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4000 - Advisory Opinions
Excessive deposit insurance
FDIC--96--11
April 2, 1996
Marc J. Goldstrom, Counsel
This is in response to your February 13, 1996 letter to Vice
Chairman Hove. You have indicated that you represent several state
bankers associations which are owners of X, a multi-state insurance
company providing insurance services to financial institutions in
several states. X is considering making excess deposit insurance
available to financial institutions in several states.
According to your letter, the insurance would be in the form of a
bond under which X would agree to guarantee certain designated
depository accounts in excess of the deposit insurance provided by the
FDIC. X would promptly reimburse the account owner the amount of the
uninsured portion of the account up to the limit of the liability set
forth in the bond in the event of a bank's failure. It is anticipated
that X's limit of liability would be five million dollars
($5,000,000.00) for each participating financial institution.
You have raised certain questions regarding relationship with the
FDIC in the event of bank failure. Those questions and our responses
are as follows:
(1) If X were to pay account owners in an amount in excess of
FDIC deposit insurance, would X be subrogated to the account owner's
rights to participate in any liquidation of the bank which might
involve a payout on uninsured deposits?
{{10-31-96 p.4980}}
As you know, when a federally insured institution fails, the FDIC
pays each depositor the amount of his/her deposits up to the limits of
federal deposit insurance. 1
To the extent a depositor has deposits in excess of the federally
insured amount, the depositor has a claim against the failed
institution's receivership estate for the uninsured amount. That claim
is processed in accordance with the FDIC's claims procedures, and,
ultimately, the FDIC as receiver (the "Receiver") determines
whether to allow or disallow the claim.
Generally, when the Receiver allows a claim, it issues the claimant
a receiver's certificate. The receiver's certificate itself includes a
form of assignment which can be used by a claimant to assign the claim
to a third party. After receipt and acknowledgment of such assignment
by the Receiver, any dividends paid on the claim would be paid directly
to the assignee. Claims for uninsured deposits would be treated in the
same manner.
Consequently, if a depositor with an allowed claim for uninsured
deposits properly executes the assignment on the receiver's certificate
assigning his/her interest in the claim to X, and if the Receiver
acknowledges such assignment, all dividends paid on that claim after
such acknowledgment would be paid directly to
X. 2
(2) Does the FDIC in the liquidation of a failed bank
coordinate its disbursement of funds to depositors with a private
insurance company such as X? For example, if X were to pay the
depositor under its bond, would the depositor also be eligible to
participate in the liquidation of the bank, and, in effect, double the
amount collected?
The Receiver does not generally coordinate its payments with a
private deposit insurer. However, with some slight modification to the
timing of any payments under the Bond, there may not be a significant
danger of double payment to a depositor. Section IV of the proposed
Bank Deposit Guaranty Bond (the "Bond") provides that if a bank
covered by the Bond fails, the designated account owners will be paid
the amount of the uninsured deposits up to the limits of the Bond. It
further provides that "[p]ayment will be made promptly upon
receipt by [X] of the assignment of the receiver's certificate from
the Designated Depository Account Owner(s)." However, until the
Receiver acknowledges receipt of that assignment on the receiver's
certificate, the Receiver will continue to deliver or mail dividends to
the depositor. Upon acknowledgment of the assignment of that receiver's
certificate by the Receiver, the depositor would no longer be eligible
to receive dividends on that receiver's certificate. At that point, X
as assignee would then be entitled to such dividends. Consequently, if
X pays the depositor immediately upon receipt of the assignment, there
is a chance that the Receiver could receive the assignment while a
dividend check is en route to the depositor. Nevertheless, it appears
that X could develop a solution to this potential problem.
(3) Is there anything with respect to the conduct and
operation of the FDIC in the event of a failed bank with which X should
be made aware?
It is not possible to answer this question with any degree of
accuracy. There are many laws, regulations, and procedures which govern
the establishment, conduct, and termination of receiverships for failed
institutions. It is not possible to know which of those X is aware of,
and furthermore, whether their effect on the proposed plan would be of
significance from X perspective. Notwithstanding, we continue to be
available to answer specific questions on receivership topics.
(4) Would the FDIC have any reason to
encourage or discourage banks from purchasing excess deposit
insurance?
