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Federal Deposit
Insurance Corporation

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

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4000 - Advisory Opinions


Where Public Unit Places in Excess of $100,000 in Same Insured Bank and Collateralizes Uninsured Funds with Mortgage-Backed Securities or Repurchase Agreement, Amount Recoverable Depends on Value of Collateral at Time Bank Fails

FDIC 91-41 May 3, 1991 Claude A. Rollin, Counsel

This is in response to your letter inquiring about the potential effects of certain hypothetical transactions. I apologize for our delay in responding to your letter, which was just recently forwarded to this office from our Chicago Regional Office.

In your letter, you describe the following two hypothetical options that a public unit might have for placing $500,000 with an insured bank:

Option #1.  $500,000 deposit at a certain rate for the period desired: $100,000 is insured by FDIC insurance and the balance is collateralized with market value of GNMA, mortgage-backed securities. The collateralization is accomplished with a 3rd party safekeeping arrangement and is in excess of the amount of deposit collateralized to compensate for market fluctuations.

Option #2.  Public Entity offers $100,000 for insured deposit to the bank. The balance of $400,000 is offered as a collateralized repurchase agreement. The collateralized portion is accomplished with a 3rd party safekeeping arrangement and is in excess of the amount of the repurchase agreement liability in order to compensate for market fluctuations.

You ask if the timeframe or the amount available to the public unit would differ, depending on which option is chosen, assuming the bank is closed and it is liquidated or its liabilities are transferred. You state that the purpose of your question is to determine the options available to the bank to reduce the FDIC's assessment.

Under either Option #1 or Option #2, the amount that the public unit would recover in the event the bank fails would depend on the value of the collateral at the time the bank fails. The FDIC generally recognizes and honors collateral arrangements and repurchase agreements so long as they are permitted under state law (or the National Bank Act for national banks) and the collateral interests are properly perfected. Under Option #1, the collateral would be GNMA, mortgage-backed securities and under Option #2, the sample repurchase agreement enclosed with your letter provides that the collateral will be a "United States Government security." As long as the value of these securities exceeds $400,000 at the time the bank fails, the public unit would recover all of its funds, assuming that the aforementioned prerequisites are satisfied. Consequently, the public unit would recover the same amount regardless of whether Option #1 or Option #2 is chosen.

The timing of the return of the public unit's funds would depend upon the type of transaction the FDIC engages in after the bank fails and the time it takes the FDIC to liquidate the collateral (if necessary). Since I am unable to predict these things, I cannot tell you with any certainty how long it would take for the public unit to recover all of its funds. The FDIC generally does, however, make every effort to expedite the return of all funds and other property rightfully belonging to bank customers after a bank fails.

Finally, the amount of the FDIC assessment would be greater under Option #1 than under Option #2. This is because under Option #1 the amount of the deposit that would be assessed is $500,000 and under Option #2 the amount of the deposit that would be assessed is $100,000. Consequently, the assessment would be less under Option #2 than under Option #1.

I trust that this has been responsive to your inquiry. If you have any further questions, please call me at (202) 898-3985.


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