued in 2005
and 2006, respectively the ``2005 ANPR'' and the ``2006 ANPR''.\1\
Also, in January of this year the FDIC published a proposed rule
composed of two parts, addressing in part two the issues involved in
the final rule and addressing in part one issues involving the FDIC's
practices for determining deposit and other liability account balances
at a failed insured depository institution (``proposed rule'').\2\
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\1\ 70 FR 73652 (Dec. 13, 2005) and 71 FR 74857 (Dec. 13, 2006).
\2\ 73 FR 2364 (January 14, 2008).
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The FDIC received twenty-one comments on the proposed rule. (The
comment letters may be viewed on the FDIC's Web site at http://
www.fdic.gov/regulations/laws/federal/2008/08comAD26.html.)
Based in part on those comments, the FDIC has decided to finalize
the proposed rule by issuing two separate rulemakings--(1) the final
rule, covering part two of the proposed rule and (2) a separate interim
rule, covering part one of the proposed rule (``Interim Rule on
Processing Deposit Accounts'').
Throughout the preamble the terms ``deposit'' (or ``domestic
deposit''), ``foreign deposit'' and ``international banking facility
deposit'' identify liabilities having different meanings for deposit
insurance purposes. A ``deposit'' is used as defined in section 3(l) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(l)) (``Section
3(l)''). A deposit includes only deposit liabilities payable in the
United States, typically those deposits maintained in a domestic office
of an insured depository institution. Only deposits meeting these
criteria are eligible for insurance coverage. Insured depository
institutions may maintain deposit liabilities in a foreign branch
(``foreign deposits''), but these liabilities are not deposits in the
statutory sense (for insurance or depositor preference purposes) for
the time that they are payable solely at a foreign branch or branches.
Insured depository institutions also may maintain liabilities in an
international banking facility (IBF). An ``international banking
facility deposit,'' as defined by the Board of Governors of the Federal
Reserve System in Regulation D (12 CFR 204.8(a)(2)), also is excluded
from the definition of ``deposit'' in Section 3(l) and the depositor
preference statute (12 U.S.C. 1821(d)(11)).
The FDIC anticipates questions regarding implementation of the
functionality required by this rule. Questions and requests for
telephonic meetings may be submitted via e-mail to
depositclaims@fdic.gov.
[[Page 41181]]
II. Overview
The final rule applies to large FDIC-insured institutions, defined
as ``Covered Institutions.'' The definition includes insured depository
institutions having at least $2 billion in domestic deposits and at
least either: (1) 250,000 deposit accounts; or (2) $20 billion in total
assets, regardless of the number of deposit accounts. In summary,
Covered Institutions are required to adopt mechanisms that would, in
the event of the institution's failure:
Allow automatic posting of provisional holds on large
liability accounts in any percentage specified by the FDIC on the day
of failure.
Provide the FDIC with deposit and customer account data in
a standard format.
Allow automatic removal of the provisional holds and
posting of the results of insurance determinations as specified by the
FDIC.
III. The Proposed Rule
Definition of Institutions Covered
Under the proposed rule a Covered Institution was defined as any
insured depository institution having at least $2 billion in domestic
deposits and at least either: (1) 250,000 deposit accounts; or (2) $20
billion in total assets, regardless of the number of deposit
accounts.\3\ All other insured depository institutions were designated
as Non-Covered Institutions and, thus, were not subject to this part of
the proposed rule.\4\
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\3\ For the purposes of the criteria in the text, an ``insured
depository institution'' includes all institutions defined as such
in the FDI Act. 12 U.S.C. 1813(c)(2). Other applicable terms would
be as defined in the Reports of Condition and Income (Call Report)
instructions (for insured banks) and Thrift Financial Reports (TFR)
instructions (for insured savings associations): ``deposit
accounts'' mean the total number of deposit accounts (including
retirement accounts), ``domestic deposits'' mean total deposits held
in domestic offices (for insured banks) or deposits (for insured
savings associations), and ``total assets'' means the reported
amount of total assets.
\4\ The criteria for a Covered Institution apply to separately
chartered insured depository institutions. Commonly owned depository
institutions are not aggregated for the purposes of these criteria.
Furthermore, a holding company may own insured depository
institutions that are both Covered and Non-Covered.
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Continuation of Business Operations
As discussed in the proposed rule, in the event of failure a
Covered Institution's legal entity status will terminate. In most
cases, however, it is expected that a new entity will carry on the
Covered Institution's business operations.\5\ The new legal entity
under which business operations will be continued is the Successor
Institution, which could include an established or new insured
depository institution or a bridge bank operated by the FDIC. Through
the proposed rule the FDIC intended to provide a means to facilitate
access to deposit funds and maintain the franchise value of the failed
Covered Institution or a Successor Institution. Thus, in most cases,
core business operations would continue post failure, although some
operations might be suspended temporarily.
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\5\ The provisional hold functionality and other requirements of
the proposed rule were to be developed in this context. It is
possible a Covered Institution may be liquidated in the event of
failure. The decision to liquidate or continue the deposit
operations of a Covered Institution would be made on a case-by-case
basis depending on the individual circumstances at the time.
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Process Overview
As discussed in part one of the proposed rule, in the event of
failure, the FDIC would complete daily account processing to generate
the end-of-day deposit ledger balances used by the FDIC for insurance
purposes. Under part two of the proposed rule, after completion of the
failed Covered Institution's final daily processing, the Successor
Institution would place provisional holds on selected \6\ deposit
accounts, foreign deposit accounts and certain other liability accounts
subject to a sweep arrangement. Provisional holds, once posted, would
allow depositors access to the remaining balance in their accounts the
day following failure, yet guard against the possibility of an
uninsured depositor or unsecured general creditor receiving more than
allowed under deposit insurance rules or the depositor preference
statute.\7\ The FDIC would use a standard set of depositor and customer
data to make deposit insurance determinations. These determinations
would be provided to the Successor Institution, probably several days
after failure. The Successor Institution would then remove the
provisional holds as specified by the FDIC and, if necessary, replace
them with additional holds or debits based upon the deposit insurance
determinations. The FDIC would continue to notify the Successor
Institution to remove additional holds as information is received from
depositors to complete the insurance determination.
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\6\ The FDIC will supply the business rules upon which a
provisional hold will be placed. These business rules will be based
upon current balance and account product types.
\7\ Uninsured depositors are entitled to a pro rata distribution
of the receivership proceeds with respect to their claim. The FDIC--
at its discretion-may immediately distribute receivership proceeds
in the form of advance dividends at failure. Advance dividends are
based on the expected recovery to uninsured depositors.
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Provisional Holds
General description. The proposed rule would have required Covered
Institutions to have in place an automated process for implementing
provisional holds concurrent with or immediately following the daily
deposit account processing on the day of failure. After the placement
of provisional holds, all other holds previously placed by the
institution would still remain in effect.\8\ The proposal did not
require development of mechanisms to stop or alter interest accrual for
the affected accounts.
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\8\ Provisional holds could overlap preexisting holds if the
entire account is held or the unheld account balance before posting
the provisional hold is less than the amount of the provisional
hold. In such cases posting the provisional hold would have to be
constructed so that it did not cause the account to become
``overdrawn'' and trigger service fees against the account.
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Account-by-account application. Provisional holds would be applied
to individual accounts in an automated fashion. Commonly owned accounts
would not have been aggregated by ownership for the purposes of
calculating or placing provisional holds. Provisional holds would
extend to all non-closed deposit accounts held in domestic and foreign
offices, as well as certain sweep account arrangements.\9\
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\9\ Non-closed deposit accounts include those that are open,
dormant, inactive, abandoned, restricted, frozen or blocked, in the
process of closing or subject to escheatment.
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The nature of a provisional hold. As explained in the proposed
rule, the provisional hold is intended to bar access to some or all of
a customer's account pending the results of the insurance
determination. The proposed rule offered for comment the following
three options for implementing provisional holds.
Persistent hold. A ``persistent'' provisional hold would
be applied once (on or immediately after the day of failure) and stay
on the deposit account until it is removed at the order of the FDIC.
Once applied, the persistent hold would reduce the customer's available
balance.
Memo hold. A memo-type provisional hold remains effective
only intra-day and does not affect the batch deposit posting process.
The memo type provisional hold amount is calculated immediately after
end-of-day balances are available on the day of failure and the same
amount is applied on a daily basis until changed or removed at the
instruction of the FDIC. Once applied, a memo-type provisional hold
would
[[Page 41182]]
reduce the customer's available intra-day balance.
Holding balances in an alternate account. Rather than
placing an account hold, balances could be removed from the account to
which a provisional hold is to be applied and otherwise ``held'' in a
work in progress (WIP) or suspense account. Since balances are removed
from the affected account, they would not be available to the customer
until the provisional hold was removed and the balance restored to the
original account.
Provisional holds for deposit accounts. Under the proposed rule, on
the day of failure the FDIC would specify a deposit account balance
(the ``account balance threshold'') that would determine whether a
provisional hold would be placed on a particular deposit account.\10\
No provisional hold would be placed on a deposit account with a balance
less than or equal to the account balance threshold. For a deposit
account above the account balance threshold, the FDIC would specify,
again on the day of failure, a percentage (the ``provisional hold
percentage'') that would be multiplied by the account balance in excess
of the account balance threshold.\11\ The product of this
multiplication would equal the dollar amount of the provisional hold.
The proposed rule would have required a Covered Institution to adopt
systems allowing the hold to be calculated and placed. The account
balance threshold as well as the provisional hold percentage could vary
for the following four categories, as the Covered Institution
customarily defines them:
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\10\ The account balance threshold could be any dollar amount
specified by the FDIC, including zero.
\11\ The provisional hold percentage could be any percentage
specified by the FDIC, from 0 to 100 percent.
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1. Consumer demand deposit, negotiable order of withdrawal
(``NOW'') and money market deposit accounts (``MMDA'').
2. Other consumer deposit accounts (time deposit and savings
accounts, excluding NOW accounts and MMDAs).
3. Non-consumer demand deposit, NOW accounts and MMDAs.
4. Other non-consumer deposit accounts (time deposit and savings
accounts, excluding NOW accounts and MMDAs).
Provisional holds for foreign deposits. For foreign deposits the
provisional hold methodology was proposed to be the same as for deposit
accounts, except that the account balance thresholds and the
provisional hold percentages could have varied based on the country in
which the account is located.
Provisional holds for IBF deposits. For IBF deposits the
provisional hold methodology was proposed to be the same as for deposit
accounts, except that the account balance thresholds and the
provisional hold percentages could have been different.
Provisional holds for deposit accounts with prearranged, automated
sweep features. As discussed in part one of the proposed rule, certain
deposit accounts have a feature to ``sweep'' funds periodically
according to predefined rules into another deposit account, a foreign
deposit or an alternative investment vehicle.\12\ The deposit account
through which the customer has primary access to deposited funds--
usually a demand deposit account--is the ``base sweep account.'' The
investable or excess account balance is swept periodically into a
``sweep investment vehicle.'' Sweep investment vehicles may include,
but are not limited to: (1) A deposit account at the same institution
or an affiliated insured depository institution, (2) a foreign or IBF
deposit, (3) repurchase agreements, (4) federal funds, (5) commercial
paper and (6) a proprietary or third-party money market mutual fund.
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\12\ Sweep accounts as described here do not include zero
balance account (ZBA) arrangements that move funds to and from a
master (or concentration) deposit account and one or more subsidiary
deposit accounts at the same bank. Such deposit account arrangements
are not intended to provide a yield on excess deposit balances nor
do they change the customer's insurance status. ZBAs would be
subject to the provisional hold methodology for deposit accounts
described above.
