SUMMARY: The FDIC is proposing to amend its regulations governing the
insurance coverage of joint ownership accounts and revocable trust (or
payable-on-death) accounts. These proposed amendments to the insurance
regulations would supplement the revisions adopted by the FDIC in a
final rule published in May 1998. The purpose of these amendments is to
increase further the public's understanding of the insurance
regulations through simplification. The proposed rule would make two
amendments to the regulations. First, it would eliminate step one of
the two-step process for determining the insurance coverage of joint
accounts. Second, it would change the insurance coverage of ``payable-
on-death'' accounts by adding parents and siblings to the current list
of ``qualifying beneficiaries.''
DATES: Written comments must be received on or before October 15, 1998.
ADDRESSES: Written comments should be addressed to the Office of the
Executive Secretary, Federal Deposit Insurance Corporation, 550 17th
Street, N.W., Washington, D.C. 20429. Comments may be hand-delivered to
the guard station at the rear of the 17th Street Building (located on F
Street) on business days between 7:00 a.m. and 5:00 p.m. Also, comments
may be sent by FAX ((202) 898-3838) or e-mail (comments @FDIC.gov).
Comments will be available for inspection in the FDIC Public
Information Center, Room 100, 801 17th Street, N.W., Washington, D.C.,
on business days between 9:00 a.m. and 5:00 p.m.
FOR FURTHER INFORMATION CONTACT: Christopher L. Hencke, Counsel, (202)
898-8839, or Joseph A. DiNuzzo, Senior Counsel, (202) 898-7349, Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street, N.W.,
Washington, D.C. 20429.
I. Simplifying the Insurance Regulations
Federal deposit insurance plays a critical role in assuring
stability and public confidence in the nation's financial system. At
the same time, deposit insurance may reduce the incentive for
depositors to monitor and discipline banks for excessive risk-taking.
At present, the only depositors who will impose a degree of market
discipline are those with deposits over the $100,000 insurance limit.
All depositors should understand the rules governing the
application of the $100,000 limit. Confusion regarding these rules
could lead to a loss of funds by some depositors and an erosion in
public confidence. In addition, depositors over the $100,000 limit will
impose no market discipline if they do not realize that their deposits
are partly uninsured. For these reasons, the deposit insurance rules
should be as simple as possible.
Unfortunately, recent evidence indicates that some of the insurance
rules are misunderstood by a large percentage of the employees of
depository institutions. This evidence includes surveys conducted in
three states by public interest research groups (PIRGs). These surveys
involved the FDIC's rules governing the insurance coverage of joint
accounts and ``payable-on-death'' (POD) accounts. Of the bank employees
included in the PIRG surveys, 63% to 80% misunderstood the joint
account rules and 59% to 83% misunderstood the POD rules. (Copies of
the PIRG survey results may be obtained by contacting the FDIC.)
Two years ago, in May 1996, the FDIC sought comments on amending
the rules governing joint and POD accounts in an advance notice of
proposed rulemaking (ANPR). See 61 FR 25596 (May 22, 1996). In May
1997, the FDIC published a proposed rule. See 62 FR 26435 (May 14,
1997). The amendments involving joint and POD accounts were not
included in the proposed rule because the FDIC, at that time, did not
possess sufficient information regarding the amendments' potential
In May 1998, the proposed rule became a final rule. See 63 FR 25750
(May 11, 1998). Through this final rule, the FDIC made a number of
important changes that will make the insurance regulations more
understandable to the public. (A detailed explanation of these changes
is set forth in the preamble of the Federal Register final rule.) In
the preamble, the FDIC also stated that it would continue to study the
policy, economic and other implications of amending the rules governing
joint and POD accounts. The staff's study of those issues has resulted
in the proposed rule published today.
II. The Proposed Rule
The proposed rule would amend two sections of the deposit insurance
regulations: the new Sec. 330.9 (former Sec. 330.7), governing the
insurance of joint ownership accounts; and the new Sec. 330.10 (former
Sec. 330.8), governing the insurance of revocable trust (or POD)
\1\ ``New'' sections refer to the section numbers resulting from
the recent final rule. The ``new'' sections became effective on July
A. Joint Accounts
Under the current rules, qualifying joint accounts are insured
separately from any single ownership accounts maintained by the co-
owners at the same insured depository institution. See 12 CFR 330.9(a)
(former 330.7(a)). A joint account is a ``qualifying'' joint account if
it satisfies certain requirements: (1) the co-owners must be natural
persons; (2) each co-owner must personally sign a deposit account
signature card; and (3) the withdrawal rights of the co-owners must be
equal. See 12 CFR 330.9(c)(1) (former 330.7(c)(1)). The requirement
involving signature cards is inapplicable if the account at issue is a
certificate of deposit, a deposit obligation evidenced by a negotiable
instrument, or an account maintained for the co-owners by an agent or
custodian. See 12 CFR 330.9(c)(2) (former 330.7(c)(2)).
