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4000 - Advisory Opinions


Treatment of Cash Letter Balances, Correspondent Bank Overdrafts, and Federal Funds Sales Upon Failure of Correspondent Bank

FDIC-91-75 August 28, 1991 Joseph A. DiNuzzo, Senior Attorney

This is in response to your letter of August 6, 1991, on certain questions related to correspondent relationships *** ("Bank") has with other banks throughout the United States.

1.  Cash Letter Balances.  Your first question concerns the failure of the Bank's correspondent bank ("Correspondent Bank") after its receipt of a cash letter from the Bank. Specifically, the question is what are the deposit insurance implications when: (1) prior to the Correspondent Bank's failure it has commenced, for collection purposes, the forwarding of checks drawn on other banks and has given the Bank provisional credit for the proceeds of those checks; and (2) at the time it is closed the Correspondent Bank has neither returned nor paid checks drawn on the Correspondent Bank.

The response to the first part of the question is as stated in FDIC advisory opinions 86--28 (a copy of which is enclosed) and 87--41 (which is cited in your letter). As stated in advisory opinion 86--28, under section 4--201 of the Uniform Commercial Code ("UCC"), unless a contrary intent clearly appears, and prior to the time that a settlement given by a collecting bank becomes final, a collecting bank is an agent or sub-agent of the depository bank which, in turn, is the agent of the owner of the respective cash items. Funds (whether cash or another form of settlement) coming into the hands of the agent bank, or its receiver after closing, would not constitute assets of the bank for its general creditors (or deposits of the depository bank), but belong to the owners of the items and would properly be passed along by the receiver to the depository bank for ultimate payment of the items. Thus, in the situation posed in your letter, the checks forwarded for collection to other banks but on which no final payment had been made at the time the Correspondent Bank is closed would be held by the FDIC as agent for the Bank and not be deemed deposits owned by the Bank at the Correspondent Bank for purposes of insurance coverage.1

The response to the second part of the question is not addressed directly in either of the above-cited advisory opinions. The legal theory noted in advisory opinion 86--28, however, applies. In particular, the agency status of a collecting bank created by section 4--201 of the UCC would continue until a settlement given by a collecting bank for an item is or becomes "final." Any item that was drawn on the Correspondent Bank that was not finally paid prior to closing would be insured as a deposit of the holder (i.e., the party for whom the Bank is acting as agent) under Paragraph 330.4(b)(4)(ii) of the FDIC's regulations, a copy of which is enclosed. Any items in the cash letter that were finally paid before the Correspondent Bank was closed would be part of the Bank's deposit balance with the failed Correspondent Bank and, thus, subject to the $100,000 limit.2

Under article 4 of the UCC, final payment normally occurs as soon as an item is paid in cash or posted to the drawer's account by the drawee bank, or when final settlement is made in the clearing process without retaining the right of revocation, or when a provisional settlement is not actually revoked within the time limit required by law, clearinghouse rules or other agreement.

2.  Correspondent Bank Overdrafts.  Your next question is about the FDIC's treatment of an overdraft that the Correspondent Bank might have on its account at the Bank at the time the Correspondent Bank is closed. As you know, an overdraft would be deemed a loan on the Bank's books and a non-deposit liability on the books of the Correspondent Bank. When the Correspondent Bank is closed its overdraft balance at the Bank would be deemed a liability of the receivership to be paid in accordance with the applicable law governing the receivership of the closed bank. The Correspondent Bank's indebtedness ordinarily would not be treated as a deposit under Section 3(l) of the Federal Deposit Insurance Act (12 U.S.C. § 1813(l)).3

3.  Federal Funds Sales.  In response to your final question, the treatment of federal funds would be similar to that of the overdrafts. Such federal funds are a non-deposit liability of the Correspondent Bank. Such obligation would represent a claim against the receivership estate. If, however, the federal funds are legally secured by designated collateral held by the closed Correspondent Bank, the FDIC, as receiver, would recognize that security interest.

I hope this letter is fully responsive to your questions. Feel free to phone me at (202) 898-7349 if you have any additional questions or comments.

1Please contrast this result with that explained in situation "3.b." of Advisory Opinion 86--28. In that context the proceeds credited to a bank's account at a correspondent bank prior to the closing of the correspondent bank would be deemed deposits of the bank insured to an aggregate limit of $100,000, if no agency status is otherwise established. Go back to Text

2Please see the prior footnote. Go back to Text

3For an exception to this rule, see First Interstate v. FDIC, 718 F. Supp. 848 (D. Col. 1989). Go back to Text


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