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The proposed rule would have subjected some sweep accounts to the
same provisional hold requirements as a deposit account. These were
defined as ``Class A'' sweep accounts and included:
Base sweep accounts where the sweep investment vehicle is
another deposit account in an office of the same institution. Both the
base sweep account and the sweep investment vehicle are deposits that
would have been subject to the provisional hold requirements of a
deposit account.
Base sweep accounts where funds are wired from the Covered
Institution to a separate legal entity other than the Covered
Institution (e.g., a proprietary or third-party money market mutual
fund). In this case, funds residing in the base sweep account (if any)
would have been subject to a provisional hold as any other deposit
account held in a domestic office. No provisional hold would have been
required for funds residing outside the Covered Institution in the
sweep investment vehicle.
The proposed rule defined all other sweep accounts as ``Class B''
sweep accounts requiring a dual provisional hold methodology. For the
fund balance remaining in the base sweep account as of the
institution's customary end-of-day on the day of failure, the
provisional hold methodology would have been the same as applied to
other deposit accounts. For the funds residing in the sweep investment
vehicle as of the institution's customary end-of-day, the provisional
hold methodology would have had a separate account balance threshold
and provisional hold percentage.\13\ The proposed rule would have
required the balance threshold as well as the provisional hold
percentage to vary for different types of sweep investment
vehicles.\14\
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\13\ Some Covered Institutions may allow a single base sweep
account to be associated with multiple investment vehicles. In this
case a separate provisional hold methodology would have been
developed for each investment vehicle.
\14\ Some alternative investment vehicles are deposits held in
foreign offices. These foreign deposits would be subject only to the
provisional hold methodology for the sweep alternative investment.
Such foreign deposits would be excluded from the provisional hold
methodology designed for non-sweep deposits held in the same foreign
office.
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The proposed rule would not have required mechanisms to stop the
processing of any prearranged deposit account sweep transactions in the
event of failure. The provisional holds process described above would
have allowed for the transfer of balances from a deposit account to a
sweep investment vehicle. The provisional holds would have applied to
liability accounts as they were designated on the books and records of
the institution at its customary end-of-day.
Provisional holds for deposit accounts which accept automated
credits from funds invested within the Covered Institution. Certain
customers may provide the depository institution with instructions each
day or periodically to invest funds in a non-deposit investment vehicle
within the institution (e.g., an overnight time account at the Cayman
Island branch), whereby such funds are automatically credited to the
customer's deposit account the following day (``automated credit
account''). The proposed rule would have required a dual provisional
hold methodology for automated credit accounts. For the fund balance
remaining in the automated credit account as of the institution's
customary end-of-day the provisional hold methodology would have been
the same as applied to other deposit accounts. For the funds residing
in the investment vehicle as of the institution's customary end-of-day,
the provisional hold methodology would have had the
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capability of a separate account balance threshold and provisional hold
percentage.\15\ The account balance threshold, as well as the
provisional hold percentage, would have been required to vary for
different types of investment vehicles. These account balance
thresholds and provisional hold percentages could be different from
those applied to: (1) Funds automatically swept into a similar or
identical investment vehicle or (2) funds held in a similar or
identical investment vehicle that does not provide for an automated
crediting of funds.\16\
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\15\ Some automated credit accounts may also be a base sweep
account. In this case a separate provisional hold methodology must
be developed for each investment vehicle. It is possible, for
example, for a customer to each day provide the institution with
instructions to invest a certain amount of funds in a Cayman Island
branch time account where the funds would be returned to the
customer's demand deposit account the following morning. Further,
the customer may also have provided prearranged instructions to have
excess balances residing in the same demand deposit account swept to
a Cayman Island branch account where such funds also are returned to
the demand account the following morning. In this case the Covered
Institution must have a provisional hold methodology that: (1)
Treats funds residing in the demand deposit account as of the
institution's end-of-day consistent with other deposit accounts, (2)
treats funds residing in the Cayman Island branch account as a
result of the prearranged sweep consistent with other Cayman Island
sweep investment vehicles and (3) treats funds residing in the
Cayman Island branch account as a result of the daily investment
instructions using a separate account balance threshold and
provisional hold percentage.
\16\ Some investment vehicles are foreign deposits. These funds
would be subject only to the provisional hold methodology for the
automated credit account. Such accounts would be excluded from the
provisional hold methodology designed for non-sweep foreign deposits
held in the same office.
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Account balance used for provisional hold calculation. The proposed
rule would have required the account balance threshold and provisional
hold percentage to be applied against the end-of-day ledger balance as
calculated by the institution, in the event of failure.
Provisional hold duration. Under the proposed rule, the methodology
for implementing a provisional hold process was required to hold funds
until removed by the Successor Institution as instructed by the FDIC.
Provisional holds would have been removed when the results of the
deposit insurance determination are available, generally anticipated
being several days after failure, depending on the size and complexity
of the failed institution's deposit base.
Provisional hold designation. The proposed rule would have required
provisional holds to be labeled ``FDIC PHold''.
Provisional hold customer disclosure. The proposed rule requested
comment on whether the FDIC should require the provisional hold, once
placed, to be apparent if the customer views account information on-
line or through other means.
Security level and mechanism for manual removal of provisional
holds. The proposed rule would have required the Covered Institution to
create policies, procedures and systems reasonably capable of
preventing the alteration of FDIC provisional holds or other FDIC hold
amounts except under the specific written direction of the FDIC.
Timeliness of the provisional holds process. The proposed rule
would have required a Covered Institution to have the capability of
placing provisional holds on the applicable accounts prior to the
Successor Institution opening for business the following day, but in no
case later than 9 a.m. local time the day following the day of the
depository institution failure.
Exception for systems with a small number of accounts. The proposed
rule requested comment on whether a Covered Institution having multiple
account systems through which provisional holds will be placed may
apply them manually in certain cases. Some account systems may service
a relatively small number of accounts making the manual application of
provisional holds feasible. If used, the proposed rule would have
required approval by the FDIC in response to a written request,
including a justification for the manual process and its relative
effectiveness for posting provisional holds in the event of failure.
Institutional contacts. The proposed rule would have required a
Covered Institution to notify the FDIC of the person(s) responsible for
producing the standard deposit data download and administering
provisional holds, both while this functionality is being constructed
and on an on-going basis. The Covered Institution would have been
responsible for ensuring such contact information is current.
Removal of Provisional Holds
General process. As specified in the proposed rule, the FDIC would
begin forwarding insurance determination results to the Successor
Institution once a substantial number of the insurance determinations
have been made, which should be within a few days after failure. These
results would have been required to be incorporated into the
institution's deposit systems as soon as practicable, perhaps as
quickly as the day following the receipt of the standard depositor and
customer data sets. The results would contain instructions for the
removal of provisional holds as well as replacement transactions, which
could include the placement of new holds or account debits and credits.
Removal of provisional holds. As proposed, the Successor
Institution would be required to remove provisional holds in batch as
specified by the FDIC. On the day(s) provisional holds are to be
removed, the FDIC would provide the Successor Institution with a file
listing the accounts subject to removal of the provisional hold. A file
format was specified and would be provided to the Successor Institution
through FDICconnect or Direct Connect, depending on the size of the
file. The file would be encrypted using an FDIC-supplied algorithm.
Provisional Hold Replacement Transactions
Debiting and crediting accounts after provisional holds are
removed. As specified in the proposed rule, on the day a provisional
hold removal file is provided to the Successor Institution, the FDIC
also would provide a file or set of files either in ACH format or in a
tab- or pipe-delimited format listing the accounts subject to debit or
credit transactions, which reflect the results of the insurance
determination process. A file format was specified and would be
provided to the Successor Institution through FDICconnect or Direct
Connect, depending on the size of the file. The file would be encrypted
using an FDIC-supplied algorithm to secure data during the transport
process.
Posting of additional FDIC holds. As specified in the proposed
rule, on the day provisional holds are to be removed the FDIC also
would provide the Successor Institution with a file listing the
accounts subject to a new hold to be placed after the removal of the
provisional hold. A file format was specified and would be provided to
the Successor Institution through FDICconnect or Direct Connect,
depending on the size of the file. The file would be encrypted using an
FDIC-supplied algorithm.
Removal of Additional FDIC Holds
Under the proposed approach, in some cases provisional holds would
be replaced by a second FDIC hold. These holds would be removed over
time as further information is gathered from depositors needed to
complete the insurance determination. A file format was specified.
The Generation of Deposit Account and Customer Data in a Standard
Structure
The proposed rule would have required a Covered Institution to have
in
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place practices and procedures to provide the FDIC with required
depositor and customer data in a standard format following the close of
any day's business. Covered Institutions would not have been required
to collect or generate new depositor or customer information. The
standard data files would have been created through a mapping of pre-
existing data elements and internal institution codes into standard
data formats. Data was to be provided on all non-closed deposit or
foreign deposit accounts as well as Class B and automated credit
accounts.
Files. The proposed rule would have required these data to be
provided in the following five separate files:
1. Deposit file. Data fields for each non-closed deposit or foreign
deposit account, except those deposit or foreign deposit accounts
serving as an investment vehicle reported in the Class B Sweep/
Automated Credit file.
2. Class B Sweep/Automated Credit file. Data fields capturing
information on funds residing in investment vehicles linked to each
non-closed deposit account: (1) Involved in Class B sweep activity or
(2) which accept automated credits.
3. Hold file.\17\ Deposit hold data fields for each non-closed
deposit account.
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\17\ The Hold file contains information on holds against each
deposit account, including FDIC provisional holds. Since provisional
holds may be generated after the completion of an institution's
nightly deposit processing cycle, they may not be reflected fully in
the Hold file generated as of the day of closing. The FDIC may
require a second Hold file to be generated the day following closing
to fully capture provisional holds that may not have been posted
until the next deposit processing cycle.
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4. Customer file. Data fields for each customer.
5. Deposit-customer join file. Data necessary to link each deposit
and foreign deposit with the customers who have an interest in the
account.
Possible file combinations. The proposed rule provided that data
could be submitted using one of each deposit, Class B sweep/automated
credit, hold, customer, customer address and deposit-customer join
files. Alternatively, data could be supplied using multiple files for
each type. The number of files could correspond to the number of
institutional systems of record, for example.
File format. Under the proposed rule depositor and customer data
files would have been provided in tab- or pipe-delimited format.
Further, each file name would contain the institution's FDIC
Certificate Number, the file type (deposit, sweep hold, customer,
customer address, join or other) and the date of the extract. The FDIC
would support both ASCII and EBCDIC delimited files. All EBCDIC fields
must be provided in Pic(X) format. Binary, packed or signed numeric
formats would not be allowed.
File transmission mechanism. Under the proposed rule the data files
would be provided to the FDIC in the most expeditious manner. Data
which can be compressed and encrypted could be transmitted to FDIC
using existing telecommunication services. Should the volume be too
great to transmit in the most expeditious manner then a portable hard
drive should be used and physically transported by FDIC personnel to
the FDIC's data processing facilities.
Reporting Requirements
The proposed rule noted that the criteria defining a Covered
Institution include the number of its deposit accounts, total domestic
deposits and total assets. Total domestic deposits and total assets are
reported quarterly on the Consolidated Reports of Condition and Income
(insured bank) and the Thrift Financial Report (insured savings
association). Savings associations report the number of deposit
accounts quarterly, but banks report on the total number of deposit
accounts only annually, as part of the June reporting cycle. The FDIC
recommended quarterly reporting of the number of deposit accounts for
all insured institutions with total assets over $1 billion.
