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Financial Institution Letters

Processing Deposit Accounts in the Event of an Insured Depository Institution Failure
Interim Rule
FIL-64-2008
July 17, 2008


Summary: The FDIC has issued the attached interim rule establishing the FDIC's practices for determining deposit and other liability account balances at a failed insured depository institution. Under the rule, the FDIC will also require institutions to prominently disclose to sweep account customers whether the swept funds are deposits and the status of the swept funds if the institution were to fail. The FDIC is soliciting comment on all aspects of this rule. Comments are due by September 15, 2008. The rule becomes effective on August 18, 2008; however, the effective date of the sweep account disclosure requirement will be deferred until July 1, 2009, to allow the FDIC to consider specific comments.

Highlights:

  • Upon the failure of an FDIC-insured depository institution, the FDIC must determine the total insured amount for each depositor. The rule defines a deposit account balance on the day of failure as the end-of- day ledger balance. With certain exceptions, the FDIC will use the cutoff times applied by the failed insured depository institution in establishing the end-of-day ledger balance for deposit insurance determination purposes.
  • All checks deposited into and posted to a deposit account by the applicable cutoff time and reflected as part of the end-of-the-day ledger balance will be treated as a deposit for insurance purposes, regardless of whether these funds have been collected.
  • Any automated sweep transaction transferring funds internal to the depository institution's operations from one deposit account at the failed institution to a sweep investment vehicle at the failed institution will be completed on the day of failure.
  • The interim rule does not establish any new operational requirements for insured institutions.
  • The FDIC originally solicited comments on this rule on January 14, 2008 (see FIL-2-2008).

Continuation of FIL-64-2008

Distribution:
All Insured Depository Institutions

Suggested Routing:
Chief Executive Officer
Chief Operating Officer

Related Topics:
Deposit Insurance Coverage
12 C.F.R. Part 330

Attachment:
Interim Rule (PDF Help)

Contact:
James Marino, Project Manager, Division of
Resolutions and Receiverships, at
jmarino@fdic.gov or 202-898-7151; or Joseph A.
DiNuzzo, Counsel, Legal Division, at
jdinuzzo@fdic.gov or (202) 898-7349

Printable Format:
FIL-64-2008 - PDF (PDF Help)

Note:
FDIC financial institution letters (FILs) may be accessed from the FDIC's Web site at www.fdic.gov/news/news/financial/2008/index.html.

To receive FILs electronically, please visit http://www.fdic.gov/about/subscriptions/fil.html.

Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E-1002, Arlington, VA 22226 (1-877-275-3342 or 703-562- 2200).



Financial Institution Letters
FIL-64-2008
July 17, 2008

Processing Deposit Accounts in the Event of an Insured Depository Institution Failure
Interim Rule

The Federal Deposit Insurance Corporation (FDIC) has issued the attached interim rule relating to the determination of account balances in the event of a depository institution's failure. Under the rule, the FDIC will use the following principles for determining the value and nature of claims against a failed insured depository institution in the event of failure:

  • In making deposit insurance determinations and in determining the value and nature of claims against the receivership on the institution's date of failure, the FDIC, as insurer and receiver, will treat deposits and other liabilities of the failed institution according to the ownership and nature of the underlying obligations based on end-of- day ledger balances for each account using the depository institution's normal posting procedures.
  • Upon taking control of the failed institution, the receiver will use its best efforts to take all steps necessary to stop the generation of new deposit or other transactions that might result in creating new liabilities or extinguishing existing liabilities for the depository institution or its customers.
  • End-of-day ledger balances are subject to corrections for posted transactions that are inconsistent with the above principles.

The interim rule defines a deposit account balance on the day of failure as the end-of-day ledger balance. With certain exceptions, the FDIC will use the cutoff times previously applied by the failed insured depository institution in establishing the end-of-day ledger balance for deposit insurance determination purposes. The use of end-of-day ledger balances and the institution's normal cutoff times for insurance determination purposes continues long-standing FDIC procedures in processing such balances at a failed depository institution. All checks deposited into and posted to a deposit account by the applicable cutoff time will be deemed as part of the end-of-the-day ledger balance for insurance purposes.

Under the interim rule, any automated sweep transaction transferring funds internal to the depository institution's operations from one deposit account at the failed institution to a sweep investment vehicle at the failed institution will be completed on the day of failure. Thus, for example, the sweeping of funds from a customer's demand deposit account to a deposit account located in a foreign branch office would be completed for that day by the receiver on the day of failure and the account holders, who hold end-of-day ledger foreign deposit accounts after the sweep, would be deemed to be general creditors of the receivership, rather than insured depositors, under the deposit preference statute. In the case of a sweep transferring funds outside the failed institution, the funds will be treated consistent with how they are reflected in the end-of-day ledger balances, which may mean the funds are not an obligation of the depository institution.

Many sweeps arrangements transfer deposit funds from insured deposit accounts to non- deposit investment vehicles or accounts. In those cases, the swept funds will not be treated by the FDIC as deposit obligations of the failed institution, meaning that the swept funds will not be eligible for deposit insurance coverage and will not be afforded status as a deposit under the depositor preference statute. In order to ensure that sweep account customers are aware that their funds will not be treated as deposits if the insured institution fails, however, the FDIC will require institutions to prominently disclose to customers whether the swept funds are deposits and the status of the swept funds if the institution failed. The effective date of this requirement will be deferred until July 1, 2009, to allow the FDIC to consider specific comments on the disclosure requirement.

Comments on the interim rule are due by September 15, 2008.

Mitchell L. Glassman
Director
Division of Resolutions and Receiverships




Last Updated 7/17/2008 communications@fdic.gov