Preparing for the worst, the FDIC has proposed regulations that would improve the process for identifying uninsured depositors at larger institutions in the event of a failure. The agency says the change will enhance its ability to make funds promptly available to insured deposit customers “in the unlikely event that a large financial institution is closed.”

For Big Banks

One part of the proposal relates only to institutions that have at least $2 billion in domestic deposits, have more than 250,000 deposit accounts, or have total assets of more than $20 billion, regardless of the number of deposits or accounts. Currently, 159 institutions meet these criteria.

A failing institution covered by this part of the proposed rule would have to place provisional holds on large deposit accounts in a percentage specified by the FDIC, provide the FDIC with deposit account data in a standard format, and allow automatic removal of provisional holds once the FDIC makes an insurance determination.

For All Banks

The second section applies to all FDIC-insured institutions, regardless of size, and governs the specific time and circumstance under which account balances will be determined in the event of a failure. The FDIC proposal would use the end-of-day ledger balance as normally calculated by the institution. By using the end-of-day ledger, the FDIC will be able to apply a single standard across all failed banks in order to treat every transaction equally.

The FDIC emphasizes that it places a high priority on providing access to insured deposits as promptly as it can. In the past, the FDIC has usually been able to allow most depositors access to their deposits on the next business day. “If adopted, the proposed rule would better enable the FDIC to continue this practice, especially for the larger, more complex institutions it insures,” the agency says.

Long Effort

The proposal represents the culmination of a two-year effort to devise a system that would allow for a quicker and more accurate determination of insurance in the event that a large bank was closed due to financial difficulty. The FDIC released an advance notice of the proposal in December 2005 and a formal proposal in December 2006.

The agency last updated its deposit insurance determination process in 1999. The largest number of deposit accounts in a failed institution for which the FDIC had to make an insurance determination was about 175,000 for NetBank, FSB, Alpharetta, Georgia, which failed on September 28, 2007. By way of comparison, some of the larger insured banks have more than 50 million deposit accounts.