The Dodd-Frank Wall Street Reform and Consumer Protection Act codified a form of the Transaction Account Guarantee (TAG) program initiated by the FDIC that extended unlimited deposit insurance coverage to certain no- or low-interest transaction accounts. Under the Dodd-Frank version, which expires on December 31, 2012, there is no cap on FDIC insurance for “noninterest-bearing transaction accounts.” As we have explained, qualifying accounts must meet the statutory definition and cannot have even the potential to be paid interest. Congress modified this definition at the end of 2010 in order to extend coverage for IOLTA accounts (which may pay interest).
The industry is beginning to draw attention to the statutory expiration of this unlimited coverage. As originally initiated by the FDIC in 2008, the program was intended to stabilize large deposits in a time of crisis within the financial system. The Dodd-Frank extension of TAG was completely paid for by financial institutions under the general deposit insurance assessment framework. Community banks have arguably benefitted the most from the unlimited coverage provisions because the corporate, non-profit, and government depositors holding most of the affected accounts may have more concerns (real or imagined) about the continued solvency of small banks than of big banks. Without the guarantee, smaller banks may have to rely more on pricing in order to retain these depositors, potentially exposing the insurance fund to greater risk.
By one industry estimate, more than half of all TAG account balances (over $500 billion) are already held by just 19 banks over $100 billion in assets. According to the FDIC, more than three-quarters ($191.2 billion) of Q4 2011 growth in domestic deposits was attributable to account balances subject to the guarantee. The 10 largest insured banks accounted for 73.6 percent ($140.7 billion) of the growth in these balances during this period. As of December 31, 2011, the average institution with less than $1 billion in assets had 15 covered accounts worth an average of $713,000. Although liquidity is generally less of a concern than it was in 2008, these large depositors are more likely to seek loans and otherwise bank with institutions holding their TAG-size accounts.
The questions, then, are whether the industry and its regulators are unified around this issue and whether legislators will have the stomach to extend the program in an environment where initiatives seens to benefit banks are politically sensitive. The original FDIC manifestation was optional, with participating banks paying for the coverage. Although the Dodd-Frank version is universal, again, banks have picked up the tab through the assessment process. Nonetheless, it is always possible that an extension of the program will be marred as a boon to banks and a burden to taxpayers.
Notwithstanding the position of former Chairman Sheila Bair and some currently within the agency that the program should only be further extended by Congress, the FDIC stands at the center of the issue and could always extend the program administratively. FDIC’s 2008 program was authorized under the FDI Act by a determination by the Secretary of the Treasury in consultation with the FDIC and the Federal Reserve that conditions of ”systemic risk” justified an exception to the least-cost-resolution requirements of the Act. It was extended by the FDIC in 2009 as a continued response to this finding, although at that time the agency also cited as “additional authority” more general statutory language relating to its mission. We believe there is footing for a similar, transitional extension of the program under this broader authority. In fact, when the FDIC extended the program in 2010 through the end of that year, it reserved the right to extend the program through 2011 without additional rulemaking. This was ultimately not necessary in light of Dodd-Frank, and we think an additional regulatory extension is unlikely to occur here without significant advocacy for it. The Independent Community Bankers of America and the American Bankers Association, for their part, have recently outlined their views on the issue.
Meanwhile, examiners are beginning to ask how banks are planning for the expiration of the program. Many institutions are balancing this expiration with Dodd-Frank’s repeal of the prohibition on the payment of interest on business checking accounts (and by extension Regulation Q). Challenging as this may be in a time of regulatory uncertainty, these considerations should also be evaluated along with Regulation D’s reserve requirements (where restructured accounts may become demand deposits).
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.
On November 15, 2010, the Federal Deposit Insurance Corporation (FDIC) issued a final rule to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Section 343 of the Act provides for unlimited deposit insurance for “noninterest-bearing transaction accounts” through December 31, 2012.
In the months since the FDIC issued its final rule, we have observed some confusion in the banking industry as to exactly what kinds of accounts will be considered to be “noninterest-bearing transaction accounts.” It is not the case, as some seem to have believed, that the definition covers only accounts offered to businesses. Consumer accounts can qualify for the unlimited deposit insurance, if properly structured. For some banks, this may mean a change to their existing deposit agreement terms.
