4000 - Advisory Opinions
Deposit Insurance for U.S. Treasury Bills
February 4, 1988
Walter P. Doyle, Counsel
Thank you for your letter on January 11, 1988, regarding treatment of payments by the U.S. Treasury on Treasury bills where the custodian bank fails prior to payment of interest by the Treasury Department.
The rights of parties (including depositors) against the assets of a failed bank are fixed at the time of the declaration of insolvency. If payments of interest due on Treasury bills are subsequently made by the Treasury Department to a depositor's account, the FDIC as receiver would hold the payments in trust and remit them to the depositor. These payments would not be included when calculating the amount limit on the insured deposit.
You should be aware, however, that Treasury bills held in safekeeping by an insured bank for its customers are not insured by the FDIC. A payment by a client to a bank for the purchase of securities does not create a deposit relationship. The relationship which does result is in the nature of a bailment rather than a debtor-creditor relationship. The Treasury bills remain the property of the client. Since no deposit relationship arises from the transaction, the transaction is not covered by deposit insurance.
When a bank fails, any securities remaining in its customers' accounts accrue to the benefit of the receivership estate of the bank, unless the customer can demonstrate a superior ownership interest in the securities. If so, the securities are returned to the customer as their rightful owner. In the event the customer cannot demonstrate an ownership interest in the securities, he would be an unsecured general creditor of the bank and entitled to share, pro rata, in the bank's liquidation with the bank's other creditors.
To explain more fully, in the system operated by the Federal Reserve Banks, referred to as the commercial system, Treasury bills are purchased through commercial banks or dealers in Government securities and are reflected in the records of a Federal Reserve Bank or Branch as book-entry issues held for the account of a member bank of the Federal Reserve System. Each member bank should maintain records that identify Treasury bills held for account of its customers, including correspondent banks, other financial institutions, and securities dealers. In turn, each security dealer and financial institution having a book-entry account with a member bank should maintain records showing the Treasury bills it holds in its own account and the Treasury bills it holds for each customer for whom it acts as a depository.
The book-entry procedure for United States Government securities was introduced in 1968 in order to help the Treasury and the Federal Reserve Banks handle a large volume of such securities through the use of modern high-speed data processing equipment. Under that procedure, definitive Government securities (the engraved pieces of paper evidencing Government obligations) are eliminated and the obligations are entered on the computerized records of a Federal Reserve Bank. The book-entry procedure reduces theft and other risks of loss.
It is a generally accepted rule that FDIC as receiver takes title to the assets of a closed bank subject to all existing rights and equities and takes no greater rights in the property than the insolvent bank itself possessed. [Tobias v. College Towne Homes, Inc. 110 Misc., 2d 987, 442 N.Y.S.2d 380 (1981)]
The receiver stands in the place of the bank which he represents, and has only such rights as it had, so that the rights of third parties are not increased, diminished or varied by his appointment. He takes charge of the banking affairs where the bank left them, and takes over its assets with its concomitant burdens. In other words, he takes only such title to the assets as the bank itself had, subject to all equities which existed against the assets in the hands of the bank. And he can set up no right against claims which the bank could not have maintained. [Michie, 3 Banks and Banking § 96 (1974).]
Since the bank, prior to insolvency, would most likely have had no legal entitlement to the Treasury bills it holds for its customers, the FDIC as receiver would likewise not be able to assert any greater rights than the bank itself could have asserted. Thus, the beneficial owner of a Treasury bill would normally be entitled to possession upon maturity of the bill in the event of a bank closing if he can clearly establish that the bank held the Treasury bill in a safekeeping or custodial capacity only. Provided that the bank has not carried the bills as an asset on its own balance sheet and the individual can provide the receiver with a safekeeping receipt documenting his unimpaired ownership rights, the FDIC, acting as receiver of a closed bank, would honor the customer's claim to the Treasury bills (or proceeds thereof).
As to your further question regarding the Government backing of Treasury bills as compared to its support of FDIC's insurance obligations, it should be noted that the FDIC's deposit insurance fund now exceeds $18 billion, having doubled in the last ten years in spite of a significant increase in the number and size of bank failures. The FDIC also has the right to borrow up to $3 billion from the U.S. Treasury if necessary, a right which it has never needed to exercise. Moreover, as part of the Competitive Equality Banking Act of 1987 (Public Law 100-86), Congress reaffirmed that deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States. The FDIC has always paid off insured deposits in a failed insured bank promptly and in full. Of course, uninsured deposits exceeding the insurance limit are general claims against the receivership of a failed bank and are paid off over a longer period of time to the extent possible from collections on receivership assets.
Finally, your reference to "loan companies" is unclear to us. FDIC insures most commercial banks and state-chartered savings banks, as well as certain industrial banks that operate like loan companies. The FSLIC insures most savings and loan associations and Federal savings banks. If you would give us more specifics on what you mean by "loan companies", we could give you a more definitive answer on this point.