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The Upcoming End to Unlimited FDIC Insurance for Non-Interest Bearing Transaction Accounts

In the Fall of 2008, the FDIC implemented the Transaction Account Guarantee program, which permitted banks to opt-in to a voluntary program which provided an unlimited guarantee for deposits held in non-interest bearing transaction accounts, as well as certain low-interest bearing accounts.  In 2010, the Dodd-Frank Act replaced this voluntary Transaction Account Guarantee with an across the board temporary increase in FDIC insurance to provide unlimited insurance for deposits held in non-interest bearing transaction accounts through December 31, 2012.

Although the initial program was done under the FDIC’s existing statutory authority, the FDIC has taken the position that only Congress can now extend the unlimited insurance program.  Accordingly, unless Congress acts prior to December 31, 2012, as of January 1, 2013, deposits held in non-interest bearing transaction accounts will be subject to the existing $250,000 cap on FDIC insurance.

The possibility of ending the unlimited insurance creates an obligations for banks and depositors to analyze their deposits and plan for possible changes.

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FDIC Insurance Unaffected by Debt Ceiling

The failure of Congress to raise the debt ceiling should have no short-term impact on the ability of the FDIC to cover insured deposits.

The FDIC Deposit Insurance Fund (the “Fund”) is supported by assessments levied by the FDIC on individual banks. After experiencing above normal outflows from the Fund due to the recent spate of bank failures, the FDIC recently required banks to prepay three years’ worth of premiums in order to restore its financial strength.  While the Fund has been running a negative balance on an actuarial basis for several quarters, the FDIC projected that the Fund would have a positive balance by the end of the second quarter.

At the end of the first quarter (the last date for which information is currently available), the Fund’s liquid assets, cash and marketable securities, totaled $45.5 billion. In addition, the FDIC has a $100 billion committed line of credit from the US Treasury as a backstop. We do not anticipate that the FDIC will have any problems meeting its obligations to cover any covered losses in insured deposit accounts.

The FDIC is an independent agency of the United States government.  Both the FDIC and the Fund are paid for by the banking industry, and not from the U.S. taxpayers. A default by the U.S. government on its obligations will have no impact on the FDIC or the FDIC Deposit Insurance Fund. Since 1933, no depositor has ever lost a single penny of FDIC-insured funds.

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Unlimited Insurance for IOLTA Accounts

On February 18, 2011, the FDIC adopted updated final rules, regarding the unlimited insurance coverage, through December 31, 2012, for deposits held in Interest on Lawyers Trust Accounts (IOLTAs).  These accounts were previously covered by the FDIC’s Temporary Liquidity Guarantee Program, but were subsequently left out of Dodd-Frank’s expanded insurance coverage.

Recognizing that the interest paid on IOLTAs were used by States to support legal aid for low-income individuals, Congress passed (on December 22, 2010), and the President signed (on December 29, 2010), H.R. 6398, which amended the Federal Deposit Insurance Act to define noninterest-bearing transaction accounts to include IOLTAs.  The FDIC noted the potential for this Congressional action in its final rules adopted November 9, 2011, implementing the unlimited insurance coverage for noninterest-bearing transaction accounts, and provided that it would act quickly to notify depository institutions on how to react to the change.

Prior to year-end, the FDIC notified depository institutions that they were not required to send individual notices to IOLTA customers that such funds would not longer be provided with unlimited insurance, and that any institutions that had previously provided such notice were encouraged, but not required to, provide a revised notice advising that IOLTAs will receive unlimited insurance coverage as noninterest-bearing transaction accounts for two years ending December 31, 2012.

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Dodd-Frank's Proposed FDIC Insurance Changes

The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act contains a number of changes to FDIC Insurance limits.  The Dodd-Frank Act will also effectively make permanent the FDIC guarantee currently provided under the FDIC’s Transaction Account Guarantee program, with a few modifications.

As background, the $250,000 FDIC insurance limit has previously been extended through December 31, 2013, and the Transaction Account Guarantee program has previously been extended through December 31, 2010, with the FDIC maintaining the right to further extend through December 31, 2011.

