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4000 - Advisory Opinions

Insurance Coverage of Deposits in Merged Banks


October 28, 1988

Jules Bernard, Senior Attorney

In your letter of October 13, 1988, you ask for clarification of the rules pertaining to the insurance of deposits in merging banks.

Section 8(q) of the Federal Deposit Insurance Act provides some relief in such cases. It declares, "[T]he separate insurance of all deposits so assumed shall terminate at the end of six months from the date such assumption takes effect or, in the case of any time deposit, the earliest maturity date after the six-month period." 12 U.S.C. § 1818(q).

The general rule is that the aggregate of all deposits (demand, time, and savings) that are assumed by the acquiring bank is separately insured up to $100,000 for a certain interval. At the end of that interval--namely, the six-month period following the date of the merger--the component of that aggregate representing demand and savings deposits ceases to be insured separately.

Time deposits are governed by a special and more liberal rule. They are separately insured until the "earliest maturity date" after the six-month period. That means two things:

--If a time deposit does not mature until after the end of the six-month period, the FDIC will insure it separately until it matures.

--If a time deposit matures and is renewed during the six month period, the FDIC will insure the renewed deposit separately until the first time it matures after the end of the six-month period--but only if the renewed time deposit has the same principal amount and maturity as the original one (and does not otherwise differ materially from the prior deposit).

The deposit may be renewed automatically, or by action of the customer, or by mutual agreement of the bank and the customer. The renewed time deposit may include any interest earned on the original time deposit, but may not otherwise include new funds.

The renewed deposit may have a different interest rate (or method of computing the interest rate) from the original one.

If the renewed deposit's terms and conditions are significantly different from those of the prior deposit, however, then the special rule does not come into play. The funds assumed from the merged bank lose their separate insurance at the end of the six-month period.

You particularly focus on the issue of what "significantly different" means. You present several hypothetical cases in which a depositor may want to renew a certificate for an interval that is a day or two longer than the term of the original certificate, or perhaps even a day or two shorter than the original term:

For example, we [ceased to be an independent bank] on September 30, 1988. If a customer had a 28 day deposit maturing on October 11, and wanted to renew the deposit for another one month period to maintain full coverage, would he have to renew it for exactly 28 days, assuming the maturity date was a good business day, or could he renew it for 27 days, or 34 days and still maintain maximum coverage? . . .

Another question, if the exact number of days for the renewal is the same as the maturing deposit, and the maturity date falls on a Saturday or Sunday, can the customer renew his investment to mature either the previous business day or [the] directly following good business day and still maintain maximum coverage?

The FDIC has not taken any position on this question. I expect the FDIC will deal with this issue on a case-by-case basis, and would be unwilling to articulate a rule of general applicability.

My own view is that the FDIC would look to the surrounding circumstances to determine whether the renewal of the deposit amounted to a new investment decision on the part of the depositor, or whether instead the renewal merely amounted to a rollover of the funds. I would consider that, in cases where the renewed certificate would mature on a nonbusiness day, and accordingly the maturity of the new time deposit differed from that of the prior one by a day or two (or possibly three) as a result, the FDIC would regard the renewal as a mere rollover, and would continue to insure the deposit separately. But if the depositor changed the term of the deposit for his own convenience-- e.g., to coincide with a loan he planned to repay when he cashed in the deposit--the FDIC would regard the renewal as a new investment in the depository bank, and would decline to provide separate insurance for the deposit from that point onward.

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