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4000 - Advisory Opinions

How Items in Process of Payment Are Handled When Payor Bank Fails


January 23, 1995

Adrienne George, Attorney

Your letter, concerning what happens to items in the process of payment when a payor bank fails, has been forwarded to me for response. I apologize for the delay in answering your questions.

In your letter, you ask whether the receiver closing a bank returns checks and drafts (whether of the one-day delayed payable-through variety or not) on which the bank has not yet made final payment even if there are sufficient funds in the account, no stop payment order has been issued, no garnishment or similar process has been received, and no bankruptcy has occurred. Further, you wish to know how the depositor's claim is affected by the existence of items presented against the account (checking, standard payable-through draft, and one-day delayed payable-through draft) but not finally paid before the bank closes. Finally, a governmental customer of your bank wishes to know whether, in determining the amount of collateral necessary to back its uninsured deposits at the bank, it should use the Ledger Balance or the Adjusted Balance, as described in your letter.

In researching the answers to these questions, I enlisted the help of Wayne Ness, the Assistant Director, Operations Branch, of the FDIC's Division of Depositor and Asset Services. Mr. Ness's response follows.

When an insured depository institution fails and there is a payout of the insured deposits, the FDIC currently follows a collection/payment system which differs from the procedures described in the FDIC's Advisory Opinion FDIC--86--3 (January 28, 1986), which you cite in your letter. First, in determining the rights of the depositors and/or other general creditors of the receivership estate, the FDIC as Receiver will process any completed but as yet unposted work prior to the closing to make the books of the institution current as of the close of business on the day of the closing. For example, usually a financial institution is closed by its chartering authority at the end of the institution's normal business day, say, at 5:00 p.m. Assume that the institution's normal cutoff time is 2:00 p.m., and any items accepted for deposit after 2:00 p.m. would be credited the next business day. The Receiver will include the 2:00 p.m. to 5:00 p.m. work and process it as part of the last day's business as opposed to the institution's practice of crediting the items the next business day.

Next, if the incoming cash letter is received by the institution prior to its failure, it, too, will be posted. As suggested in the last paragraph of your letter, that cash letter will be processed and posted to customer accounts assuming that the items are properly drawn and endorsed, and that there are sufficient funds in the customer's account to pay the items. There is no difference here between the Receiver's actions and normal banking practices. If an incoming cash letter were to arrive after the institution's failure, the cash letter would be returned intact to the presenter. One of the first of many actions taken by the Receiver is to notify the Federal Reserve and other correspondent banks that the institution has been closed, no further charges are to be made to its correspondent account (except normal return items presented within the recourse period), and that any incoming "on us" items are to be returned marked "drawee bank in receivership."

Items taken in for deposit prior to closing will be processed, posted to the customer accounts and forwarded for collection in the outgoing cash letter for those items drawn on other banks. Here, the process differs from normal banking practice. Even though items drawn on other banks will not have been finally paid, the deposits not yet collected are included in the depositor's balance and paid as a part of the insured deposit. In the interest of rapid payouts and in view of the minimal risk associated therewith, the FDIC made a policy decision many years ago to include such deposits as a part of the time-consuming process of trying to reverse all deposits not yet finally paid.

If including items not yet finally paid as a part of the deposit creates an uninsured balance over and above the basic $100,000, the FDIC as Receiver will issue a Receiver's Certificate to the depositor for the uninsured balance. However, the Receiver will later schedule items eventually accepted for deposit but not finally paid as of the closing of the institution, those funds will be returned to the depositor by Receiver's check, and the original Receiver's Certificate will be voided. For example:

Collected Ledger Balance day before closing  $100,000
Deposit made day of closing and provisional credit given by bank    10,000
Ledger Balance at closing   110,000
FDIC deposit insurance paid –100,000
Uninsured; Receiver's Certificate issued $  10,000

In the above example, if the Receiver determines that the $10,000 deposit made before the closing of the institution was not finally paid until the day following the closing, the Receiver will issue its check for $10,000 to the depositor to replace the Receiver's Certificate previously issued for the uninsured balance.

With respect to your question on the one-day delayed payable-thorugh draft account, I am assuming that drafts presented on, say, a Monday, for processing on Tuesday, are quite simply "warehoused" until processing. Assume, for example, that the institution is declared insolvent and closed at the end of the business day on Monday. Drafts presented Monday for payment on Tuesday would be returned to the presenter by the Receiver. For instance, here is a slight variation on your example:

Ledger Balance as of Monday morning $1,000,000
Drafts presented on Monday (not yet reflected in Monday ending/Tuesday beginning balance because of one-day delay), returned to the presenter    200,000
Deposits on Monday, before bank is closed    800,000
Ledger balance at closing $1,800,000
FDIC deposit insurance paid  –100,000
Uninsured $1,700,000

In the example above, drafts presented on Monday for payment on Tuesday would be returned to the presenter by the Receiver, and the Ledger Balance would be $1,800,000. After the $100,000 FDIC deposit insurance is deducted from that total, the customer's exposure would be $1,700,000. However, this calculation does not take into consideration whether the balance might include any deposits which have not been finally paid but which might be paid in the future, and which, therefore, would then be subject to return to the depositor as discussed above.

I hope that this information will prove useful to you. If I can be of any further help, I can be reached at (202) 898-3859.

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