Assuming these requirements are satisfied, the current rules
provide that the $100,000 insurance limit shall be applied in a two-
step process. First, all joint accounts owned by the same combination
of persons at the same insured depository institution are added
together and insured to a limit of $100,000. Second, the interests of
each person in all joint accounts, whether owned by the same or some
other combination of persons, are added together and insured to a limit
of $100,000. See 12 CFR 330.9(b) (former 330.7(b)). The effects of this
two-step process are: (1) no joint account can be insured for more than
$100,000; (2) no group of joint accounts owned by the same combination
of persons can be insured for more than $100,000; and (3) no person's
combined interest in all joint accounts can be insured for more than
The two-step process for insuring joint accounts often is
misunderstood by bankers (as indicated by the PIRG studies) as well as
consumers. This widespread confusion has resulted in the loss by some
depositors of significant sums of money. For example, at one failed
depository institution, three joint accounts (and no other types of
accounts) were maintained by three siblings. The interest of each
sibling was less than $100,000. The siblings chose to place all of
their funds in joint accounts so that each of them would have access to
the money in the event of an emergency or sudden illness. When the
institution failed, step one of the two-step process required the
aggregation of the three joint accounts. The amount in excess of
$100,000 was uninsured.
In this example, all of the funds owned by the siblings could have
been insured if the funds had been held in individual accounts as
opposed to joint accounts. Thus, the depositors did not suffer a loss
because they placed too much money in a single depository institution
that failed. Rather, they suffered a loss simply because they
misunderstood the FDIC's regulations.
Another example is provided by Sekula v. FDIC, 39 F.3d 448 (3d Cir.
1994). That court case involved six joint accounts owned by a husband
and wife. The combined balance of these accounts was almost $170,000.
Of this amount, only $100,000 was found to be insured. The court
rejected the argument made by the depositors that they were entitled to
insurance up to $200,000 (i.e., $100,000 for each owner). The court
stated, however, that the two-step process for insuring joint accounts
In order to simplify the coverage of joint accounts, the FDIC is
proposing to eliminate the first step of the two-step process. Under
this proposed amendment, the maximum coverage that any one person could
obtain for his/her interests in all qualifying joint accounts would
remain $100,000. The maximum insurance coverage of a particular joint
account, however, would no longer be $100,000. In the case of a joint
account owned by two persons, for example, the maximum coverage would
increase from $100,000 to $200,000 (i.e., $100,000 for each owner).
The effects of the proposed amendment are subject to debate. For
some depositors, such as the three siblings in the example, the
amendment would result in an expansion of coverage. On the other hand,
many or most such depositors could obtain the same level of coverage
without the proposed amendment if they understood the regulations. The
potential cost to the FDIC of the proposed amendment is discussed in
greater detail below.
B. POD Accounts
Under the current rules, qualifying revocable trust (or POD)
accounts are insured separately from any other types of accounts
maintained by either the owner or the beneficiaries at the same insured
depository institution. See 12 CFR 330.10(a) (former 330.8(a)). A POD
account is a ``qualifying'' POD account if it satisfies certain
requirements: (1) the beneficiaries must be the spouse, children or
grandchildren of the owner; (2) the beneficiaries must be specifically
named in the deposit account records; (3) the title of the account must
include a term such as ``in trust for'' or ``payable-on-death to'' (or
any acronym therefor); and (4) the intention of the owner of the
account (as evidenced by the account title or any accompanying
revocable trust agreement) must be that the funds shall belong to the
named beneficiaries upon the owner's death. If the account has been
opened pursuant to a formal ``living trust'' agreement, the fourth
requirement means that the agreement must not place any conditions upon
the interests of the beneficiaries that might prevent the beneficiaries
(or their estates or heirs) from receiving the funds following the
death of the owner. Such conditions are known as ``defeating
Assuming these requirements are satisfied, the $100,000 insurance
limit is not applied on a ``per owner'' basis. Rather, the $100,000
insurance limit is applied on a ``per beneficiary'' basis to all POD
accounts owned by the same person at the same insured depository
institution. For example, a POD account owned by one person or a group
of POD accounts owned by one person could be insured up to $500,000 if
the qualifying beneficiaries (i.e., spouse, children and grandchildren)
were five in number.