Testing Requirements
The proposed rule indicated the FDIC would conduct an initial test
at each Covered Institution sometime after the initial implementation
period ends.\18\ All testing would be coordinated with the financial
institution and conducted at the site of their choosing if multiple
sites are available. Once the initial test is completed successfully,
the FDIC anticipated that it would conduct additional tests
infrequently at institutions that do not make major changes to their
deposit systems \19\--perhaps only once every three-to-five years. It
was noted that more frequent testing may be necessary for institutions
that make major acquisitions, experience financial distress (even if
the distress is unlikely to result in failure) or undertake major
system conversions.
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\18\ In addition to testing, the FDIC expects to require that
information contact points be validated (and updated as needed)
every three-to-six months.
\19\ A major change to a deposit system means a change made to a
Covered Institution's data environment affecting one or more of the
data elements described in attached Appendices. Changes could be the
result of a merger or the streamlining of a financial institution's
systems of record.
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The proposed rule would have required Covered Institutions to
establish a series of test accounts on their deposit account systems
that could be used for verification purposes. These accounts would be
used to verify the processing of holds, debits and credits.
The FDIC also contemplated development of a XML validation service
which would be provided to each Covered Institution for the purpose of
establishing compliance with the standard data requirements for
depositor and customer records. The XML schema would read a file (which
has been created in the standard format), validate the accuracy and
integrity of the file content and provide a report that establishes the
institution's compliance with the criteria. In addition to the XML
service, the FDIC also proposed providing a more readable description
of the validation process to help facilitate institutional testing.
The proposed rule provided that a Covered Institution would be
responsible for ensuring that a representative sample of data has been
passed through the XML validation service. At a minimum the sampling
strategy should cover a cross-section of different insurance categories
and a cross section of account ledger balances maintained by the
institution. The Covered Institution would have been required to
provide the FDIC its sampling strategy along with the validation
results as a part of the periodic verification process.
To reduce the frequency of FDIC testing and ensure ongoing
compliance, the FDIC proposed requiring Covered Institutions to conduct
tests in-house on a regular basis (perhaps every year) and provide the
FDIC with evidence that the test was conducted and a summary of the
test results.
In addition, the proposed rule would allow the FDIC to test certain
other requirements inside the institution, including but not limited to
the ability to place and remove provisional holds, place new holds and
implement debits and credits using a data set that meets the FDIC
standards.
Implementation Requirements
Institutions meeting the criteria of a Covered Institution upon the
effective date of the regulation. The proposed rule would have required
a Covered Institution to fully implement the respective requirements 18
months from the regulation's effective date.
Institutions meeting the criteria of a Covered Institution after
the effective date of the regulation. The proposed rule would have
required that any insured institution meeting the criteria
[[Page 41185]]
of a Covered Institution for at least two consecutive quarters would
have 18 months following the end of the two consecutive quarters in
which to fully implement the respective requirements.
Merger involving two Covered Institutions. Under the proposed rule,
the requirements were to be fully implemented within 18 months
following the completion of an acquisition, although an acquisition
does not delay any implementation requirements which may already have
been in place for the individual institutions involved in the merger.
Merger involving a Covered and Non-Covered Institution. Under the
proposed rule, the requirements were to be fully implemented within 18
months following the completion of an acquisition, although a merger
does not delay any implementation requirements which may already have
been in place for the individual institutions involved in the merger.
Exception for troubled institutions. Under the proposed rule, on a
case-by-case basis, the FDIC could accelerate the implementation
timeframe of all or part of the proposed rule for a Covered Institution
that either: (1) Has a composite rating of 3, 4 or 5 under the Uniform
Financial Institutions Rating System (commonly referred to as CAMELS)
\20\ or (2) is undercapitalized as defined for purposes of the prompt
corrective action (``PCA'') rules.\21\ In determining the accelerated
implementation timeframe for such institutions, the FDIC would have
been required to consider such factors as the: (1) Complexity of the
institution's deposit systems and operations; (2) extent of asset
quality difficulties; (3) volatility of funding sources; (4) expected
near-term changes in capital levels; and (5) other relevant factors
appropriate for the FDIC to consider in its roles as insurer and
possible receiver of the institution. The proposed rule would have
required the FDIC to consult with the Covered Institution's primary
federal regulator in determining whether to implement this provision of
the proposed rule.
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\20\ CAMELS is an acronym drawn from the first letters of the
individual components of the rating system: Capital adequacy, Asset
quality, Management, Earnings, Liquidity, and Sensitivity to market
risk.
\21\ 12 CFR Part 325.
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Applications for extension of implementation requirements. The
proposed rule provided that a Covered Institution could request an
extension of the 18-month deadline for implementing the requirements.
An application for such an extension would be subject to the FDIC's
rules of general applicability, 12 CFR 303.251. For good cause shown,
the FDIC could grant the application for an extension.
New Deposit Accounts
The proposed rule would not have required a unique depositor ID for
customer accounts, rather the FDIC would rely upon customer information
already maintained by the Covered Institution to link commonly owned
accounts. Nevertheless, the FDIC asked whether a unique depositor ID
should be assigned by Covered Institutions when a new account is opened
and the relative costs of such a requirement.
IV. Comments on the Proposed Rule
The FDIC received twenty-one comments on the proposed rule, the
bulk of which addressed both parts of the proposed rule. Four of the
comments were from banking industry trade associations (including one
joint letter), two from bank regulatory authorities, ten from large
insured depository institutions, one from a law firm representing
broker-dealers who place brokered funds in insured depository
institutions, one from a member-owned electronic funds transfer network
and three from individuals. The following is a summary of the comments
we received on part two of the proposed rule--Large-Bank Deposit
Insurance Determination Modernization.
General Comments
The FDIC received a joint comment letter from three banking
industry trade associations. This letter summarized their sense of the
second part of the proposed rule as follows: ``The Associations support
the intent of the NPR to provide in a bank failure for timely deposit
insurance determination, prompt release of depositor funds, and least
cost resolution. Nonetheless many of the NPR's proposals would be very
costly for banks to implement. We recommend adoption of elements from
the NPR only where demonstrated benefits justify the cost, and request
that the FDIC make every effort to limit the burdens on banks and
provide flexibility to accommodate the variety of bank systems.''
Cost and Benefits
Many of the large-bank and all of the bank trade association
commenters expressed concern over the potential costs of implementing
the provisions of the second part of the proposed rule. Several
commenters also noted that the expected benefits to the FDIC are not
likely to outweigh the costs, especially given the perceived extremely
low likelihood of failure of any particular large bank.
Commenters emphasized that the potential implementation costs are
not small. ``Indeed, even small changes to information systems require
hundreds of person hours both in programming and testing to ensure
proper functionality and avoid disruption with ongoing operations.
Several of our member banks estimate that the cost per institution of
the initial implementation and testing of the Proposal's requirements
is likely to exceed $10 million and involve thousands of hours of
labor. As institutions begin the implementation process, based on prior
experience, these costs could increase beyond these initial estimates,
perhaps substantially. Moreover, significant additional costs will be
incurred to maintain and test these processes in the future.''
Several large banks provided estimates of implementation costs in
their comments. These cost estimates are shown in Table 1 along with
their deposit assessment base and a comparison of the estimated cost
with a 1 basis point deposit insurance assessment.
Several commenters also cited the extremely low likelihood of the
failure of a Covered Institution and that the FDIC typically is aware
of financial difficulties well in advance of failure. It was noted this
early warning should allow the FDIC ample time for preparation.
[[Page 41186]]
Table 1.--Estimated Implementation Costs
----------------------------------------------------------------------------------------------------------------
1-Basis point
Estimated Assessable annual FDIC Estimated cost as
Responder implementation cost deposits ($ assessment ($ a % of 1 BP
millions) millions) assessment
----------------------------------------------------------------------------------------------------------------
Bank A......................... $8-10 million......... 630,000 63.0 13-16
Bank B......................... ``total costs in the 230,000 23.0 NA
millions of dollars''.
Bank C......................... ``in excess of $2 29,000 2.9 70
million''.
Bank D......................... $2-4 million.......... 17,000 1.7 120-235
----------------------------------------------------------------------------------------------------------------
One banking trade association noted that the proposed requirements
are likely to provide no financial benefit to the FDIC. ``The proposed
rule offers no financial benefit to the FDIC because the FDIC does not
pay out the full amount of an uninsured deposit's recovery from a
failed institution until several years after the failed institution is
closed. Hence, the FDIC has ample time after an institution is closed
to properly aggregate deposit accounts to ensure that no uninsured
depositor obtains an excess recovery from the FDIC. Since the deposit-
account aggregation process under the proposed rule will not be
foolproof, the FDIC must still conduct a post-failure review of all
deposit accounts in a failed institution to ensure that they have been
properly aggregated for deposit-insurance purposes. The only way the
FDIC will pay out too much to an uninsured depositor is if its initial
dividend payment to uninsured depositors cannot be recovered through
(1) an offset against future dividend payments or (2) if offsets
against subsequent dividend payments do not fully recover the
overpayment, court actions or other collection procedures.''
Meeting the FDIC's Objectives
A letter from a bank regulatory agency cited the importance of
advance preparation in the event of a large-bank failure. The commenter
noted that the proposal ``reduces the chance that policymakers will
invoke the systemic risk exception of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) \22\ for technical reasons
rather than true concern over spillovers. This outcome has the benefit
of reducing potential resource misallocations arising from implied
guarantees of large-bank creditors. I further argued [in a previous
comment letter] that policymakers will not achieve this desired outcome
by implementing a new determination regime only at the time when banks
are in trouble.'' This commenter also provided the following five
observations regarding recent financial events:
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\22\ Pub. L.102-242 (1991).
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1. ``Several very large financial institutions (FIs) moved from
reasonably strong financial positions to what observers characterized
as near failure in short periods of time.''
2. ``The market turmoil reinforced the benefits of an ex ante
system that provide creditors of failed banks with ex post rapid access
to their available funds.''
3. ``Responses during the recent tumult reinforce the need for bank
policymakers to actively manage the implied safety net.''
4. ``Recent events reaffirm the need for policymakers to act before
bad outcomes occur.''
5. ``Large financial institutions have been at the epicenter of
recent events, and some of their creditors benefited most directly from
the policy response.''
One large-bank commenter ``supports the FDIC's continued work on
this important project. The current environment reminds us that bank
failures are not necessarily a phenomenon of only the past.''
Covered Institution Exemptions
Several commenters recommended exemptions from the definition of a
Covered Institution. Three potential exemptions were discussed.
Strong financial condition. Several commenters--including a state
banking agency--suggested that a Covered Institution with strong
financial characteristics should be exempt from the proposed
requirements. The state banking agency noted that the proposed
requirements would apply to only one depository institution in its
state, but that this institution has consistently demonstrated strong
financial characteristics. As such, commenters recommended that the
FDIC consider an exemption based on such things as CAMELS ratings, debt
ratings, capital levels or other financial characteristics.
Specialty institutions. Several commenters proposed an exemption
for specialty institutions, specifically those primarily involved in
credit card operations and bankers' banks. With regard to credit card
banks, it was noted that the deposits of these banks consist largely of
credit card overpayments and balances used to secure cards. In that
these are typically low balances, the commenters argued the deposits
attributed to credit card operations should be exempt from the criteria
of a Covered Institution.