If the conference report version of Dodd-Frank is signed into law, Section 335 will make the $250,000 FDIC insurance coverage limit permanent.  In addition, Dodd-Frank will make that increase retroactive to January 1, 2008, providing the benefit of the increased insurance limits for depositors in the thirteen institutions that were placed into receivership between January 1, 2008 and October 3, 2008, including IndyMac and Integrity Bank.  However, no relief would be provided to depositors with funds in excess of $100,000 on deposit with the three depository institutions that failed in 2007.

In addition, Section 343 will provide unlimited insurance for funds held in non-interest bearing transaction accounts effective December 31, 2010, the scheduled termination date for the existing Transaction Account Guarantee program.  While frequently described as making the Transaction Account Guarantee program as permanent, there are significant differences with the new insurance for non-interest bearing transaction accounts.  First, unlike the Transaction Account Guarantee program where institutions may opt out of the additional coverage, the new insurance coverage for non-interest bearing transaction accounts will apply to all depository financial institutions.  Under the current fee structure for the Transaction Account Guarantee program, participating institutions paid a fee of 15 to 25 basis points of the daily average balance in excess of $250,000 held in  non-interest bearing transaction accounts.  Section 343 treats the unlimited insurance for non-interest bearing transaction accounts as part of the overall insurance program, and institutions will not separately be assessed for this additional coverage (although additional insured funds under the Deposit Insurance Fund will necessitate the FDIC maintaining higher reserves).

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Updated Guidance on Prepaid Assessment Exemptions

Standards for Prepaid Assessment Exemptions

We understand that the FDIC has decided to exempt the following categories of financial institutions from the requirement to prepay three years of deposit assessments:

  • Institutions with a CAMELS rating of 4 or 5; and
  • Institutions that are less than well-capitalized.

Institutions falling in either of these categories should have already received an electronic letter from the FDIC confirming that they have been exempted from the prepayment of deposit assessments.

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FDIC Finalizes Prepaid Assessments Rule

On November 12, 2009, the FDIC adopted its final rule regarding prepaid assessments.  The final rule is largely unchanged from the FDIC’s initial proposal; the most significant change is that the FDIC will now refund any unused assessments after collection of the amount due on June 30, 2013, as opposed to December 30, 2014.

Effect

As noted by the FDIC, the prepayment of FDIC assessments primarily impacts liquidity – both of the FDIC Deposit Insurance Fund and the banks.  As the prepaid assessments merely represent the prepayment of future expense, they do not affect a Bank’s capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.

Given the higher FDIC assessments generally, and the elevated assessment rates for troubled banks, the prepayment of FDIC assessments could represent a significant cash outlay.  The FDIC’s online assessment rate calculator includes a prepayment tab to help banks estimate their payments

Exemptions

The final rule provides that the FDIC, after consultation with the institution’s primary federal regulator, may exempt any institution from the prepayment requirement if it determines, in its sole discretion, that the prepayment “would adversely affect the safety and soundness of the institution.”  The FDIC is required to provide notice to such institutions by Monday, November 23, 2009 if it has exempted the institution.  We are aware that the FDIC started mailing exemption letters on November 12th.

The FDIC has not indicated the standards it will apply for exemptions.  Based on the exemptions we’ve seen so far, it appears that all institutions subject to a formal enforcement action may be exempted.

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Fraudulent E-Mails Claiming to Be From the FDIC

We are aware of several fraudulent emails circulating purporting to be from the FDIC.  Subject lines include: “FDIC has officially named your bank a failed bank” and “FDIC Alert: you need to check your Bank Deposit Insurance Coverage.”

These e-mails and the associated Web site are fraudulent. Recipients should consider the intent of these e-mails as an attempt to collect personal or confidential information, some of which may be used to gain unauthorized access to on-line banking services or to conduct identity theft.

The FDIC does not issue unsolicited e-mails to consumers. Financial institutions and consumers should NOT follow the link in the fraudulent e-mail.

The FDIC has released a special alert confirming that these announcements are not from the FDIC.

The official FDIC website does contain useful information if you have questions about FDIC insurance; alternatively, we encourage you to contact your bank if you have questions about whether your deposited funds are insured.