{{10-31-96 p.4981}}
In our view, there is nothing in the Federal Deposit Insurance Act
(12 U.S.C. § 1811 et. seq.) or the FDIC's Rules and
Regulations (12 C.F.R. Part 301--Part 363) that would expressly
prohibit banks from purchasing excess deposit insurance. Assuming that
the proposed plan does not involve potential risk or liability to
insured institutions 3
and assuming no other laws are violated, the FDIC would generally not
object to a private insurance arrangement of the type described in your
letter. Of course, the FDIC's failure to object should not be construed
as an endorsement of X's program or any other proposed or existing
private insurance program.
The foregoing notwithstanding, the FDIC does have certain concerns
with respect to private deposit insurance arrangements generally. These
concerns relate to (i) the manner in which the private deposit
insurance is advertised or otherwise marketed, (ii) the possibility of
disclosure to the private insurer of confidential documents prepared by
the FDIC, and (iii) the possibility of the private insurer attempting
to influence actions of an insured institution that may impact the
institution's safety and soundness or its statutory or regulatory
obligations.
You should be aware of certain restrictions which may apply to
advertisements for deposits. The manner in which an insured depository
institution advertises its deposits is subject to the provisions of
Federal Reserve Board Regulation DD, Truth in Savings,
12 C.F.R. Part 230 and
section 709 of the United States criminal code,
18 U.S.C. § 709. More
specifically, section 230.8(a) of Regulation DD provides that
"[a]n advertisement shall not be misleading or inaccurate and
shall not misrepresent a depository institution's deposit contract."
12 C.F.R. § 230.8(a). Section
709 of Title 18, a criminal statute, provides that it shall be unlawful
for anyone to "falsely [advertise] or otherwise [represent] by
any device whatsoever the extent to which or the manner in which the
deposit liabilities of an insured bank or banks are insured by the
Federal Deposit Insurance Corporation . . . ." Accordingly,
advertisements making any reference to private insurance should
clearly, conspicuously, and unmistakably state that such private
insurance is in no way connected with the deposit insurance provided by
the FDIC.
In the process of underwriting excess deposit insurance coverage X
may wish to examine certain bank records. Please keep in mind that
Reports of Examination and any related or similar documentation
prepared by the FDIC are confidential documents which may not be made
available to X or any other insurance company offering to underwrite
excess deposit insurance coverage without the express permission of the
FDIC. 4
Finally, the FDIC would object to X's attempting to influence the
actions of a bank which would in any way adversely affect the safety
and soundness of the bank or in any way interfere with the bank's
statutory or regulatory mandates. For example, the FDIC would object to
a private deposit insurer's attempting to persuade an insured
institution to make a loan which the FDIC or another federal or state
regulator believes to be unsafe or unsound.
The opinions expressed herein are the views of the FDIC Legal
Division staff and, like all other staff opinions, are not binding upon
the FDIC or its Board of Directors. Moreover, the opinions expressed
herein are based upon the facts as you have presented them and any
change in those facts might cause us to reach different conclusions.
I hope this letter is responsive to your inquiries. If you have any
further questions you may contact the undersigned at (202) 898--8807,
or Robert C. Fick, Counsel at (202) 736--3069.
{{10-31-96 p.4982}}
1See, generally, 12
U.S.C. §§ 1813,
1817, &
1821 and
12 C.F.R. Part 330 for the
limits of federal deposit insurance. Go Back to Text
2This assumes that the depositor's claim is equal to or less
than the amount of his private insurance. In cases in which the
depositor's claim exceeds the amount of private insurance, the FDIC
would expect that X and the depositor would have agreed in advance as
to how this situation would be handled. Go Back to Text
3The FDIC would likely object to the arrangement if the plan
you describe would in any way adversely affect the safety and soundness
of insured depository institutions. It is not clear from your letter
whether, through membership in a state bankers associations, or by any
other way, insured institutions would be exposed to potential liability
or risk in connection with the proposed program. To the extent such
potential liability or risk is assumed by insured depository
institutions, the FDIC would be concerned. Go Back to Text
4See 12 C.F.R.
§ 350.9 and
§ 309.6(c)(7). Go Back to Text
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