Fewer than 250,000 deposit accounts. Several commenters requested
that the definition for a Covered Institution should include only those
depository institutions with at least 250,000 deposit accounts. One
large-bank commenter with fewer than 250,000 deposit accounts (that
would be a Covered Institution under the criteria proposed) argued that
the bank's ``insurance determination profile is no more complex than
that of a small to mid-sized bank.'' It was further argued ``due to the
large balances of our typical deposit accounts, the ratio of our
deposit insurance coverage to our domestic assessed deposit base is
substantially lower than nearly all other U.S. banks. [Our] potential
exposure to the insurance fund is therefore at best modest and creates
few of the complex challenges which the NPR seeks to address.''
Implementation Time
Most large-banks and all bank trade association commenters argued
for an extension in implementation time from the proposed 18 months to
24-to-36 months. Commenters contend the proposed requirements of the
proposed rule are significantly more complex than those of the past
advance notices of proposed rulemaking; particularly with regard to the
provisional hold requirements on sweep accounts and foreign deposits.
Several commenters also recommended an extension in implementation time
for institutions recently involved in merger and assumption activities.
Provisional Hold Exemptions
Sunsetting deposit systems. One large bank suggested providing an
exemption from requirements for deposit systems expected to be retired
in the near future, as long as the replacement system is compliant.
Small systems. Several commenters requested that--for a Covered
Institution
[[Page 41187]]
with multiple deposit systems--the FDIC should provide an exemption for
systems handling a small percent of overall deposit accounts at the
Covered Institution. As an example, the commenters proposed that a
deposit system handling five percent or fewer of the Covered
Institution's deposit accounts should be exempt from the provisional
holds requirements.
Foreign Deposit Provisional Holds
Several large-bank and all banking trade association commenters
recommended changing the provisional hold requirement on foreign
deposits to be uniform across all countries in which the Covered
Institution has deposit accounts. Commenters noted that for individual
institutions all foreign deposits frequently reside on a single deposit
system and that mandating different provisional hold percentages by
country would be burdensome.
Provisional Hold Flexibility
All banking trade association and many large bank commenters
approved of the flexibility to implement provisional holds using the
options of a persistent hold, a memo hold or a WIP account. The
commenters noted that this flexibility could reduce significantly
implementation costs. Generally the commenters believed they understood
what the FDIC intended to accomplish through provisional holds and
requested they be provided the flexibility to implement the holds in a
manner least costly for their institution.
Several commenters also requested additional flexibility regarding
the placement of provisional holds on funds swept out of a deposit
account into a sweep investment vehicle. It was noted that--in some
cases--funds are swept into a system within the institution that does
not have the capability of posting holds. In these cases commenters
requested the option of placing the hold on these funds as they return
to the deposit account rather than when they reside in the alternative
investment vehicle. Again, the commenters argued that they understood
the FDIC's intent and asked that they be allowed to implement the hold
in a manner least costly for their institution.
Provisional Hold Disclosure
Most banking trade associations and several large-bank commenters
argued it was unnecessary and unduly burdensome to require on-line or
other disclosure of provisional holds. Commenters noted the FDIC has
other mechanisms for distributing information to customers in the event
of a bank failure that would be equally effective.
Deposit Broker Requirements
One commenter requested confirmation that the proposed rule would
not require changes to brokered deposit recordkeeping or require
brokers to develop systems to comply with the rule. The commenter noted
that in addition to the more traditional brokered CD programs many
brokers offer brokered money market deposit and NOW accounts.
Unique Depositor ID
All commenters addressing the proposal to require a unique
depositor ID for newly opened accounts recommend against it. One
commenter noted ``the compliance and training costs would be excessive
while offsetting benefits are not apparent.''
V. The Final Rule
After considering the comments on the second part of the proposed
rule, the FDIC has adopted a final rule in a form similar to that
proposed. While there are a number of limited changes from the proposed
rule, the main changes are that the final rule will:
Permit application to the FDIC for an exemption from the
requirements of the final rule if an institution has a high
concentration of deposits incidental to credit card operations.
Expand the circumstances under which a Covered Institution
may be required to accelerate implementation of the final rule
requirements to include materially deteriorating financial conditions,
as discussed below.
Provide for a uniform provisional hold strategy for
foreign deposits.
Allow application to use alternatives to persistent
provisional holds.
Costs and Benefits
Many commenters cited the potentially high implementation costs of
the final rule and noted that the expected benefits might be low,
especially given the low likelihood of a Covered Institution failure.
One banking trade association commenter suggested there would be no
benefits to the FDIC.
In the proposed rule the FDIC noted that even if the likelihood of
a failure among Covered Institutions is perceived to be low, it is not
zero. Recent events have placed stress on the banking industry as a
whole. The FDIC must have in place a credible plan for resolving the
failure of an institution of any size at the least possible cost. The
ability to provide depositors prompt access to funds and determine the
insurance status of depositors in a failed institution in a timely
manner is a critical element for ensuring a least-costly resolution and
maintaining public confidence.
Meeting the FDIC's legal mandates. FDICIA was one of the most
important pieces of legislation affecting the FDIC's failure resolution
process. Its least-cost requirement effectively requires uninsured
depositors to be exposed to losses.\23\ Also, FDICIA's legislative
history and the nature of the systemic risk exception provide a clear
message that uninsured depositors of large institutions are to be
treated on par with uninsured depositors of other institutions. The
requirements being imposed in this rulemaking provide essential support
for the FDIC to meet these statutory mandates--particularly given the
current size and complexity of some insured depository institutions.
---------------------------------------------------------------------------
\23\ 12 U.S.C. 1823(c)(4).
---------------------------------------------------------------------------
Providing liquidity to depositors. The provisional hold
functionality creates a mechanism for the FDIC to provide customer
access to deposit accounts immediately after failure, albeit with some
FDIC hold for large accounts. The ability to continue uninterrupted the
deposit operations of a Covered Institution in the event of failure has
significant benefits for depositors and also helps preserve the
institution's franchise value.
Enhancement of market discipline. The FDIC's legal mandates have
direct implications for Too-Big-to-Fail and market discipline. If
financial markets perceive that uninsured depositors in large
institutions will be made whole in the event of failure, uninsured
deposits will be directed toward these larger depository institutions,
which could result in a significant misallocation of economic
resources. Many market observers believe there are substantial benefits
of improved market discipline that accrue even without serious industry
distress or bank failures.
Effective market discipline also limits the size of troubled
institutions and results in a more rapid course toward failure. Both
serve to mitigate overall resolution losses. Lower resolution losses
benefit insured institutions through lower insurance assessments.
Equity in the treatment of depositors of insured institutions.
Without the provisions of the final rule, the FDIC is concerned that
the resolution of a Covered Institution could be accomplished only
through a significant departure from the FDIC's normal claims
procedures. This departure could leave the bank closed until an
insurance determination is made or require the use of shortcuts to
speed the opening of the bridge institution. The use of shortcuts or
other mechanisms to facilitate
[[Page 41188]]
depositor access to funds could result in disparate treatment among
depositors within the failed institution and certainly different
treatment relative to the closure of a Non-Covered Institution.
Preservation of franchise value in the event of failure. The sale
of the franchise of a failed institution can provide significant value
to mitigate failure costs and is likely to be part of a least-cost
resolution. Superior Bank, FSB, one of the largest failures over the
past 10 years, generated a franchise premium of $52 million, or 17
percent of current estimated FDIC losses in the failure. An ineffective
claims process--especially one deviating significantly from the FDIC's
normal policies and procedures--risks reducing or destroying an
important asset of the receivership. Preservation of franchise value in
the event of failure of a Covered Institution will be an important
benefit of the final rule.
A banking trade association commenter suggested the FDIC delay
implementation of the final rule ``until the FDIC evaluates how to
relieve such cost and burden on the industry.'' The FDIC first proposed
the elements of the final rule in its 2005 ANPR. A second ANPR was
issued in 2006, roughly a year in advance of the January 2008 proposed
rule leading to this final rule. As indicated in the proposed rule,
based on the respective comments on the 2005 and 2006 ANPRs, the FDIC
reduced the potential for industry burden relative to the requirements
in the proposed rule. Several of the commenters on the proposed rule
acknowledged this reduction in industry burden. Likewise, as a result
of the comments on the proposed rule, the FDIC has further reduced the
potential for industry burden as to the requirements of the final rule.
In both ANPRs and in the proposed rule the FDIC requested comment
on alternative approaches that could meet the FDIC's objectives with a
lower industry burden. None of these three requests for comment yielded
suggestions for a different overall approach meeting the FDIC's
objectives. In consideration of the extensive public comment process
covering the second part of the proposed rule, the FDIC believes no
further examination of costs and benefits is necessary prior to the
adoption of the final rule.
Definition of Institutions Covered
The final rule applies to a Covered Institution, defined as any
insured depository institution having at least $2 billion in domestic
deposits and at least either: (1) 250,000 deposit accounts; or (2) $20
billion in total assets, regardless of the number of deposit
accounts.\24\ All other insured depository institutions are designated
Non-Covered Institutions and, thus, are not subject to the final
rule.\25\
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\24\ For the purposes of the criteria in the text, an ``insured
depository institution'' includes all institutions defined as such
in the FDI Act. 12 U.S.C. 1813(c)(2). Other applicable terms would
be as defined in the Reports of Condition and Income (Call Report)
instructions (for insured banks) and Thrift Financial Reports (TFR)
instructions (for insured savings associations): ``deposit
accounts'' mean the total number of deposit accounts (including
retirement accounts), ``domestic deposits'' mean total deposits held
in domestic offices (for insured banks) or deposits (for insured
savings associations), and ``total assets'' means the reported
amount of total assets.
\25\ As discussed previously, the criteria for a Covered
Institution apply to separately chartered insured depository
institutions.
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Commenters suggested exemptions for institutions: (1) With strong
financial characteristics, (2) specializing in credit card operations
or services to depository institutions (bankers' banks) and (3) with
fewer than 250,000 deposit accounts. As discussed below, based on the
comments, the final rule provides (through an application process) for
an exemption from the final rule for institutions with a high
concentration of deposits incidental to credit card operations.
Strong financial characteristics. The financial characteristics of
Covered Institutions vary considerably, as reflected in differing
CAMELS ratings, capital levels and debt ratings. The recent
difficulties experienced by the financial markets demonstrate the
degree to which rapid financial deterioration is possible, even for
some institutions only recently considered to be in strong health. The
FDIC is concerned that the possible pace of financial deterioration-
even among those historically showing strong financial characteristics-
could expose the FDIC to undue risk, especially given the potential
implementation times cited by commenters. Thus, the final rule provides
no exception to the criteria of a Covered Institution based on
financial characteristics.
Credit card specialists and bankers' banks. Some depository
institutions specialize in credit card operations. As such, the
preponderance of their deposits relate to overpayments on credit cards
or balances held to secure a credit card. Some credit card specialists
have in excess of 250,000 deposit accounts and could also have more
than $2 billion in domestic deposits. Such institutions rarely hold
large deposit balances in a significant number of accounts. As
discussed below, under the final rule, the FDIC will permit application
for an exemption from the final rule requirements if an institution has
a high concentration of deposits incidental to credit card operations.
A bankers' bank specializes primarily in services to other
depository institutions. Deposit balances can be large and such
organizations typically have high levels of uninsured deposits. A large
bankers' bank raises concerns similar to other depository institutions,
perhaps to a greater extent given its stronger link to those
institutions. For a bankers' bank the FDIC would be concerned about
rapidly restoring deposit operations in the event of failure so that
depositors can have access to their funds. Consequently, the final rule
provides no exception to the criteria of a Covered Institution for a
bankers' bank.
