4000 - Advisory Opinions
Timing and Method of Paying Insured Deposits When FDIC-Insured Bank Fails
December 16, 1988
Roger A. Hood, Assistant General Counsel
This is in response to your letter, dated December 6, 1988, inquiring about the timing and method by which the FDIC pays insured deposits when an FDIC-insured bank fails.
In your letter, you describe a program for placing deposits in one or more banking subsidiaries of *** (each an ***). The deposit program includes multi-tiered fiduciary relationships involving ***, the ***, *** various securities brokers and their customers. Your letter does not request an opinion concerning the extent to which deposit insurance would be afforded to any accounts maintained pursuant to the deposit program described in your letter and thus this letter does not address that issue. Instead, you ask us to confirm your understandings with regard to the timing and method by which the FDIC pays insured deposits when an FDIC-insured bank fails.
Section 11(f) of the Federal Deposit Insurance Act provides that, upon the failure of an FDIC-insured bank, payment of the insured deposits therein shall be made "as soon as possible," either by cash or by making available to each depositor a transferred deposit in another bank in an amount equal to the insured deposit of such depositor. 12 U.S.C. § 1821(f). This obligation is, however, subject to the provision that the FDIC may require proof of claims to be filed before paying the insured deposits and that, in certain cases, the FDIC may withhold payment on a claim until the claim has been litigated and judgment thereon has been rendered. 12 U.S.C. § 1821(f).
When an insured bank fails and the FDIC is appointed receiver or when an insured bank is in danger of failing, the FDIC has several options for meeting its obligations to the depositors of the bank. The four options mentioned in your letter are: (1) deposit payoff; (2) insured deposit transfer; (3) purchase and assumption transaction; and (4) open bank assistance transaction. You are correct that the FDIC often engages in one of these four transactions.
The "deposit payoff" is a procedure whereby the FDIC issues checks directly to the depositor for the insured amounts of their deposit accounts. The extent to which the accounts are insured is determined in accordance with the rules stated in 12 C.F.R. Part 330, including the provision in 12 C.F.R. § 330.15 which states that the amount of an insured deposit includes both principal and interest accrued at the contract rate until the bank is closed. In a deposit payoff, the FDIC generally begins to issue deposit insurance checks within three to five calendar days after the bank is closed.1 Of course, this is the time frame within which payments begin, not when they are completed. The length of time it takes to make all payments in a deposit payoff depends on such factors as the size of the bank, the condition of its records and the level of cooperation by its depositors. Moreover, all depositors must provide evidence of deposit ownership and fill out claim forms as a prerequisite to receiving the amount of their insured deposits.
An "insured deposit transfer" is a procedure whereby the FDIC transfers the insured deposits of a failed bank to an agent bank, which makes those funds available to the customers of the failed bank. The insurance on the accounts of the failed bank (which equals the amount transferred to the agent bank) is determined in accordance with the rules stated in 12 C.F.R. Part 330. The agent bank generally makes the funds available to the customers of the failed bank on the next business day after the failed bank closes. See, footnote 1.
A "purchase and assumption transaction" is a procedure whereby both the insured and uninsured deposits of a failed bank are assumed by another insured bank, which receives financial assistance from the FDIC. All of the deposit liabilities of the failed bank become deposit liabilities of the assuming bank, on the same terms and conditions (including interest rate and maturity as they were in the failed bank. The assuming bank generally makes the demand and savings deposits available to the depositors of the failed bank on the first business day after the purchase and assumption transaction is consummated. See, footnote 1.
An "open bank assistance transaction", unlike the other transactions described above, is completed in anticipation of a bank failure. In such a transaction, the FDIC provides financial assistance in order to prevent an insured bank from failing. The insured bank remains operative, with no interruption in service, and the deposits therein continued to be available on the same terms and conditions as existed prior to the FDIC's grant of open bank assistance.
For your further reference, I have enclosed a pamphlet entitled "When a Bank Fails," which answers many of the most frequently asked questions about the procedures followed by the FDIC when a bank fails.
1 This statement is based on my knowledge of the FDIC's past experience in handling such transactions. It is not based on any empirical data and I do not believe that any such data has been compiled by the FDIC. Go back to Text