Skip Header

Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank



Home > Regulation & Examinations > Laws & Regulations > FDIC Federal Register Citations




FDIC Federal Register Citations

From: Bert Ely [mailto:bert@ely-co.com]
Sent: Wednesday, March 08, 2006 8:54 AM
To: Comments
Subject: Large-Bank Deposit Insurance Determination Proposal - RIN 3064-AC98

To all concerned:

I am submitting as one comment letter on this ANPR an article of mine (copied below the horizontal line into the body of this email) which appeared in the February 24, 2006, issue of the American Banker newspaper. As the biographical information at the end of the article indicates, my comments in the ANPR do not represent any client views. Instead, they reflect my personal views, which are based on over 30 years of predicting bank and thrift failures and analyzing numerous deposit-insurance issues.

Separately, I will submit a letter commenting on and rebutting the February 7, 2005 [sic] comment letter Mr. Gary Stern, president of the Federal Reserve Bank of Minneapolis, submitted with regard to this ANPR.

Thank your for your consideration of my comments on this most important ANPR. Please email or call (703-836-4101) if you have any questions regarding this article.

Bert Ely
Ely & Company, Inc.
Alexandria, Virginia
703-836-4101
bert@ely-co.com
_______________

Viewpoint: FDIC's Account-Link Plan a Pointless, Costly Threat
From: American Banker
Friday, February 24, 2006
By Bert Ely

Bankers, beware! An expensive new regulation the Federal Deposit Insurance Corp. wants to impose on large banks and thrifts could reverberate through the entire banking industry. You must work to kill this proposal before it gains momentum.

The FDIC has published an advance notice of proposed rulemaking, or ANPR, innocuously titled "Large-Bank Deposit Insurance Determination Modernization Proposal." While modernization often is good, this is one time when it is simply unnecessary. It would be costly to the banking industry, provide absolutely no benefit to the FDIC or taxpayers, and threaten civil liberties and depositor privacy.

The FDIC has proposed a solution for a nonexistent problem. The essence of the proposal: Each large bank or thrift would have to electronically link all deposit accounts of a depositor so that, to quote from the ANPR, "the insurance status of each depositor is determined in the event of failure."

This information would permit the FDIC to resolve overnight a large bank that suddenly failed. Upon closing the bank, the FDIC would transfer to a new "bridge bank" each depositor's insured deposit plus some portion of the depositor's uninsured deposits.

For example, imagine a corporate depositor with $120 million of deposits spread across 150 accounts in a $200 billion bank that was suddenly closed because of the discovery that it was insolvent. Apparently, the FDIC believes a $200 billion bank, reportedly well capitalized, can suddenly be found to be kaput.

By the next morning, the FDIC would have transferred to the bridge bank our corporate customer's $100,000 insured deposit plus some portion, say 80%, of its $119.9 million of uninsured deposits. The depositor's recovery percentage might increase further as the failed bank's assets were liquidated.

For the purpose of this ANPR, a large bank or thrift has "over 250,000 deposit accounts and total domestic deposits over $2 billion." As of last June 30, 245 banks and thrifts met those criteria. The ANPR presents two options for how these institutions would aggregate deposit data by depositor: use existing data or add "a unique identifier for each depositor and the insurance category of each account."

A third option, applicable to just the 10 or 20 largest banks, would require them to "know the insurance status of their depositors at any given point in time [that is, on a real-time basis] and have the capability to automate the placement of hard holds and debit uninsured funds as specified by the FDIC upon failure."

To put this as politely as possible, this FDIC proposal is patently absurd. It bears absolutely no relationship to how the banking industry has evolved since prompt corrective action was enacted in 1991 and interstate branching was authorized in 1994.

Those laws, as well as better stock market discipline, have done wonders to strengthen larger banks. Since 1994, bank failures have occurred only in small banks, which are susceptible to sudden failure due to fraud, or in larger institutions which were extreme outliers as banks or simply criminal enterprises.

The 70 banks and thrifts that have failed since 1994 had total assets of just $11.4 billion. Combined, they would have been the 100th largest bank or thrift today.

Inspector-general reports on the most costly failures - Superior, Hamilton, Keystone, BestBank, and NextBank - document that banking supervisors knew for years about the problems at them. Even the fastest failure, NextBank, exhibited problems shortly after its founding, 26 months before it failed. These five failures account for 70% of the FDIC's total insurance loss since 1994.

Perhaps the best-known sudden failure was that of the $72 million-asset Oakwood Deposit Bank, which was based in a small Ohio town and had 7,336 deposit accounts. It failed in 2002 because its CEO skimmed off $49 million in unrecorded deposits to invest in riverboat casinos.

The ANPR mentions a "cost/benefit tradeoff" for this proposal. Unfortunately, the FDIC pooh-poohs how costly it would be while not quantifying the benefit. The FDIC staff mistakenly thinks that banks can easily aggregate depositor data. Even the most sophisticated "customer management relationship" systems, though, cannot readily identify all accounts which must be linked together for deposit-insurance purposes, particularly for complex deposit relationships.

Vendors of deposit-accounting software claim the cost of providing account linkage "would be fairly modest." Their opinion, though, must be discounted, since they would reap substantial business from updating this software. Further, most large banks have highly customized deposit-accounting systems not suited to across-the-board software fixes.

Worse, the FDIC has not quantified any benefit from this proposal, and for good reason - there is none. Not only are large banks not failing, but all but the very smallest failures sink slowly, giving the FDIC ample time to aggregate depositor accounts.

Congress has just directed the Government Accountability Office to assess the effectiveness of the federal banking regulators "in identifying troubled depository institutions and taking effective action with respect to such institutions." Before hectoring sound institutions the FDIC should respond to the problems the GAO finds. Additionally, FDIC staff faces an enormous amount of work over the next nine months to implement the just-passed deposit-insurance legislation. That is work enough.

If the FDIC imposes this regulation on large banks, it won't be long before small banks will have to aggregate deposit accounts, too. It would then be just a small step to aggregate account balances across all banks and thrifts.

Although the FDIC "is aware of the potential privacy issues surrounding the holding of depositor information," it cannot assure that this data won't be misused. Defenders of civil liberties and data privacy, take note.

Bankers have only until March 13 to comment on this ANPR. They need to do so, with a loud "No!"

Mr. Ely, the principal at Ely & Co. Inc., is a financial institutions and monetary policy consultant in Alexandria, Va. He has consulted on deposit-insurance related issues for trade associations and individual companies, but the views expressed above are his own.





Last Updated 03/08/2006 Regs@fdic.gov

Skip Footer back to content