Fewer than 250,000 deposit accounts. Under the proposed rule a
Covered Institution could include a depository institution with fewer
than 250,000 deposit accounts, as long as it has total assets in excess
of $20 billion and domestic deposits over $2 billion. These criteria
expand the list of Covered Institutions by roughly seven compared to a
more narrow definition including depository institutions with at least
250,000 deposit accounts and over $2 billion in domestic deposits. Some
large depository institutions with fewer than 250,000 deposit accounts
play a significant role in the financial system, some having total
assets in excess of $100 billion. In the event of failure, the FDIC
would be concerned about rapidly restoring deposit operations so that
depositors can have access to their funds. Hence, the final rule
provides no exception to the criteria of a Covered Institution based on
the number of deposit accounts.
Provisional Holds
General description. The final rule requires Covered Institutions
to have in place an automated process for implementing provisional
holds concurrent with or immediately following the daily deposit
account processing on the day of failure. After the placement of
provisional holds, all other holds previously placed by the institution
would still remain in effect.\26\ The final rule does not require
development of mechanisms to stop or
[[Page 41189]]
alter interest accrual for the affected accounts.
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\26\ 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 must be applied
to individual accounts in an automated fashion. Commonly owned accounts
need not be aggregated by ownership for the purposes of calculating or
placing provisional holds. Provisional holds will extend to all non-
closed deposit accounts held in domestic and foreign offices, as well
as certain sweep account arrangements.\27\ For these purposes a deposit
account also includes omnibus accounts reflected on the books and
records of the Covered Institution used to temporarily house customer
funds, such as those used in connection with sweep transactions.
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\27\ As noted above, 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 final rule requires a
persistent provisional hold to be applied once (on or immediately after
the day of failure) and stay on the deposit account until it is removed
at the order of the FDIC. Once applied, the persistent hold would
reduce the customer's available balance.
The proposed rule discussed the use of memo holds and holding
balances in an alternate account, such as a work in progress or
suspense account. The use of these alternatives could reduce
implementation costs. Under the final rule, a Covered Institution may
apply to the FDIC to develop a provisional holds process involving memo
holds or alternative account mechanisms. If used, the Covered
Institution is required to obtain prior approval from the FDIC in
response to a written request, including a justification for the
process and its relative effectiveness for posting provisional holds in
the event of failure.
Provisional holds for deposit accounts. Under the final rule, a
Covered Institution is required to develop and implement a process
whereby a provisional hold could be placed on each deposit account in
excess of the ``account balance threshold'' specified by the FDIC on
the day of failure.\28\ No provisional hold would be placed on a
deposit account with a balance less than or equal to the account
balance threshold. For a deposit account above the account balance
threshold, the FDIC would specify, again on the day of failure, a
percentage (the ``provisional hold percentage'') that would be
multiplied by the account balance in excess of the account balance
threshold.\29\ The product of this multiplication would equal the
dollar amount of the provisional hold. The final rule requires a
Covered Institution to adopt systems allowing the hold to be calculated
and placed. The account balance threshold as well as the provisional
hold percentage could vary for the following four categories, as the
Covered Institution customarily defines them:
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\28\ The account balance threshold could be any dollar amount
specified by the FDIC, including zero.
\29\ The provisional hold percentage could be any percentage
specified by the FDIC, from 0 to 100 percent.
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1. Consumer demand deposit, negotiable order of withdrawal
(``NOW'') and money market deposit accounts (``MMDA'').
2. Other consumer deposit accounts (time deposit and savings
accounts, excluding NOW accounts and MMDAs).
3. Non-consumer demand deposit, NOW accounts and MMDAs.
4. Other non-consumer deposit accounts (time deposit and savings
accounts, excluding NOW accounts and MMDAs).
One commenter requested confirmation that the proposed rule would
not require changes to brokered deposit recordkeeping or require
brokers to develop systems to comply with the rule. The final rule does
not impose any such requirements, although deposit brokers may be
affected in the event of the failure of a Covered Institution. Under
the final rule a brokered deposit would be treated as any other deposit
account for provisional hold purposes. The implications for deposit
brokers may vary depending on the ability of the underlying owners to
access funds in the account or otherwise change their ownership
interests. Some brokered deposit accounts may be structured as money
market deposit accounts, for example, thus allowing the underlying
owners check-writing access to funds in the account. If an underlying
owner with an uninsured interest removes funds from the account
subsequent to failure, the result might be a shortfall to other
underlying owners. Responsibility for this shortfall will rest with the
broker or agent in whose name the account is titled, and not the FDIC
as insurer.
Provisional holds for foreign deposits. Under the final rule, a
Covered Institution is required to develop and implement a process
whereby a provisional hold could be placed on each foreign deposit
account on the day of failure applying a provisional hold percentage to
the entire account balance. For foreign deposits the provisional hold
percentage may differ from that applied to deposit accounts. Also, the
provisional hold percentage would not vary by account category (i.e.,
consumer versus non-consumer and transaction versus non-transaction) as
is the case with deposit accounts.
The proposed rule would have required the provisional hold
percentage on foreign deposits to vary by country. Several commenters
noted that foreign deposits frequently are housed on a single deposit
system within the institution. It was argued that the application of
different provisional hold mechanisms based on a country would be
burdensome. After considering these comments, the FDIC believes an
effective provisional hold strategy could be implemented without the
need for country-by-country distinctions.
Provisional holds for IBF deposits. Under the final rule, a Covered
Institution is required to develop and implement a process whereby a
provisional hold could be placed on each IBF deposit account on the day
of failure applying a provisional hold percentage to the entire account
balance. For IBF deposits the provisional hold percentage may differ
from that applied to deposit or foreign deposit accounts. Also, the
provisional hold percentage would not vary by account category (i.e.,
consumer versus non-consumer, and transaction versus non-transaction)
as is the case with deposit accounts.
Provisional holds for deposit accounts with prearranged, automated
sweep features. For sweep accounts \30\ under the final rule the FDIC
will consider a deposit account through which the customer has primary
access to deposited funds--usually a demand deposit account--as the
``base sweep account.'' The investable or excess account balance is
swept periodically into a ``sweep investment vehicle.''
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\30\ Sweep accounts as described here do not include zero
balance account (ZBA) arrangements that move funds to and from a
master (or concentration) deposit account and one or more subsidiary
deposit accounts at the same bank. Such deposit account arrangements
are not intended to provide a yield on excess deposit balances nor
do they change the customer's insurance status. ZBAs would be
subject to the provisional hold methodology for deposit accounts
described above.
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In the case where the sweep investment vehicle is another deposit
account in the same institution, both the base sweep account and the
sweep investment vehicle are deposits subject to the provisional hold
requirements of a deposit account. Some sweep arrangements channel
funds through an omnibus account as an intermediate step prior to their
transfer to the sweep investment vehicle. In some cases, such as with
``next-day'' money market mutual fund sweeps, customer funds
[[Page 41190]]
will reside in the omnibus deposit account as reflected in the Covered
Institution's end-of-day ledger balances. Under the final rule the
omnibus account is subject to the provisional hold requirements of a
deposit account.
In the case where the sweep investment vehicle is housed in a
separate legal entity other than the Covered Institution (e.g., a
proprietary or third-party money market mutual fund), funds residing in
the base sweep account (if any) are subject to a provisional hold as
any other deposit account. No provisional hold is required for funds
residing outside the Covered Institution in the sweep investment
vehicle.
All other sweep accounts, those where the sweep investment vehicle
is not a deposit and is reflected on the books and records of the
Covered Institution, are required by the final rule to have a dual
provisional hold methodology. This means that, for the fund balance
remaining in the base sweep account as of the institution's customary
end-of-day on the day of failure, the provisional hold methodology will
be the same as applied to other deposit accounts. But, for the funds
residing in the sweep investment vehicle as of the institution's
customary end-of-day, the provisional hold methodology will have a
separate account balance threshold and provisional hold percentage.\31\
Under the final rule the balance threshold as well as the provisional
hold percentage may vary for different types of sweep investment
vehicles.\32\
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\31\ Some Covered Institutions may allow a single base sweep
account to be associated with multiple investment vehicles. In this
case a separate provisional hold methodology must be developed for
each investment vehicle.
\32\ Some alternative investment vehicles are deposits held in
foreign offices. These foreign deposits would be subject only to the
provisional hold methodology for the sweep alternative investment.
Such foreign deposits would be excluded from the provisional hold
methodology designed for non-sweep deposits held in the same foreign
office.
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The proposed rule distinguished between Class A and Class B sweep
account arrangements, where Class A sweep arrangements were those where
the sweep investment vehicle is either a deposit or a money market
mutual fund account while Class B covered all other sweep arrangements.
In response to comments and for better clarity this distinction is not
used in the final rule.
The final rule does not require mechanisms to stop the processing
of any prearranged deposit account sweep transactions in the event of
failure. The provisional holds described above would allow for the
transfer of balances from a deposit account to a sweep investment
vehicle. The provisional holds would apply to liability accounts as
they are designated on the books and records of the institution at its
customary end-of-day.
One commenter noted that frequently ``systems or processes for
booking swept products (like securities repos, money market mutual
funds or fed funds) are not like a deposit system that would have
functionality for holds. In many cases, there are not `accounts' in a
sense equivalent to a deposit account. * * * Due to the structure,
timing and automated processes of sweeps, there is no practical ability
of a customer to access and remove such funds until the incoming side
of that sweep transaction is processed and the funds are placed back
into the U.S. deposit account. Bank deposit systems could utilize
existing capabilities to either place holds on the domestic deposit
account upon return of the funds or a bank could trap such funds prior
to their being returned by routing such funds into an alternative
suspense account. This method would allow the FDIC to control such
funds until it releases them to the customer and would reduce the
burden and cost of process and technology development.'' The final rule
would allow a Covered Institution to apply to the FDIC to use such
approaches. If used, the Covered Institution is required to obtain
prior approval from the FDIC in response to a written request,
including a justification for the process and its relative
effectiveness for posting provisional holds in the event of failure.
Provisional holds for deposit accounts which accept automated
credits from funds invested within the Covered Institution. The final
rule requires a dual provisional hold methodology for automated credit
accounts. For the fund balance remaining in the automated credit
account as of the institution's customary end-of-day the provisional
hold methodology would be the same as applied to other deposit
accounts. For the funds residing in the investment vehicle as of the
institution's customary end-of-day, the provisional hold methodology
must have the capability of a separate account balance threshold and
provisional hold percentage.\33\ The account balance threshold as well
as the provisional hold percentage are required to vary for different
types of investment vehicles. These account balance thresholds and
provisional hold percentages could be different from those applied to:
(1) Funds automatically swept into a similar or identical investment
vehicle or (2) funds held in a similar or identical investment vehicle
that does not provide for an automated crediting of funds.\34\
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\33\ Some automated credit accounts may also be a base sweep
account. In this case a separate provisional hold methodology must
be developed for each investment vehicle. It is possible, for
example, for a customer to each day provide the institution with
instructions to invest a certain amount of funds in a Cayman Island
branch time account where the funds would be returned to the
customer's demand deposit account the following morning. Further,
the customer may also have provided prearranged instructions to have
excess balances residing in the same demand deposit account swept to
a Cayman Island branch account where such funds also are returned to
the demand account the following morning. In this case the Covered
Institution must have a provisional hold methodology that: (1)
Treats funds residing in the demand deposit account as of the
institution's end-of-day consistent with other deposit accounts, (2)
treats funds residing in the Cayman Island branch account as a
result of the prearranged sweep consistent with other Cayman Island
sweep investment vehicles and (3) treats funds residing in the
Cayman Island branch account as a result of the daily investment
instructions using a separate account balance threshold and
provisional hold percentage.