If one of the named beneficiaries of a POD account is not a
qualifying beneficiary (i.e., not a spouse, child or grandchild), the
funds corresponding to that beneficiary are treated for insurance
purposes as single ownership funds of the owner (i.e., the account
holder). In other words, they are aggregated with any funds in any
single ownership accounts of the owner and insured to a limit of
$100,000. See 12 CFR 330.10(b) (former 330.8(b)).
On a number of occasions, depositors have lost money upon the
failure of an insured depository institution because they believed that
POD accounts were insured on a simple ``per beneficiary'' or ``per
family member'' basis. They did not understand the difference between
qualifying beneficiaries and non-qualifying beneficiaries. Typically,
in such cases, the named beneficiary has been a parent or sibling. In
the absence of a qualifying beneficiary, the POD account has been
aggregated with one or more single ownership accounts.
In response to such cases, the FDIC is proposing to add siblings
and parents to the list of qualifying beneficiaries. This approach
would protect most depositors who misunderstand the current rules
without abandoning the basic concept that insurance for POD accounts is
provided up to $100,000 on a ``per qualifying beneficiary'' basis. The
potential cost to the deposit insurance funds is discussed below.
III. The Cost of the Proposed Rule
At the request of the Board of Directors, the FDIC staff recently
conducted a study of the potential cost of eliminating step one of the
two-step process for insuring joint accounts. The study also addressed
the potential cost of adding parents and siblings to the list of
``qualifying beneficiaries'' for POD accounts. Copies of this study may
be obtained from the FDIC.
The FDIC study was based upon depositor files from ten banks that
failed during the past decade. At each of these banks, depositors
suffered losses as a result of owning deposits over the $100,000
insurance limit. The advantage of studying the accounts at such failed
banks is that the accounts were subject to actual insurance
determinations. Also, as a depository institution weakens, some
depositors may withdraw their deposits in order to protect themselves.
For this reason, in determining the cost to the FDIC of a change in the
insurance regulations, an analysis of the accounts at failed banks is
more useful than an analysis of accounts at healthy institutions.
The total of all deposits at the ten banks at the time of failure
was $6.7 billion, of which $57 million (0.85%) was determined to be
uninsured. The FDIC's analysis involved the files of 1,300 depositors,
each of whom maintained account(s) in excess of $100,000.
As discussed below, the FDIC's study suggests that the cost of the
proposed rule would be minimal compared with the potential benefits.
Depositors would benefit by not losing funds through misconceptions
regarding the scope of their insurance coverage; the financial system
would benefit through increased public confidence.
A. Joint Accounts
At the ten failed banks in the FDIC's study, uninsured joint
account deposits totaled $13 million. Of this amount, $12 million was
uninsured under step one of the current two-step process. This figure
represented 21.5% of all uninsured deposits but only 0.18% of total
deposits. The impact of eliminating step one can be estimated by
applying this 0.18% figure to failed bank data from 1988 (the costliest
year in recent history).
In 1988, the FDIC assumed the obligation to pay insurance on
deposits in the amount of $38 billion. This figure does not represent
the FDIC's losses for the year because the FDIC (as subrogee of the
insured depositors) recovered a significant amount of money through the
liquidation of the assets of the failed institutions. The losses for
the year amounted to $6.8 billion, representing a loss ratio of 18%.
Increasing $38 billion (the deposit obligations assumed by the FDIC
in 1988) by 0.18% (the increase that would result from the elimination
of step one) yields additional insured funds in the amount of $69.8
million. Applying a loss ratio of 18% to this $69.8 million (18% being
the FDIC's loss ratio in 1988) yields additional losses in the amount
of $12.6 million. In other words, in 1988, the absence of step one of
the two-step process for insuring joint accounts would have resulted in
estimated additional losses to the FDIC of $12.6 million (an increase
In 1993, the Federal Reserve Board found that the elimination of
step one of the current joint account rules would have increased the
amount of insured deposits in all FDIC-insured institutions by about
$22 billion (out of a total deposit base at that time of $3.273
trillion). In its own study, the FDIC came to a different conclusion.
Currently, the level of domestic deposits at all FDIC-insured
institutions is $3.6 trillion. If the 0.18% figure discussed above is
applied to this $3.6 trillion, the conclusion follows that the
elimination of step one would increase the amount of insured deposits
by $6.5 billion--not $22 billion as found in the Federal Reserve study.
