4000 - Advisory Opinions
Excessive deposit insurance
April 2, 1996
Marc J. Goldstrom, Counsel
This is in response to your February 13, 1996 letter to Vice Chairman Hove. You have indicated that you represent several state bankers associations which are owners of X, a multi-state insurance company providing insurance services to financial institutions in several states. X is considering making excess deposit insurance available to financial institutions in several states.
According to your letter, the insurance would be in the form of a bond under which X would agree to guarantee certain designated depository accounts in excess of the deposit insurance provided by the FDIC. X would promptly reimburse the account owner the amount of the uninsured portion of the account up to the limit of the liability set forth in the bond in the event of a bank's failure. It is anticipated that X's limit of liability would be five million dollars ($5,000,000.00) for each participating financial institution.
You have raised certain questions regarding relationship with the FDIC in the event of bank failure. Those questions and our responses are as follows:
(1) If X were to pay account owners in an amount in excess of FDIC deposit insurance, would X be subrogated to the account owner's rights to participate in any liquidation of the bank which might involve a payout on uninsured deposits?
As you know, when a federally insured institution fails, the FDIC pays each depositor the amount of his/her deposits up to the limits of federal deposit insurance.1 To the extent a depositor has deposits in excess of the federally insured amount, the depositor has a claim against the failed institution's receivership estate for the uninsured amount. That claim is processed in accordance with the FDIC's claims procedures, and, ultimately, the FDIC as receiver (the "Receiver") determines whether to allow or disallow the claim.
Generally, when the Receiver allows a claim, it issues the claimant a receiver's certificate. The receiver's certificate itself includes a form of assignment which can be used by a claimant to assign the claim to a third party. After receipt and acknowledgment of such assignment by the Receiver, any dividends paid on the claim would be paid directly to the assignee. Claims for uninsured deposits would be treated in the same manner.
Consequently, if a depositor with an allowed claim for uninsured deposits properly executes the assignment on the receiver's certificate assigning his/her interest in the claim to X, and if the Receiver acknowledges such assignment, all dividends paid on that claim after such acknowledgment would be paid directly to X.2
(2) Does the FDIC in the liquidation of a failed bank coordinate its disbursement of funds to depositors with a private insurance company such as X? For example, if X were to pay the depositor under its bond, would the depositor also be eligible to participate in the liquidation of the bank, and, in effect, double the amount collected?
The Receiver does not generally coordinate its payments with a private deposit insurer. However, with some slight modification to the timing of any payments under the Bond, there may not be a significant danger of double payment to a depositor. Section IV of the proposed Bank Deposit Guaranty Bond (the "Bond") provides that if a bank covered by the Bond fails, the designated account owners will be paid the amount of the uninsured deposits up to the limits of the Bond. It further provides that "[p]ayment will be made promptly upon receipt by [X] of the assignment of the receiver's certificate from the Designated Depository Account Owner(s)." However, until the Receiver acknowledges receipt of that assignment on the receiver's certificate, the Receiver will continue to deliver or mail dividends to the depositor. Upon acknowledgment of the assignment of that receiver's certificate by the Receiver, the depositor would no longer be eligible to receive dividends on that receiver's certificate. At that point, X as assignee would then be entitled to such dividends. Consequently, if X pays the depositor immediately upon receipt of the assignment, there is a chance that the Receiver could receive the assignment while a dividend check is en route to the depositor. Nevertheless, it appears that X could develop a solution to this potential problem.
(3) Is there anything with respect to the conduct and operation of the FDIC in the event of a failed bank with which X should be made aware?
It is not possible to answer this question with any degree of accuracy. There are many laws, regulations, and procedures which govern the establishment, conduct, and termination of receiverships for failed institutions. It is not possible to know which of those X is aware of, and furthermore, whether their effect on the proposed plan would be of significance from X perspective. Notwithstanding, we continue to be available to answer specific questions on receivership topics.
In our view, there is nothing in the Federal Deposit Insurance Act (12 U.S.C. § 1811 et. seq.) or the FDIC's Rules and Regulations (12 C.F.R. Part 301--Part 363) that would expressly prohibit banks from purchasing excess deposit insurance. Assuming that the proposed plan does not involve potential risk or liability to insured institutions3 and assuming no other laws are violated, the FDIC would generally not object to a private insurance arrangement of the type described in your letter. Of course, the FDIC's failure to object should not be construed as an endorsement of X's program or any other proposed or existing private insurance program.
The foregoing notwithstanding, the FDIC does have certain concerns with respect to private deposit insurance arrangements generally. These concerns relate to (i) the manner in which the private deposit insurance is advertised or otherwise marketed, (ii) the possibility of disclosure to the private insurer of confidential documents prepared by the FDIC, and (iii) the possibility of the private insurer attempting to influence actions of an insured institution that may impact the institution's safety and soundness or its statutory or regulatory obligations.
You should be aware of certain restrictions which may apply to advertisements for deposits. The manner in which an insured depository institution advertises its deposits is subject to the provisions of Federal Reserve Board Regulation DD, Truth in Savings, 12 C.F.R. Part 230 and section 709 of the United States criminal code, 18 U.S.C. § 709. More specifically, section 230.8(a) of Regulation DD provides that "[a]n advertisement shall not be misleading or inaccurate and shall not misrepresent a depository institution's deposit contract." 12 C.F.R. § 230.8(a). Section 709 of Title 18, a criminal statute, provides that it shall be unlawful for anyone to "falsely [advertise] or otherwise [represent] by any device whatsoever the extent to which or the manner in which the deposit liabilities of an insured bank or banks are insured by the Federal Deposit Insurance Corporation . . . ." Accordingly, advertisements making any reference to private insurance should clearly, conspicuously, and unmistakably state that such private insurance is in no way connected with the deposit insurance provided by the FDIC.
In the process of underwriting excess deposit insurance coverage X may wish to examine certain bank records. Please keep in mind that Reports of Examination and any related or similar documentation prepared by the FDIC are confidential documents which may not be made available to X or any other insurance company offering to underwrite excess deposit insurance coverage without the express permission of the FDIC.4
Finally, the FDIC would object to X's attempting to influence the actions of a bank which would in any way adversely affect the safety and soundness of the bank or in any way interfere with the bank's statutory or regulatory mandates. For example, the FDIC would object to a private deposit insurer's attempting to persuade an insured institution to make a loan which the FDIC or another federal or state regulator believes to be unsafe or unsound.
The opinions expressed herein are the views of the FDIC Legal Division staff and, like all other staff opinions, are not binding upon the FDIC or its Board of Directors. Moreover, the opinions expressed herein are based upon the facts as you have presented them and any change in those facts might cause us to reach different conclusions.
2This assumes that the depositor's claim is equal to or less than the amount of his private insurance. In cases in which the depositor's claim exceeds the amount of private insurance, the FDIC would expect that X and the depositor would have agreed in advance as to how this situation would be handled. Go back to Text
3The FDIC would likely object to the arrangement if the plan you describe would in any way adversely affect the safety and soundness of insured depository institutions. It is not clear from your letter whether, through membership in a state bankers associations, or by any other way, insured institutions would be exposed to potential liability or risk in connection with the proposed program. To the extent such potential liability or risk is assumed by insured depository institutions, the FDIC would be concerned. Go back to Text