\34\ Some investment vehicles are foreign deposits. These funds
would be subject only to the provisional hold methodology for the
automated credit account. Such accounts would be excluded from the
provisional hold methodology designed for non-sweep foreign deposits
held in the same office.
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Account balance used for provisional hold calculation. The final
rule requires the account balance threshold and provisional hold
percentage to be applied against the end-of-day ledger balance
calculated by the institution as of the date of failure.
Provisional hold duration. Under the final rule, the methodology
for implementing a provisional hold process will be required to hold
funds until removed by the Successor Institution as instructed by the
FDIC. Provisional holds will be removed when the results of the deposit
insurance determination are available, generally anticipated being
several days after failure, depending on the size and complexity of the
failed institution's deposit base.
Provisional hold designation. The final rule requires provisional
holds to be labeled ``FDIC Hold.''
Provisional hold customer disclosure. The majority of the
commenters addressing the issue of provisional hold disclosure
indicated it would be burdensome and unnecessary. They indicated the
FDIC has other means at its disposal to notify customers the
provisional holds are in place. Once placed, the provisional hold will
be reflected in the account's available balance, which can be viewed
and accessed through normal channels.
The final rule does not require the development of new mechanisms
so that provisional holds, once placed, would be apparent if the
customer
[[Page 41191]]
views account information on-line or through other means.
Security level and mechanism for manual removal of provisional
holds. The final rule requires the Covered Institution to create
policies, procedures and systems reasonably capable of preventing the
alteration of FDIC provisional holds or other FDIC hold amounts except
under the specific written direction of the FDIC.
Timeliness of the provisional holds process. The final rule
requires a Covered Institution to have the capability of placing
provisional holds on the applicable accounts prior to the Successor
Institution opening for business the following day, but in no case
later than 9 a.m. local time the day following the day of the
depository institution failure.
Exception for systems with a small number of accounts. The final
rule allows an exception for account systems servicing a relatively
small number of accounts making the manual application of provisional
holds feasible. If used, the Covered Institution is required to obtain
prior approval from the FDIC in response to a written request,
including a justification for the manual process and its relative
effectiveness for posting provisional holds in the event of failure.
Institutional contacts. The final rule requires a Covered
Institution to notify the FDIC of the person(s) responsible for
producing the standard deposit data download and administering
provisional holds, both while this functionality is being constructed
and on an on-going basis. The Covered Institution is responsible for
ensuring such contact information is current.
Removal of Provisional Holds
Removal of provisional holds. Under the final rule, the Successor
Institution is required to remove provisional holds in batch as
specified by the FDIC. On the day(s) provisional holds are to be
removed, the FDIC would provide the Successor Institution with a file
listing the accounts subject to removal of the provisional hold. The
file format is shown in Appendix A. The file will be in a tab-or pipe-
delimited ASCII format and provided to the Successor Institution
through FDICconnect or Direct Connect, depending on the size of the
file. The file will be encrypted using an FDIC-supplied algorithm. The
FDIC will provide the Successor Institution with the necessary software
algorithms needed to decrypt the data files.
In addition to the batch process used to remove provisional holds,
the Covered Institution is required to have in place a mechanism for
manual removal of provisional holds on a case-by-case basis. The FDIC
expects that virtually all provisional holds will be removed via the
batch process described above; however, the removal of provisional
holds on a case-by-case basis during the business day, which could
include the day following failure, may also be necessary to provide an
individual depositor access to funds.
Provisional Hold Replacement Transactions
Debiting and crediting accounts after provisional holds are
removed. Under the final rule, on the day a provisional hold removal
file is provided to the Successor Institution, the FDIC also will
provide a file or set of files in a tab-or pipe-delimited ASCII format
listing the accounts subject to debit or credit transactions, which
reflect the results of the insurance determination process. Appendix B
provides details on the debit/credit data file structure. The debit and
credit transaction file will be transmitted to the Successor
Institution through FDICconnect or Direct Connect, depending on the
size of the file. The file will be encrypted using an FDIC-supplied
algorithm.
Posting of additional FDIC holds. Under the final rule, on the day
provisional holds are to be removed, the FDIC also will provide the
Successor Institution with a file listing the accounts subject to a new
hold to be placed after the removal of the provisional hold. The file
format is shown in Appendix A. The file will be in a tab-or pipe-
delimited ASCII format and provided to the Successor Institution
through FDICconnect or Direct Connect, depending on the size of the
file. The file will be encrypted using an FDIC-supplied algorithm.
Removal of Additional FDIC Holds
Under the final rule, in some cases provisional holds will be
replaced by a second FDIC hold. These holds will be removed over time
as further information is gathered from depositors needed to complete
the insurance determination. These additional FDIC holds will be
removed using the same file format described in Appendix A.
The Generation of Deposit Account and Customer Data in a Standard
Structure
The final rule requires a Covered Institution to have in place
practices and procedures to provide the FDIC with required depositor
and customer data in a standard format following the close of any day's
business. The depositor and customer data would be provided as soon as
practicable, but in no case later than by the following calendar day,
and must reflect the end-of-day ledger balances as customarily shown on
the books and records of the Covered Institution as of the day data are
requested. Furthermore, all other deposit account and customer data
provided must be current as of the close of business on that day.
Covered Institutions are not required to collect or generate new
depositor or customer information. The standard data files would be
created through a mapping of pre-existing data elements and internal
institution codes into standard data formats. Data will be provided on
all non-closed deposit or foreign deposit accounts as well as sweep and
automated credit accounts.
Files. The final rule requires these data to be provided in the
following five separate files:
1. Deposit file. Data fields for each non-closed deposit or foreign
deposit account,\35\ except those accounts serving as an investment
vehicle reported in the Sweep/Automated Credit file. See Appendix C for
more detail.
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\35\ For these purposes a deposit account also includes omnibus
accounts reflected on the books and records of the Covered
Institution used to temporarily house customer funds, such as those
used in connection with sweep transactions.
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2. Sweep/Automated Credit file. Data fields capturing information
on funds residing in investment vehicles linked to each non-closed
deposit account: (1) Involved in sweep activity where the sweep
investment vehicle is not a deposit and is reflected on the books and
records of the Covered Institution or (2) which accept automated
credits. See Appendix D for more detail.
3. Hold file.\36\ Deposit hold data fields for each non-closed
deposit account. See Appendix E for more detail.
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\36\ The Hold file contains information on holds against each
deposit account, including FDIC provisional holds. Since provisional
holds may be generated after the completion of an institution's
nightly deposit processing cycle, they may not be reflected fully in
the Hold file generated as of the day of closing. In this case the
FDIC would require a second Hold file to be generated the day
following closing to fully capture provisional holds that may not
have been posted until the next deposit processing cycle.
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4. Customer file. Data fields for each customer. See Appendix F for
more detail.
5. Deposit-customer join file. Data necessary to link each deposit
and foreign deposit with the customers who have an interest in the
account. See Appendix G for more detail.
Possible file combinations. The final rule provides that data could
be submitted using one of each deposit, sweep/automated credit, hold,
customer, and deposit-customer join files. Alternatively, data could be
supplied using multiple files for each
[[Page 41192]]
type. The number of files could correspond to the number of
institutional systems of record, for example. When an institution
provides multiple data files for a single deposit application, all of
the files must sum to the institution's subsidiary system control
totals. In addition, either a set of customer files or a single
customer file must accompany the deposit file(s). See Appendix H for
rules governing the possible file combinations for depositor and
customer data.
File format. Under the final rule depositor and customer data files
must be provided in tab- or pipe-delimited ASCII format. Each file name
would contain the institution's FDIC Certificate Number, the file type
(deposit, sweep, hold, customer, join or other) and the date of the
extract. Additional data could be provided, not required by the
regulation, that may be helpful to the FDIC's deposit insurance
determination process. For these additional files, the names should
describe the file content such as ``lookup table'' or ``product
codes''. All files will be compressed and encrypted using an FDIC-
supplied or specified algorithm. The FDIC would transmit the encryption
algorithm over FDICconnect. The FDIC will support an ASCII file format.
File transmission mechanism. Under the final rule, the data files
must be provided to the FDIC in the most expeditious manner. Data which
are compressed and encrypted could be transmitted to the FDIC using
FDICconnect or a secure FTP site which the FDIC has established for
this purpose. Should the volume be too great to be transmitted
electronically, then a portable hard drive should be used and
physically transported by FDIC personnel to the FDIC's data processing
facilities.
Testing Requirements
The FDIC will conduct an initial test at each Covered Institution
sometime after the initial implementation period ends.\37\ All testing
will be coordinated with the financial institution and conducted at the
site of their choosing if multiple sites are available. Once the
initial test is completed successfully, the FDIC anticipates conducting
additional tests infrequently at institutions that do not make major
changes to their deposit systems \38\--perhaps only once every three-
to-five years. More frequent testing may be necessary for institutions
that make major acquisitions, experience financial distress (even if
the distress is unlikely to result in failure) or undertake major
system conversions.
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\37\ In addition to testing, the FDIC expects to require that
information contact points be validated (and updated as needed).
\38\ A major change to a deposit system means a change made to a
Covered Institution's data environment affecting one or more of the
data elements described in attached Appendices. Changes could be the
result of a merger or the streamlining of a financial institution's
systems of record.
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Covered Institutions will be asked to establish a series of test
accounts on their deposit account systems that could be used for
verification purposes. These accounts will be used to verify the
processing of holds, debits and credits.
The FDIC also contemplates development of a XML validation service
to be provided to each Covered Institution for the purpose of
establishing compliance with the standard data requirements for
depositor and customer records. The XML schema will read a file (which
has been created in the standard format), validate the accuracy and
integrity of the file content and provide a report that establishes the
institution's compliance with the criteria. In addition to the XML
service, the FDIC also will provide a description of the validation
process to help facilitate institutional testing.
Covered Institutions will be responsible for ensuring that a
representative sample of data has been passed through the XML
validation service. At a minimum the sampling strategy should cover a
cross-section of different insurance categories and of account ledger
balances maintained by the institution. The Covered Institution will be
required to provide the FDIC its sampling strategy along with the
validation results as a part of the periodic verification process.
To reduce the frequency of FDIC testing and ensure ongoing
compliance, the FDIC will require Covered Institutions to conduct tests
in-house every year and provide the FDIC with verification that the
test was conducted, a summary of the test results and certification
that the functionality can be successfully implemented.
In addition, the FDIC will test certain other requirements inside
the institution, including but not limited to the ability to place and
remove provisional holds, place new holds and implement debits and
credits using a data set that meets the FDIC standards.
Implementation Requirements
Institutions meeting the criteria of a Covered Institution upon the
effective date of the regulation. The final rule requires a Covered
Institution to fully implement the respective requirements no later
than 18 months from the regulation's effective date.
Institutions meeting the criteria of a Covered Institution after
the effective date of the regulation. The final rule requires that any
insured institution meeting the criteria of a Covered Institution for
at least two consecutive quarters will have 18 months following the end
of the two consecutive quarters in which to fully implement the
respective requirements.
Merger involving two Covered Institutions. Under the final rule,
the requirements are to be fully implemented within 18 months following
the completion of an acquisition, although an acquisition does not
delay any implementation requirements which may already have been in
place for the individual institutions involved in the merger.