The difference between the two studies may be attributable to the fact
that the FDIC's study was limited to failed banks that produced actual
losses for depositors. In any event, in measuring the impact of a
change in the insurance regulations, the important question is not the
increase in the amount of insured deposits ($6.5 billion versus $22
billion) but the increase in possible losses to the FDIC. As discussed
above, in 1988 (the costliest year in recent history), the absence of
step one of the two-step process would not have resulted in additional
losses amounting to billions of dollars. Rather, the additional loss
suffered by the FDIC would have amounted to approximately $12.6
B. POD Accounts
At the ten bank sample, the total deposit base was $6.7 billion. Of
this amount, depositors with more than $100,000 in total deposits held
$22.2 million in POD accounts for the benefit of non-qualifying
beneficiaries. In accordance with the FDIC's regulations, these funds
in the amount of $22.2 million were treated as single ownership
accounts. In this category, most of the funds were insured. Only $6.3
million was uninsured.
From this type of study, it is difficult to draw firm conclusions
about the consequences of changing the insurance rules applicable to
POD accounts. The problem is the impossibility of predicting how
depositors might alter their accounts in response to any such changes.
In any event, the results of the FDIC's study indicate that POD
accounts are not a significant component of a typical bank's deposit
portfolio. For this reason, any change in the rules governing the
insurance coverage of POD accounts should not produce a significant
impact on the FDIC.
IV. Request for Comments
The Board of Directors of the FDIC (Board) is seeking comments on
the proposed amendments to the regulations governing the insurance
coverage of joint accounts and POD accounts. In addition, the Board is
seeking comments on any other possible means of simplifying the
insurance coverage of joint or POD accounts.
V. Paperwork Reduction Act
The proposed rule would simplify the FDIC's deposit insurance
regulations. It would not involve any collections of information under
the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). Consequently, no
information has been submitted to the Office of Management and Budget
VI. Regulatory Flexibility Act
The proposed rule would not have a significant impact on a
substantial number of small businesses within the meaning of the
Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The amendments to
the deposit insurance rules would apply to all FDIC-insured depository
institutions and would impose no new reporting, recordkeeping or other
compliance requirements upon those entities. Accordingly, the Act's
requirements relating to an initial and final regulatory flexibility
analysis are not applicable.
List of Subjects in 12 CFR Part 330
Bank deposit insurance, Banks, banking, Reporting and recordkeeping
requirements, Savings and loan associations, Trusts and trustees.
The Board of Directors of the Federal Deposit Insurance Corporation
hereby proposes to amend part 330 of chapter III of title 12 of the
Code of Federal Regulations as follows:
PART 330--DEPOSIT INSURANCE COVERAGE
1. The authority citation for part 330 continues to read as
2. In Sec. 330.9, paragraph (b) is revised to read as follows:
Sec. 330.9 Joint ownership accounts.
* * * * *
(b) Determination of insurance coverage. The interests of each co-
owner in all qualifying joint accounts, whether owned by the same or
different combinations of persons, shall be added together and the
total shall be insured up to $100,000. (Example: ``A&B'' have a
qualifying joint account with a balance of $60,000; ``A&C'' have a
qualifying joint account with a balance of $80,000; and ``A&B&C'' have
a qualifying joint account with a balance of $150,000. A's combined
ownership interest in all qualifying joint accounts would be $120,000
($30,000 plus $40,000 plus $50,000); therefore, A's interest would be
insured in the amount of $100,000 and uninsured in the amount of
$20,000. B's combined ownership interest in all qualifying joint
accounts would be $80,000 ($30,000 plus $50,000); therefore, B's
interest would be fully insured. C's combined ownership interest in all
qualifying joint accounts would be $90,000 ($40,000 plus $50,000);
therefore, C's interest would be fully insured.)
* * * * *
3. In Sec. 330.10, paragraph (a) is revised to read as follows:
Sec. 330.10 Revocable trust accounts.
(a) General rule. Funds owned by an individual and deposited into
an account evidencing an intention that upon the death of the owner the
funds shall belong to one or more qualifying beneficiaries shall be
insured in the amount of up to $100,000 in the
aggregate as to each such named qualifying beneficiary, separately from
any other accounts of the owner or the beneficiaries. For purposes of
this provision, the term ``qualifying beneficiaries'' means the owner's
spouse, child/children, grandchild/grandchildren, parent/parents or
sibling/siblings. (Example: If A establishes a qualifying account
payable upon death to his spouse, sibling and two children, assuming
compliance with the rules of this provision, the account would be
insured up to $400,000 separately from any other different types of
accounts either A or the beneficiaries may have with the same
depository institution.) Accounts covered by this provision are
commonly referred to as tentative or ``Totten trust'' accounts,
``payable-on-death'' accounts, or revocable trust accounts.
* * * * *
By order of the Board of Directors.
Dated at Washington, D.C., this 7th day of July, 1998.
Federal Deposit Insurance Corporation.
Deputy Executive Secretary.
[FR Doc. 98-18830 Filed 7-16-98; 8:45 am]
BILLING CODE 6714-01-P