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FDIC Pre-payment Assessment Update

On September 29, 2009, the FDIC announced a proposed rule that would require institutions to prepay on December 30, 2009, an estimated quarterly risk-based assessments for the 4th quarter of 2009 and for all 2010, 2011, and 2012.   For a synopsis, see our prior summary of the proposed rule. Comments to the proposed rule are due by October 28, 2009.

Tax Treatment of Prepayments

The general rule is that prepayments that benefit more than one taxable period cannot be deducted in full, but must be deducted over the periods for which the benefits are obtained.  Thus, a payment of 3 years worth of insurance premiums cannot be deducted in a single tax year regardless of whether the institution is an S corporation or a C corporation.  The rule also is the same for cash method taxpayers, with one limited exception.  A cash method taxpayer can prepay up to 12 months of expenses and claim a deduction when paid.  For example, an institution could prepay its 2010 insurance premiums in December of 2009 and claim the deduction in 2009.  However, if the institution prepaid 3 years worth of insurance premiums in 2009, it could not deduct the entire amount paid.

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FDIC Board Votes to Mandate Prepaid Assessments and Immediately Adopts 3 Basis Point Increase Effective January 2011

The proposed rule adopted at the FDIC Board Meeting on September 29, 2009 amended the final rule adopted in May 2009 to restore losses to the Deposit Insurance Fund (DIF).

Assessments for 4th Quarter 2009 and all of 2010-2012 Due December 30, 2009

The proposed rule would require insured institutions to prepay on December 30, 2009, an estimated quarterly risk-based assessments for the 4th quarter of 2009 and for all 2010, 2011, and 2012. If the proposed rule is adopted, an institution’s assessment will be calculated by taking the institution’s actual September 30, 2009 assessment and adjusting it quarterly by an estimated 5 percent annual growth rate through the end of 2012. Further, the FDIC will incorporate the uniform 3 basis point increase effective January 1, 2011.

The FDIC will continue to provide quarterly statements showing the actual amount of assessment owed and reflecting a reduction of the amount of prepayment “credit” applied to the amount due. If the FDIC has underestimated the amount of the prepaid assessment when compared to the actual assessment due, or factors change that would increase the assessment during the period in which the prepayment is applied, the institution will be required to pay quarterly assessments as usual once the prepaid assessment is exhausted. If, however, the FDIC has overestimated the amount of assessment due, or factors change that would decrease the assessment due during the period in which the prepayment is applied, the institution will be entitled to a refund of any overpayment not exhausted by December 30, 2014.

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Additional FDIC Guidance on Modification of Repurchase Agreements

On July 6, 2009, the FDIC published a set of Frequently Asked Questions relating to the Sweep Account Disclosure Requirements which recently went into effect.   One of the issues addressed was what does the FDIC consider to be a perfected interest in a security.   This issue first came up earlier this year when the FDIC took the position that many repurchase agreements were defective and that in a failed bank situation the FDIC would take the position that the funds subject to such an agreement never left the deposit account.   One of the primary defects which the FDIC pointed out was the right of substitution found in many such agreements.  This announcement caused many banks to modify their master repurchase agreements to delete that right.

The FAQ clarifies the FDIC’s position in several respects.  It first addresses the basic question of when is a security interest perfected in a security.  The FDIC generally considers three elements in determining whether the customer has a perfected security interest in a security subject to a repo sweep: (1) the particular security in which the customer has an interest has been identified, and this identity is indicated in a daily confirmation statement; (2) the customer has “control” of the particular security; and (3) there is no substitution of the security during the term of the repurchase agreement even if the agreement allows for substitution with the customer/buyer’s consent.

Identification of Securities

The element of identification is met by a confirmation identifying the security (i.e., CUSIP or mortgage-backed security pool number) and also specifying the issuer, maturity date, coupon rate, par amount and market value. Fractional interests in a specific security must be identified, if relevant.  Importantly, the FDIC takes the position that an arrangement where bulk segregation or pooling of repurchase collateral without identification of specific securities does not result in the buyer receiving an identified interest in specifically identifies securities.

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