Merger involving a Covered and Non-Covered Institution. Under the
final rule, the requirements are to be fully implemented within 18
months following the completion of an acquisition, although a merger
does not delay any implementation requirements which may already have
been in place for the individual institutions involved in the merger.
Exception for certain institutions. Under the final rule, on a
case-by-case basis, the FDIC could accelerate the implementation
timeframe of all or part of the final rule for a Covered Institution
that: (1) Has a composite rating of 3, 4 or 5 under the Uniform
Financial Institutions Rating System (commonly referred to as
CAMELS),\39\ or in the case of an insured branch of a foreign bank, an
equivalent rating, (2) is undercapitalized as defined for purposes of
the prompt corrective action (``PCA'') rules \40\ or (3) is determined
by the appropriate Federal banking agency or the FDIC in consultation
with the appropriate Federal banking agency to be experiencing a
significant deterioration of capital or significant funding
difficulties or liquidity stress, notwithstanding the composite rating
of the institution by its appropriate Federal banking agency in its
most recent report of examination. In determining the accelerated
implementation timeframe for such institutions, the FDIC will consider
such factors as the: (1) Complexity of the institution's deposit
systems and operations; (2) extent of asset quality difficulties; (3)
volatility of funding sources; (4) expected near-term
[[Page 41193]]
changes in capital levels; and (5) other relevant factors appropriate
for the FDIC to consider in its roles as insurer and possible receiver
of the institution. The final rule requires the FDIC to consult with
the Covered Institution's primary federal regulator in determining
whether to implement this provision.
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\39\ CAMELS is an acronym drawn from the first letters of the
individual components of the rating system: Capital adequacy, Asset
quality, Management, Earnings, Liquidity, and Sensitivity to market
risk.
\40\ 12 CFR Part 325.
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Applications for extension of implementation requirements. The
final rule provides that a Covered Institution could request an
extension of the 18-month deadline for implementing the requirements.
An application for such an extension would be subject to the FDIC's
rules of general applicability, 12 CFR 303.251. For good cause shown,
the FDIC could grant the application for an extension.
One commenter requested that the FDIC provide an exemption from the
proposed requirements for deposit systems which may be retired in the
near future, as long as the replacement system is intended to be
compliant. Such a request could be addressed as an application for
extension of implementation requirements.
New Deposit Accounts
The proposed rule asked whether a unique depositor ID should be
assigned by Covered Institutions when a new account is opened and to
indicate the relative costs of such a requirement. Commenters generally
indicated the assignment of a unique depositor ID was burdensome and
unnecessary to meet the FDIC's objectives. The final rule does not
include a requirement to assign a unique depositor ID when a new
account is opened.
FDIC Contact
Applications for an exemption from the criteria of a Covered
Institution, a request for flexibility in the use of provisional holds,
an extension of implementation requirements or the submission of point-
of-contact information should be submitted in writing to: Office of the
Director, Division of Resolutions and Receiverships, Federal Deposit
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429-0002.
VI. Plain language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. No commenters suggested that the proposed rule was
unclear, and the final rule is substantively similar to the proposed
rule.
VII. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995, the FDIC may not conduct or sponsor, and respondents are not
required to respond to, an information collection unless it displays a
currently valid Office of Management and Budget (OMB) control number.
The FDIC submitted the information collections (as more fully described
below) contained in this rule to OMB for review. No collections of
information will be made until OMB approval has been obtained.
Background/General Description of Collection: Section 360.9
contains collections of information pursuant to the Paperwork Reduction
Act (44 U.S.C. 3501 et seq.) (``PRA''). In particular, the following
requirements of this proposed rule constitute collections of
information as defined by the PRA: (A) All notices that Covered
Institutions must provide the FDIC of persons responsible for producing
the standard data download and administering provisional holds, both
while the functionality is being constructed and on an on-going basis
(360.9(c)(3)); (B) written practices and procedures for providing the
FDIC with required deposit account and customer data, as to all
accounts held in domestic and foreign offices, in a standard format
upon the close of any day's business, to be created through a mapping
of pre-existing data elements into standard data formats in six
separate files, as indicated in the appendices to this Part 360
(360.9(d) (1) and (2); (C) all data provided to the FDIC pursuant to
360.9(d)(3); and (D) the dollar costs and time burdens associated with
information systems acquisition, modification and maintenance that
respondents will need in order to respond to the information
requirements. Items A, B, C, and D are reflected, to some extent, as
on-going burdens and costs; Item D represents primarily implementation
or ``start-up'' burdens and costs. As discussed below, the FDIC has
clarified its burden estimates in order to distinguish on-going costs
and burdens from implementation or start-up costs and to provide
additional detail concerning the FDIC's calculations.
Costs estimated in the proposed rule: Compliance with the
requirements of the proposed rule would have required Covered
Institutions to implement functionality to post provisional holds,
remove provisional holds, post debit and credit transactions, post
additional holds and provide customer data in a standard format
reconciled to supporting subsidiary systems. These requirements also
were required to be supported by policies and procedures as well as
notification of individuals responsible for the systems. Further, the
requirements involved on-going costs for testing and general
maintenance and upkeep of the functionality. Estimates of both initial
implementation and on-going costs were provided.
In the proposed rule implementation costs were estimated to vary
widely among the Covered Institutions due to considerable differences
in the complexity and scope of the deposit operations across Covered
Institutions. Some Covered Institutions only slightly exceeded the
250,000 deposit account threshold while several institutions had over
20 million deposit accounts. In addition, some Covered Institutions--
most notably the largest-have proprietary deposits systems likely
requiring an in-house, custom solution for the proposed requirements
while most--generally the small-to-mid-sized ones--purchase deposit
software from a vendor or use a servicer for deposit processing.
Deposit software vendors and servicers were expected to incorporate the
proposed requirements into their products or services to be available
for their clients. In these cases estimated implementation costs were
greatly reduced. The analysis assumed 100 of the 159 Covered
Institutions, or 63 percent, would have reduced implementation costs
due to the use of software or services from a vendor.
The cost estimates used in the proposed rule were based on comments
from the 2005 and 2006 ANPRs that provided some indication of
implementation and on-going costs. Further, during November 2007 the
FDIC had conversations with several Covered Institutions and deposit
software vendors, which also assisted in formulating these cost
estimates.
For Covered Institutions with proprietary deposit systems
implementation costs were estimated to vary considerably. The costs for
the least complex of these institutions were estimated to range between
$250,000 and $350,000.\41\ For super-regional organizations
implementation costs were estimated to be between $2 million and $4
million.\42\ The costs for the largest, most complex Covered
Institutions were estimated to be several
[[Page 41194]]
times that of the super-regional organizations. For Covered
Institutions using software or servicing provided by a vendor
implementation costs were estimated to be $13,000 to $20,000 per
institution. These costs primarily were due to installation of software
received from the vendor.
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\41\ Compliance with the proposed requirements would require
staff time. The analysis assumed an hourly cost of $160 for Covered
Institutions.
\42\ The comment letter provided by the American Bankers
Association dated March 13, 2007 in response to the 2006 ANPR
indicated cost estimates provided by members ranged from $2 million
to $6 million per institution for implementation (page 3).
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Using this methodology overall industry implementation costs were
estimated to range between $50 million and $100 million. The best
estimate of implementation costs is the mid-point of this range, or $75
million. In reviewing implementation costs as part of the comments
received from previous ANPRs the FDIC viewed them relative to a one
basis point assessment against deposits. In this context the estimated
implementation costs ranged between 11 and 21 percent of a one basis
point assessment against deposits of Covered Institutions. The mid-
point cost estimate would have been 16 percent.
On-going costs for testing, maintenance and other periodic items
were estimated to range between $6,000 and $13,000 for those Covered
Institutions using software or servicing provided by a vendor. For
super-regional organizations on-going costs were estimated to be
between $150,000 and $250,000. The largest, most complex Covered
Institution was estimated to have on-going costs as high as $500,000
per year. Overall, on-going industry cost estimates ranged from $4
million to $6.5 million, or 0.8 to 1.4 percent of a one basis point
assessment against the deposits of Covered Institutions.
Comments: Several commenters provided estimates for implementation.
These cost estimates are discussed in the preamble to the final rule.
In general, the implementation cost estimates provided by commenters
were consistent with the assumptions used in the proposed rule. The
largest, most complex depository institution estimated implementation
costs to be $8 million to $10 million, within the range of the estimate
for this institution used in the calculations for the proposed rule.
Updated cost estimates: The requirements of the final rule
effectively are identical to the proposed rule. Further, there was
considerable consistency between the cost comments provided from the
proposed rule and the assumptions used by the FDIC to estimate the
costs of the proposed rule. Therefore, the FDIC has not changed its
estimates regarding implementation or on-going costs.
When the proposed rule was issued 159 depository institutions were
estimated to meet the criteria of a Covered Institution. This estimate
was based on Call and Thrift Financial Report data as of June 2007.
Since this reporting date eight institutions included in these 159 no
longer exist due to a merger or acquisition. For commercial banks the
number of deposit accounts is reported only once a year in June. Based
on analysis from prior years, the number of institutions potentially
covered by the criteria has been about 160. While the number of
potentially covered institutions is reduced each year due to merger and
acquisition activity, it also has increased as new institutions grow in
size to meet the criteria. In this regard, for the purposes of this
cost analysis, the FDIC is assuming that since June 2007 an additional
eight depository institutions (which it is unable to identify at this
point) have met the requirements of a Covered Institution. Therefore,
the FDIC is still basing its cost estimate on 159 Covered Institutions.
OMB Number: New collection.
Frequency of Response: On Occasion.
Affected Public: Insured depository institutions having at least $2
billion in domestic deposits and either at least: (i) 250,000 deposit
accounts; or (ii) $20 billion in total assets.
Estimated Number of Respondents: 159.
On-Going Burden Hours and Costs:
Estimated Time per Response: 157 hours to 255.5 hours. These hours
are calculated as follows: $4 million low-end, annualized, over-all
industry estimated costs for on-going burden / $160 per hour salary /
159 respondents = 157 hours; and $6.5 million high-end, annualized,
over-all industry estimated costs for on-going burden / $160 per hour
salary / 159 respondents = 255.5 hours.
Estimated Total Annual Burden: 25,000 hours to 40,625 hours. These
hours are calculated as follows: 157 hours x 159 respondents = 25,000
hours at a minimum; and 255.5 hours x 159 respondents = 40,624.5 hours
at a maximum.
On-going costs for testing, maintenance and other periodic items
are estimated to range between $6,000 and $13,000 for those Covered
Institutions using software or servicing provided by a vendor. For
super-regional organizations on-going costs are estimated to be between
$150,000 and $250,000. The largest, most complex Covered Institution
was estimated to have on-going costs as high as $500,000 per year.
Overall, on-going industry cost estimates ranged from $4 million to
$6.5 million. Placed in context, this is 0.8 to 1.4 percent of a one
basis point assessment against the deposits of Covered Institutions.
This analysis assumes a cost of $160 per hour for Covered Institutions,
as suggested by Covered Institutions and vendors.
Implementation Burden Hours and Costs--Capital Start-Up Costs
Estimated Time per Individual Response: 80 hours to 75,000 hours
per respondent. With regard to the one-time burden of adopting
mechanisms required to facilitate provisional holds and standard data
sets, the FDIC estimates a range from 80 hours for the smallest Covered
Institutions with the least expensive systems, to 75,000 hours for the
largest Covered Institutions with the most expensive systems. As
discussed elsewhere, there is a broad range in the complexity and size
among Covered Institutions, with the smallest having $2.5 billion in
total assets and the largest having over $1.3 trillion in total assets.
