WASHINGTON Seven years after declaring a truce in a battle with large banks over tracking their insured deposits, the Federal Deposit Insurance Corp. reopened the fight Tuesday with a new proposal that would take an even tougher stance.
The agency released a proposal that would require 37 mega and regional banks to revamp their recordkeeping and modify their systems so they know almost exactly how many insured deposits they have at the end of every close of business.
At issue is the FDIC's ability to resolve the failure of a large institution and pay depositors quickly. The agency argues the financial crisis, which occurred just after the last time the agency tried to tackle this problem, proved the need for the agency to have as much specific data as possible.
"[Washington Mutual] and Wachovia bank deteriorated very quickly in 2008 giving the FDIC little time to prepare," said Bret Edwards, director of the division of the resolutions and receiverships at the FDIC, during a board meeting. "These experiences drove home the point that the FDIC needs additional tools to ensure depositors at banks with a large number of deposit accounts are afforded access to their funds in the event of a sudden, unexpected failure."
But the industry isn't so sure. As they did the first time this came up a decade ago it took the FDIC three years of fighting to finalize its policy bank industry representatives argue this is a costly fix to a nonexistent problem.
"What is the point of putting the largest banks through all of the expense of trying to maintain this system, trying link all associated accounts when the probability of it being utilized is barely above zero?" said Bert Ely, a financial institutions consultant in Alexandria, Va. "The cost benefit just isn't there."
Ely noted that in the cases the FDIC mentioned, no uninsured depositors even took a hit from the failure. Indeed, the government guaranteed all deposits during the crisis and even bailed out several large banks to prevent a massive failure in the first place.
James Chessen, the chief economist for the American Bankers Association, said the FDIC is attempting to shift responsibility for determining insured deposit coverage to the banks.
"That is a role the FDIC has always played in a failure and now there is a desire to put that burden back on the bank to do that," he said. "I don't disagree at all with the thought that that might be more efficient, but it does put the onus and the costs on the institutions to make that determination."
As proposed, the new plan would require banks to keep more complete data on depositors and develop systems to be able to calculate and separate insured and uninsured amounts. That goes beyond what was required in 2008, which mandated a new standard data format designed to help the agency link multiple accounts from a single account holder quickly.
The FDIC proposal would also apply to a more select group of banks than the current requirements. It would apply to banks with more than 2 million accounts, while the thresholds put in place in 2008 applied to banks with more than $2 billion in insured deposits, and either 250,000 deposit accounts or $20 billion in total assets. Currently, 151 banks are covered under the 2008 rule.
The new proposal would also decrease the chances of the FDIC making an overpayment or delaying payment of an insured deposit while it sorted through a failed bank's records, which it said are "often ambiguous or incomplete."
Additionally, the FDIC said it becomes difficult to make determinations when accounts are linked to multiple names or addresses or are facilitated through a deposit broker. FDIC officials also indicated that they would be open to alternative approaches and suggestions from the industry. There is a 90-day comment period to receive feedback.
The proposal would not apply to community banks, which the FDIC has had success resolving and can often throw more analysts at when determining which deposits are insured becomes difficult. Such an approach is not feasible with the largest institutions, the FDIC said.
Overall, there may not be as much resistance this time around as before. In 2008, industry representatives argued that the prospect of a large bank failure was too remote, but the crisis made it clear that wasn't true. Large banks are also anxious to prove that they are no longer "too big to fail," and already provide significantly more information to the FDIC than in the pre-crisis days.
"When this was first contemplated back in the middle 2000s this was a major rethinking about the data that might need to be provided to the FDIC," Chessen said.
Since then, banks' systems have become more developed and the FDIC has more access to banks' exam data, he said.
"There has been a continual conversation between the large banks the FDIC since the rule passed in 2008, so there has been regular conversations about how best to provide this data and regulators have been in these banks and examined the systems to be sure they are complying with the rule," Chessen said.
But he also argued that the 2008 rule was still too new to be changed already.
During the meeting, FDIC officials said the proposal was key to efforts to unwind failing megabanks.
Being able to identify insured deposits "would facilitate a firm's ability to plan for an orderly bankruptcy under... the Dodd-Frank Act," said FDIC Vice Chairman Tom Hoenig.
Ian McKendry is a reporter at American Banker.
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