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4000 - Advisory Opinions
Treatment of Cash Letter Balances, Correspondent Bank Overdrafts,
and Federal Funds Sales Upon Failure of Correspondent Bank
FDIC-91-75 August 28, 1991 Joseph A. DiNuzzo, Senior Attorney
This is in response to your letter of August 6, 1991, on certain
questions related to correspondent relationships *** ("Bank") has
with other banks throughout the United States.
1. Cash Letter Balances. Your first question concerns
the failure of the Bank's correspondent bank ("Correspondent
Bank") after its receipt of a cash letter from the Bank.
Specifically, the question is what are the deposit insurance
implications when: (1) prior to the Correspondent Bank's failure it has
commenced, for collection purposes, the forwarding of checks drawn on
other banks and has given the Bank provisional credit for the proceeds
of those checks; and (2) at the time it is closed the Correspondent
Bank has neither returned nor paid checks drawn on the Correspondent
Bank.
The response to the first part of the question is as stated in FDIC
advisory opinions 86--28 (a copy of which is enclosed) and 87--41
(which is cited in your letter). As stated in advisory opinion 86--28,
under section 4--201 of the Uniform Commercial Code ("UCC"),
unless a contrary intent clearly appears, and prior to the time that a
settlement given by a collecting bank becomes final, a collecting bank
is an agent or sub-agent of the depository bank which, in turn, is the
agent of the owner of the respective cash items. Funds (whether cash or
another form of settlement) coming into the hands of the agent bank, or
its receiver after closing, would not constitute assets of the bank for
its general creditors (or deposits of the depository bank), but belong
to the owners of the items and would properly be passed along by the
receiver to the depository bank for ultimate payment of the items.
Thus, in the situation posed in your letter, the checks forwarded for
collection to other banks but on which no final payment had been made
at the time the Correspondent Bank is closed would be held by the FDIC
as agent for the Bank and not be deemed deposits owned by the Bank at
the Correspondent Bank for purposes of insurance
coverage. 1
The response to the second part of the question is not addressed
directly in either of the above-cited advisory opinions. The legal
theory noted in advisory opinion 86--28, however, applies. In
particular, the agency status of a collecting bank created by section
4--201 of the UCC would continue until a settlement given by a
collecting bank for an item is or becomes "final." Any item that
was drawn on the Correspondent Bank that was not finally paid prior to
closing would be insured as a deposit of the holder (i.e.,
the party for whom the Bank is acting as agent) under Paragraph
330.4(b)(4)(ii) of the FDIC's regulations, a copy of which is enclosed.
Any items in the cash letter that were finally paid before the
Correspondent Bank was closed would be part of the Bank's deposit
balance with the failed Correspondent Bank and, thus, subject to the
$100,000 limit. 2
Under article 4 of the UCC, final payment normally occurs as soon as
an item is paid in cash or posted to the drawer's account by the drawee
bank, or when final settlement is
{{10-31-91 p.4586}}made in the clearing process without
retaining the right of revocation, or when a provisional settlement is
not actually revoked within the time limit required by law,
clearinghouse rules or other agreement.
2. Correspondent Bank Overdrafts. Your next question is
about the FDIC's treatment of an overdraft that the Correspondent Bank
might have on its account at the Bank at the time the Correspondent
Bank is closed. As you know, an overdraft would be deemed a loan on the
Bank's books and a non-deposit liability on the books of the
Correspondent Bank. When the Correspondent Bank is closed its overdraft
balance at the Bank would be deemed a liability of the receivership to
be paid in accordance with the applicable law governing the
receivership of the closed bank. The Correspondent Bank's indebtedness
ordinarily would not be treated as a deposit under Section
3(l) of the Federal Deposit Insurance Act (12 U.S.C.
§ 1813(l)). 3
3. Federal Funds Sales. In response to your final
question, the treatment of federal funds would be similar to that of
the overdrafts. Such federal funds are a non-deposit liability of the
Correspondent Bank. Such obligation would represent a claim against the
receivership estate. If, however, the federal funds are legally secured
by designated collateral held by the closed Correspondent Bank, the
FDIC, as receiver, would recognize that security interest.
* * * * *
I hope this letter is fully responsive to your questions. Feel free
to phone me at (202) 898-7349 if you have any additional questions or
comments.
1Please contrast this result with that explained in situation
"3.b." of Advisory Opinion 86--28. In that context the proceeds
credited to a bank's account at a correspondent bank prior to the
closing of the correspondent bank would be deemed deposits of the bank
insured to an aggregate limit of $100,000, if no agency status is
otherwise established. Go Back to Text
2Please see the prior footnote. Go Back to Text
3For an exception to this rule, see First Interstate v.
FDIC, 718 F. Supp. 848 (D. Col. 1989). Go Back to Text
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