The FDIC estimated the range of hours per institution as follows:
$13,000 overall implementation cost for the smallest, least expensive
programs using vendor-provided software / $160 per hour salary = 80
hours; and $12,000,000 overall implementation for the most complex,
expensive programs using proprietary software / $160 per hour salary =
75,000 hours. The FDIC considered this range of hours in estimating the
average response time shown below.
Estimated Time per Average Response: 1,965 hours to 3,931 hours.
The FDIC calculated the average, start-up cost of acquiring software/
hardware for the industry as a whole (i.e., all Covered Institutions)
based upon the cost estimates provided by Covered Institutions, vendors
and servicers with a low end of $50,000,000 and a high-end of
$100,000,000. The calculations are as follows: $50,000,000 / $160 per
hour salary / 159 Covered Institutions = 1,965 hours; and $100,000,000
/ $160 per hour salary / 159 Covered Institutions = 3,931 hours.
Estimated Total Annual Burden: 312,500 hours to 625,000 hours.
Minimum hours calculated as: 1,965 hours x 159 respondents = 312,435
hours; maximum hours calculated as: 3,931 hours x 159 respondents =
625,029 hours.
Estimated Total Annual Burden--Annualized: 104,200 hours to 208,350
hours. The FDIC averaged over the three-year collection period the
burden of start-up costs associated with the cost of acquiring
software/hardware for the industry as a whole (i.e., all Covered
Institutions). The calculations are as follows: 312,500 hours / 3 =
104,167 hours; and 625,000 hours / 3 = 208,333 hours.
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Comment Request: The FDIC has an ongoing interest in public
comments on its collections of information, including comments on: (a)
Whether the collection of information is necessary for the proper
performance of the Agencies' functions, including whether the
information has practical utility; (b) the accuracy of the estimates of
the burden of the information collection, including the validity of the
methodology and assumptions used; (c) ways to enhance the quality,
utility, and clarity of the information to be collected; (d) ways to
minimize the burden of the information collection on respondents,
including through the use of automated collection techniques or other
forms of information technology; and (e) estimates of capital or start
up costs and costs of operation, maintenance, and purchase of services
to provide information. Comments may be submitted to the FDIC by any of
the following methods: By mail to the Executive Secretary, Federal
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC
20429; by FAX at (202) 898-8788; or by e-mail to comments@fdic.gov. All
comments should refer to ``Large Bank Deposit Insurance
Modernization.'' Copies of comments may also be submitted to the OMB
desk officer for the FDIC, Office of Information and Regulatory
Affairs, Office of Management and Budget, New Executive Office
Building, Room 10235, Washington, DC 20503.
VIII. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA),
5 U.S.C. 605(b), the FDIC certifies that the final rule will not have a
significant economic impact on a substantial number of small entities,
within the meaning of those terms as used in the RFA. The final rule
requires the largest insured depository institutions to adopt
mechanisms that would, in the event of the institution's failure: (1)
Provide the FDIC with standard deposit account and customer
information; and (2) allow the placement and release of holds on
liability accounts, including deposits. The final rule applies only to
Covered Institutions--defined in the final rule as insured depository
institutions having at least $2 billion in domestic deposits and
either: (1) More than 250,000 deposit accounts; or (2) total assets
over $20 billion, regardless of the number of deposit accounts. There
are no small banking organizations that come within the definition of a
Covered Institution.
IX. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L. 105-277, 112 Stat. 2681).
List of Subjects in 12 CFR Part 360
Banks, banking, savings associations.
0
For the reasons stated above, the Board of Directors of the Federal
Deposit Insurance Corporation hereby amends part 360 of title 12 of the
Code of Federal Regulations as follows:
PART 360--RESOLUTION AND RECEIVERSHIP RULES
0
1. The authority citation for part 360 continues to read as follows:
Authority: 12 U.S.C. 1819(a) Tenth, 1821(d)(1), 1821(d)(10)(c),
1821(d)(11), 1821(e)(1), 1821(e)(8)(D)(i), 1823(c)(4), 1823(e)(2);
Sec. 401(h), Pub. L. 101-73, 103 Stat. 357.
0
2. Add new Sec. 360.9 to read as follows:
Sec. 360.9. Large-bank deposit insurance determination modernization.
(a) Purpose and scope. This section is intended to allow the
deposit and other operations of a large insured depository institution
(defined as a ``Covered Institution'') to continue functioning on the
day following failure. It also is intended to permit the FDIC to
fulfill its legal mandates regarding the resolution of failed insured
institutions to 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.
(b) Definitions.--(1) A covered Institution means an insured
depository institution which, based on items as defined in Reports of
Income and Condition or Thrift Financial Reports filed with the
applicable federal regulator, has at least $2 billion in deposits and
at least either:
(i) 250,000 deposit accounts; or
(ii) $20 billion in total assets, regardless of the number of
deposit accounts.
(2) Deposits, number of deposit accounts and total assets are as
defined in the instructions for the filing of Reports of Income and
Condition and Thrift Financial Reports, as applicable to the insured
depository institution for determining whether it qualifies as a
covered institution. A foreign deposit means an uninsured deposit
liability maintained in a foreign branch of an insured depository
institution. An international banking facility deposit is as defined by
the Board of Governors of the Federal Reserve System in Regulation D
(12 CFR Sec. 204.8(a)(2)). A demand deposit account, NOW account,
money market deposit account, savings deposit account and time deposit
account are as defined in the instructions for the filing of Reports of
Income and Condition and Thrift Financial Reports.
(3) Sweep account arrangements consist of a deposit account linked
to an interest-bearing investment vehicle whereby funds are swept to
and from the deposit account according to prearranged rules, usually on
a daily basis, where the sweep investment vehicle is not a deposit and
is reflected on the books and records of the Covered Institution.
(4) Automated credit account arrangements consist of a deposit
account into which funds are automatically credited from an interest-
bearing investment vehicle where the funds in the interest-bearing
investment vehicle were not invested by prearranged rules.
(5) Non-covered institution means an insured depository institution
that does not meet the definition of a covered institution.
(6) Provisional hold means an effective restriction on access to
some or all of a deposit or other liability account after the failure
of an insured depository institution.
(c) Posting and removing provisional holds.--(1) A covered
institution shall have in place an automated process for implementing a
provisional hold on deposit accounts, foreign deposit accounts and
sweep and automated credit account arrangements immediately following
the determination of the close-of-business account balances, as defined
in Sec. 360.8(b)(3), at the failed covered institution.
(2) The system requirements under paragraph (c)(1) must have the
capability of placing the provisional holds prescribed under that
provision no later than 9 a.m. local time the day following the FDIC
cutoff point, as defined in Sec. 360.8(b)(1).
(3) Pursuant to instructions to be provided by the FDIC, a covered
institution must notify the FDIC of the person(s) responsible for
producing the standard data download and administering provisional
holds, both
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while the functionality is being constructed and on an on-going basis.
(4) For deposit accounts held in domestic offices of an insured
depository institution, the provisional hold algorithm must be designed
to exempt accounts below a specific account balance threshold, as
determined by the FDIC. The account balance threshold could be any
amount, including zero. For accounts above the account balance
threshold determined by the FDIC, the algorithm must be designed to
calculate and place a hold equal to the dollar amount of funds in
excess of the account balance threshold multiplied by the provisional
hold percentage determined by the FDIC. The provisional hold percentage
could be any amount, from zero to one hundred percent. The account
balance threshold as well as the provisional hold percentage could vary
for the following four categories, as the covered institution
customarily defines consumer accounts:
(i) Consumer demand deposit, NOW and money market deposit accounts;
(ii) Other consumer deposit accounts (time deposit and savings
accounts, excluding NOW and money market deposit accounts);
(iii) Non-consumer demand deposit, NOW and money market deposit
accounts; and
(iv) Other non-consumer deposit accounts (time deposit and savings
accounts, excluding NOW and money market deposit accounts).
(5) For deposit accounts held in foreign offices of an insured
depository institution, other than those connected to a sweep or
automated credit arrangement, the provisional hold algorithm will apply
a provisional hold percentage to the entire account balance. For
deposit accounts held in foreign offices the provisional hold
percentage may differ from that applied to deposit accounts. Also, the
provisional hold percentage would not vary by account category (i.e.,
consumer versus non-consumer and transaction versus non-transaction) as
is the case with deposit accounts.
(6) For international banking facility deposits, other than those
connected to a sweep or automated credit arrangements, the provisional
hold algorithm will apply a provisional hold percentage to the entire
account balance. For IBF deposits the provisional hold percentage may
differ from that applied to deposit or foreign deposit accounts. Also,
the provisional hold percentage would not vary by account category
(i.e., consumer versus non-consumer, and transaction versus non-
transaction) as is the case with deposit accounts.
(7) For the interest-bearing investment vehicle of a sweep
arrangement, the provisional hold algorithm must be designed with the
capability to place a provisional hold on the interest-bearing
investment vehicle with possibly a different account balance threshold
and a different hold percentage according to the type of interest-
bearing investment vehicle.
(8) For the interest-bearing investment vehicle of an automated
credit account arrangement, the provisional hold algorithm must be
designed with the capability to place a provisional hold on the
interest-bearing investment vehicle with possibly a different account
balance threshold and a different hold percentage according to the type
of interest-bearing investment vehicle.
(9) A covered institution may submit a request to the FDIC, using
the address indicated in Sec. 360.9(g): to develop a provisional hold
process involving memo holds or alternative account mechanisms; or to
exempt from the provisional hold requirements of this section those
account systems servicing a relatively small number of accounts where
the manual application of provisional holds is feasible. Such requests
may be in the form of a letter and must include a justification for the
request and address the relative effectiveness of the alternative for
posting provisional holds in the event of failure. The FDIC will
consider such requests on a case-by-case basis in light of the
objectives of this section.
(10) The automated process for provisional holds required by
paragraph (c)(1) of this section must include the capability of
removing provisional holds in batch mode and, during the same
processing cycle, applying debits, credits or additional holds on the
deposit or other accounts from which the provisional holds were
removed, as determined by the FDIC. The FDIC will provide files listing
the accounts subject to: removal of provisional holds or additional
holds (file format as specified in Appendix A); application of debits
or credits (file format as specified in Appendix B); and application of
additional holds (file format as specified in Appendix A). In addition
to the batch process used to remove provisional holds, the Covered
Institution is required to have in place a mechanism for manual removal
of provisional holds on a case-by-case basis.
(d) Providing a standard data format for generating deposit account
and customer data.--(1) A covered institution must have in place
practices and procedures for providing the FDIC in a standard format
upon the close of any day's business with required depositor and
customer data for all deposit accounts held in domestic and foreign
offices and interest-bearing investment accounts connected with sweep
and automated credit arrangements. Such standard data files are to be
created through a mapping of pre-existing data elements and internal
institution codes into standard data formats. Deposit account and
customer data provided must be current as of the close of business for
that day.
(2) The requirements of paragraph (d)(1) of this section shall be
provided in five separate files, as indicated in the Appendices C
through G to this Part 360.
(3) Upon request by the FDIC, a covered institution must submit the
data required by paragraph (d)(1) of this section to the FDIC, in a
manner prescribed by the FDIC.
(4) In providing the data required under paragraph (d)(1) of this
section to the FDIC, the Covered Institution must be able to reconcile
the total deposit balances and the number of deposit accounts to the
institution's subsidiary system control totals.
(e) Implementation requirements.--(1) A covered institution must
comply with the requirements of this section no later than February 18,
2010.
(2) An insured depository institution not