4000 - Advisory Opinions
Insurance of Deposits Placed in Several Banks in a Bank Holding Company System
July 23, 1986
The *** ("the Bank"), provides fully-insured deposits for people investing large sums of money $100,000 to $5,000,000). The Bank accepts the money, divides it into parcels of $100,000, and transmits the parcels to various other banks ("depository banks") for deposit. The Bank and all the depository banks belong to the same bank holding company.
You ask how the deposits are insured. It depends on how the Bank, its sister banks, and the customer agree to treat the funds.
So long as the Bank holds the customer's funds, the contract between the Bank and the customer determines the question:
--The Customer may transmit the funds to the Bank for the Bank to invest on the customer's behalf. If so, the Bank acts as the customer's agent: the funds are "trust funds," 12 U.S.C. § 1813(p), and are separately insured up to $100,000. 12 U.S.C. § 1817(i); 12 C.F.R. §§ 330.1(c)(5) & 330.10.
--Alternatively, the customer may deposit the funds with the Bank, and direct the Bank to redeposit the funds in its sister banks after some (presumably brief) period. In that event the funds are aggregated with the customer's other deposits at the Bank, and the aggregate is insured to $100,000. 12 U.S.C. § 1821(a); 12 C.F.R. § 330.2(a).
Once the Bank sends the funds on to its sister banks, the insurance depends not only on the contract between the Bank and the customer, but also on the contracts between the various depository banks and the customer and/or the Bank. It is certainly possible for the Bank and its sister banks to arrange for the customer's funds to be fully insured.1 That can happen in at least two ways:
--The Bank may merely act as the conduit between the customer and each depository bank. The Bank may provide accounting and other paper-trail services for the customer, but arrange for the depository bank to open the account in the customer's name. In that case, the customer's deposit at the depository bank is aggregated with any other deposits he might have at that bank in his own name, and the total sum is insured to $100,000. 12 U.S.C. § 1821(a); 12 C.F.R. § 330.2(a).
--The Bank may act as the customer's agent in depositing the funds: that is, the Bank may make the deposit in its own name at each depository bank, and identify itself on the depository bank's records as the customer's agent. In that case, the customer's deposit at the depository bank is separately insured to a maximum of $100,000, apart from any other funds that the customer might hold at the depository bank in his own name. 12 U.S.C. §§ 1813(p) & 1817(i); 12 C.F.R. §§ 330.1(c)(5) & 330.10.
Each bank is insured separately. Accordingly, the total amount of insurance available to a single customer within a bank holding company system is equal to $100,000 times the number of banks in the system: if a system has 50 banks, a customer can insure up to $5,000,000.
On the other hand, it is also possible for the Bank to arrange things so that its customers' funds are not fully protected. For example, the Bank could accept funds from several people and commingle the funds. Then the Bank could deposit the commingled funds in the various depository banks in the Bank's own name (or in its nominee name) without indicating that it was acting as the customers' agent. The commingled funds would only be insured up to $100,000 in each depository bank. 12 C.F.R. § 330.1(b)(1); see 12 U.S.C. § 1817(i).2
1 Actually, if the initial deposit in any one bank is for $100,000, the interest earned on the deposit will be uninsured. Go back to Text
2 The Bank would be insured up to $100,000 in each depository bank, and could have up to $5,000,000 of insured funds in a 50-bank BHC system. Go back to Text