FDIC Federal Register Citations

From: Bert Ely
Sent: Tuesday, March 13, 2007 11:53 PM

To: Comments

Subject: Large-Bank Deposit Insurance Determination Modernization Proposal RIN 3064-AC98

To whom it may concern:

I am submitting the following statement, below the horizontal line, as a comment on the FDIC's Large-Bank Deposit Insurance Determination Modernization Proposal (RIN 3064-AC98).

Bert Ely
Ely & Company, Inc.
P.O. Box 21010
Alexandria, Virginia 22320
bert@ely-co.com
703-836-4101

_________________________

The Federal Deposit Insurance Corporation's Advance Notice of Proposed Rulemaking (ANPR), the
Large-Bank Deposit Insurance Determination Modernization Proposal (RIN 3064-AC98), will not only will impose a costly and unnecessary burden on large banks, and potentially all banks, but it also threatens financial privacy.

First issued in December 2005, banker outcries about this proposal's cost and impracticality should have killed it. Unfortunately, the FDIC reissued a slightly modified ANPR one year later. My American Banker article of March 2, 2007, posted as comment number 7 on this ANPR, summarized the economic arguments against this so-called modernization proposal. This comment letter addresses the threat to financial privacy this proposal poses.

The proposed regulation would require almost every bank with more than $2 billion of deposits in its U.S. offices to be able, on a few hours' notice, to identify all the deposit accounts a customer had in that bank. The FDIC asserts, without providing any supporting evidence, that it could quickly pay deposit-insurance claims should the bank suddenly fail. Presently, 159 banks, holding 69% of the nation's deposits, would be subject to this proposed regulation.

This account-linking process would utilize a Standard Data Set of 64 data items the FDIC has created, including: the depositor's name, address, telephone number, date of birth, email address, and Social Security number or for a business, its taxpayer identification number. Once all accounts in a bank are linked for each depositor, the door opens to linking account data across all the banks subject to this regulation. Congress could then mandate this cross-bank linking, in the guise of fighting terrorism, illegal drugs, or whatever. Government agencies could then access a vast pool of depositor and financial data they cannot readily obtain today.

The FDIC defends its proposal by stating that it needs to be prepared to quickly apply its deposit-insurance limit, should a large bank fail, so that it can protect insured depositors. However, due to banking reforms in the early and mid-1990s, notably the authorization of bank branching across state lines, large banks no longer fail. Instead, market forces, notably stockholders, trigger the turnaround, sale, or recapitalization of a troubled large bank long before the FDIC has to take it over. In recent years, only small banks have failed, oftentimes due to insider fraud. The 56 banks which failed over the last 12 years had total deposits of $8.8 billion in an industry with $6.6 trillion in deposits – a drop in the proverbial bucket. The largest failed bank, Superior Bank, which held $1.6 billion in deposits, went under due to regulatory ineptitude.

Were a large bank to fail, it would not fail overnight, as sometimes occurs when a fraud is suddenly discovered in a small bank. Instead, it would take several years to become insolvent. If market forces did not resolve the situation, the FDIC would have ample time to prepare for its failure and the application of the deposit-insurance limits.

The probability of a large bank failing at some cost to the FDIC is so low that the FDIC has not been able to quantify the benefit of its proposed regulation, and for good reason – there is no benefit. Yet it will cost large banks millions of dollars to modify their computer systems to provide this account-linking capability, in the highly unlikely event it will ever be need, and to keep this data current. Worse, the largest banks, which are the least likely to fail, will be required to go one step further, and provide a "unique depositor identification" number for each depositor. That will make the regulation even more costly for them, and for their stockholders. Inexplicably, the FDIC has not explained which banks will be subject to this additional requirement.

Although the FDIC has stated that it will not extend an account-linking requirement to small banks, once it is in place for large banks, this requirement could easily be applied to all banks, further adding to the small banks' regulatory burden. The cost of this regulatory expansion would far outweigh any benefit. If there was
ever a proposed regulation which should be scraped for economic reasons alone, this is it.

The FDIC's proposal initially would supply static data – how much was in a depositor's accounts last night, date of last deposit, etc. Declining technology costs, though, will make it feasible to expand this data-collection to monitor monies moving in and out of bank accounts and to access depositor contact information, such as where does she live, on a close-to-real-time basis. The land of the free does not need this.

The FDIC's seemingly innocuous proposal, which, at best, will marginally increase its operating efficiency, will be extremely costly to the banking industry to install and maintain while opening the door to a massive government incursion into the financial data of American citizens and businesses. Massive, unintended data breaches also could occur.

As technology makes it easier and cheaper to gather and aggregate data, increasing vigilance must be exercised to bar mandatory data aggregation unless the benefits far outweigh the threat that data poses to privacy and personal freedoms. Given the absence of any measurable benefit in the face of enormous cost, and threats to financial privacy, the FDIC should abandon this account-linking proposal once and for all.