Failing banks face new rules on handling deposits

Failing banks face new rules on handling deposits
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Banks are gearing up for a new rule that will give customers access to their cash deposits as soon as possible after an institution fails, with regulators expected to finalize the measure this week.

The Federal Deposit Insurance Corporation will hold a board meeting Tuesday to review the rule, which is meant to apply to large banks with more than two million accounts.

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The agency in February issued a proposed rule on imposing recordkeeping requirements on banks that would help facilitate the timely access of deposits after an institution fails.

“Timely access to insured deposits is critical to maintaining public confidence in the banking system,” said Martin Gruenberg, chairman of the FDIC, when the proposal was announced.

Banks would be required to maintain complete and accurate data on each customer with deposits. They would also be required to update their information technology systems to be able to calculate the amount of insured money for each customer within 24 hours of a bank failure.

As a general rule, the FDIC insures deposits of up to $250,000, but a complex process underlies the laws and regulations governing that limit. Now the agency wants banks to ensure their information technology systems can handle those complicated determinations.

This process becomes complicated when a bank has a large number of deposit accounts, when a bank uses multiple deposit systems, and when information for the same customer in separate accounts is incorrect or inconsistent, among other issues, the agency said in the proposal.

The FDIC called for the rule to be implemented over the course of two years, although the industry has said that the largest and most complex banks would need up to four years.

Industry: costs outweigh benefits.

The proposal generated a dozen comments from industry heavyweights, including the American Bankers Association, which submitted a letter along with the Securities Industry and Financial Markets Association, Consumer Bankers Association, and The Clearing House Association.

The groups argued that the FDIC conducted an insufficient cost-benefit analysis. The FDIC had estimated that the industry would face a total of $328 million to comply with the final rule. The four most complex banks would bear the largest burden, paying roughly $50 million each.

Those estimates fail to account for the costs that would fall to some bank customers, such as mortgage loan servicers and trust companies, the ABA and the other industry groups said.

The proposal “does not appropriately balance the burdens and costs it would impose on covered banks and their customers on the one hand, and the limited improvements for resolving such a bank and expediting payments to its depositors on the other,” their June letter said.

“We do not believe the potential benefits justify the costs,” the industry groups added.

The FDIC cited benefits such as confidence in the banking system and a more efficient resolution process after an institution fails. The FDIC is responsible for overseeing that process.

“We tried very hard to assure the FDIC that we would let them do what they want to do in a resolution situation,” Hu Benton, vice president of banking policy at ABA, told The Hill Extra. “The rule could work but it needs some fixes, such as exemptions for certain accounts.”

The proposal said that some banks could apply for exemptions from the rule in certain cases.

Barbara Hagenbaugh, a spokesperson for the FDIC, declined to comment on the final rule.

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