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4000 - Advisory Opinions
How Items in Process of Payment Are Handled When Payor Bank Fails
FDIC--95--2
January 23, 1995
Adrienne George, Attorney
Your letter, concerning what happens to items in the process of
payment when a payor bank fails, has been forwarded to me for response.
I apologize for the delay in answering your questions.
In your letter, you ask whether the receiver closing a bank returns
checks and drafts (whether of the one-day delayed payable-through
variety or not) on which the bank has not yet made final payment even
if there are sufficient funds in the account, no stop payment order has
been issued, no garnishment or similar process has been received, and
no bankruptcy has occurred. Further, you wish to know how the
depositor's claim is affected by the existence of items presented
against the account (checking, standard payable-through draft, and
one-day delayed payable-through draft) but not finally paid before the
bank closes. Finally, a governmental customer of your bank wishes to
know whether, in determining the amount of collateral necessary to back
its uninsured deposits at the bank, it should use the Ledger Balance or
the Adjusted Balance, as described in your letter.
In researching the answers to these questions, I enlisted the help
of Wayne Ness, the Assistant Director, Operations Branch, of the FDIC's
Division of Depositor and Asset Services. Mr. Ness's response follows.
When an insured depository institution fails and there is a payout
of the insured deposits, the FDIC currently follows a
collection/payment system which differs from the procedures described
in the FDIC's Advisory Opinion
FDIC--86--3 (January 28, 1986), which you cite in your letter.
First, in determining the rights of the depositors and/or other general
creditors of the receivership estate, the FDIC as Receiver will process
any completed but as yet unposted work prior to the closing to make the
books of the institution current as of the close of business on the day
of the closing. For example, usually a financial institution is closed
by its chartering authority at the end of the institution's normal
business day, say, at 5:00 p.m. Assume that the institution's normal
cutoff time is 2:00 p.m., and any items accepted for deposit after 2:00
p.m. would be credited the next business day. The Receiver will include
the 2:00 p.m. to 5:00 p.m. work and process it as part of the last
day's business as opposed to the institution's practice of crediting
the items the next business day.
Next, if the incoming cash letter is received by the institution
prior to its failure, it, too, will be posted. As suggested in the last
paragraph of your letter, that cash letter will be processed and posted
to customer accounts assuming that the items are properly drawn and
endorsed, and that there are sufficient funds in the customer's account
to pay the items. There is no difference here between the Receiver's
actions and normal banking practices. If an incoming cash letter were
to arrive after the institution's failure, the cash letter
would be returned intact to the presenter. One of the first of many
actions taken by the Receiver is to notify the Federal Reserve and
other correspondent banks that the institution has been closed, no
further charges are to be made to its correspondent account (except
normal return items presented within the recourse period), and that any
incoming "on us" items are to be returned marked "drawee bank
in receivership."
Items taken in for deposit prior to closing will be processed,
posted to the customer accounts and forwarded for collection in the
outgoing cash letter for those items drawn on other banks. Here, the
process differs from normal banking practice. Even though items drawn
on other banks will not have been finally paid, the deposits not yet
collected are included in the depositor's balance and paid as a part of
the insured deposit. In the interest of rapid payouts and in view of
the minimal risk associated therewith, the FDIC made a policy decision
many years ago to include such deposits as a part of the time-consuming
process of trying to reverse all deposits not yet finally paid.
If including items not yet finally paid as a part of the deposit
creates an uninsured balance over and above the basic $100,000, the
FDIC as Receiver will issue a Receiver's
{{4-28-95 p.4915}}Certificate to the depositor for the
uninsured balance. However, the Receiver will later schedule items
eventually accepted for deposit but not finally paid as of the closing
of the institution, those funds will be returned to the depositor by
Receiver's check, and the original Receiver's Certificate will be
voided. For example:
| Collected
Ledger Balance day before closing |
$100,000 |
|---|
| Deposit made day of
closing and provisional credit given by bank
|
10,000 |
| Ledger Balance at closing |
110,000
|
| FDIC deposit insurance paid |
–100,000 |
| Uninsured;
Receiver's Certificate issued |
$ 10,000
|
In the above example, if the Receiver determines that the $10,000
deposit made before the closing of the institution was not finally paid
until the day following the closing, the Receiver will issue its check
for $10,000 to the depositor to replace the Receiver's Certificate
previously issued for the uninsured balance.
With respect to your question on the one-day delayed payable-thorugh
draft account, I am assuming that drafts presented on, say, a Monday,
for processing on Tuesday, are quite simply "warehoused" until
processing. Assume, for example, that the institution is declared
insolvent and closed at the end of the business day on Monday. Drafts
presented Monday for payment on Tuesday would be returned to the
presenter by the Receiver. For instance, here is a slight variation on
your example:
| Ledger
Balance as of Monday morning |
$1,000,000 |
|---|
| Drafts presented on
Monday (not yet reflected in Monday ending/Tuesday beginning balance
because of one-day delay), returned to the
presenter |
200,000 |
| Deposits on Monday, before
bank is closed |
800,000 |
| Ledger balance at
closing |
$1,800,000 |
| FDIC deposit insurance
paid |
–100,000 |
| Uninsured |
$1,700,000
|
In the example above, drafts presented on Monday for payment on
Tuesday would be returned to the presenter by the Receiver, and the
Ledger Balance would be $1,800,000. After the $100,000 FDIC deposit
insurance is deducted from that total, the customer's exposure would be
$1,700,000. However, this calculation does not take into consideration
whether the balance might include any deposits which have not been
finally paid but which might be paid in the future, and which,
therefore, would then be subject to return to the depositor as
discussed above.
I hope that this information will prove useful to you. If I can be
of any further help, I can be reached at (202)
898-3859.
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