FDIC regulation now defines “noninterest-bearing transaction account” as any deposit or account maintained at an FDIC insured bank or other depository institution with respect to which all three of the following are true:
(i) no interest may be paid or accrued on the account;
(ii) the depositor must be able to make withdrawals by using a negotiable or transferable payment instrument, payment order of withdrawal, telephone or other electronic media, or other similar items for the purpose of making payments or transfers to third parties; and
(iii) The depository institution may not reserve the right to require advance notice of intended withdrawal.
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.
On August 10, 2010, the FDIC published a pilot program to evaluate the feasibility of insured depository institutions offering low-cost transactional and savings accounts. The FDIC will accept applications from banks wanting to participate in the pilot program through September 15, 2010.
Banks participating in the pilot program must offer electronic deposit accounts having the core features identified in the “Model Safe Accounts Template.” The pilot program is expected to last one year, during which participating banks would report to the FDIC on the viability of the accounts, focusing on the volume, use, success and profitability of the accounts.
In its announcement for the pilot program, the FDIC emphasizes the numbers of unbanked and underbanked consumers in the United States and the FDIC’s commitment to ensuring that all U.S. households have access to safe and affordable banking services. Unless banks participating in the pilot report significant and serious losses, there seems to be a real possibility that all banks will be coerced in one way or another to offer these accounts after the program. This post discusses the proposed features of the accounts and the possible difficulties.
Electronic, Checkless Accounts
Under the pilot program, the accounts would be “largely” electronic, purportedly for the purpose of limiting acquisition and maintenance costs. The transactional accounts also would be checkless, allowing withdrawals only through electronic means.
Because the accounts would be checkless, institutions will have somewhat more ability to prevent losses from overdrafts than they otherwise would have. On the other hand, all banks know that it is impossible to block every electronic transaction that results in an overdraft. Moreover, under at least the pilot program, banks would be expected not to impose any overdraft or insufficient funds fees. With consumers having absolutely no economic incentive to avoid overdrafts, it can be expected that banks will incur losses.
Very Low Fees
Monthly maintenance fees for the transactional accounts under the pilot program would be limited to $3, and the bank would not be able to charge any monthly fees for the savings accounts. The minimum monthly balance requirement for the account would be only $1, and it seems safe to assume that the target consumer market for these accounts is unlikely to maintain any significant average daily balances.
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.
On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment and authorizing the FDIC to impose additional special assessments of 5 basis points, if necessary. The initial special assessment and any additional special assessment will be based on an institution’s assets minus Tier 1 capital as of June 30, 2009. This final rule differs significantly from the interim rule that FDIC issued on March 2, 2009.
The interim rule contemplated a 20 basis point special assessment, based on an institution’s deposits, which is the assessment base used for the regular quarterly risk-based assessments. The interim rule also contemplated imposing additional special assessments of up to 10 basis points at the end of each remaining calendar quarter of 2009.
The final rule lowered the initial special assessment from 20 to 5 basis points, and any additional special assessment from 10 to 5 basis points, but changed the assessment base from deposits to assets minus Tier 1 capital. The memorandum from the FDIC’s director of the insurance and research division indicates that the “departure from the regular risk-based assessment base is appropriate in the current circumstances because it better balances the burden of the special assessment.”
On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896). Among other things, the Act:
- extended the $250,000 deposit insurance limit through December 31, 2013;
- extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
- increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
- increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
- removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments. The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.
This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee. The Transaction Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.
On November 21, 2008, the FDIC approved the final rule regarding the Temporary Liquidity Guarantee Program. The FDIC also held a teleconference on the final rule (with 2,100 participants) summarizing the changes, which will be available on the FDIC’s website.
There are important changes from the FDIC’s interim rule, including: (i) the exclusion of short term borrowings (30 days or less) and an alternative minimum cap for guaranteed debt under the Senior Unsecured Debt Guarantee portion of the Program; and (ii) the inclusion of IOLTA and NOW accounts in the Transaction Account Guarantee portion of the Program.
We continue to expect that all banks will decide to remain in the Transaction Account Guarantee portion of the Program, but, with the revised terms, we believe community banks will need to closely examine whether to participate in the the Senior Unsecured Debt Guarantee portion of the Program.
On November 3, 2008, the FDIC extended the deadline for opting out of either component of the Temporary Liquidity Guarantee Program from November 12, 2008 until December 5, 2008. Failure to opt out by December 5, 2008 will constitute a decision to continue to participate in both the debt guarantee and transaction account guarantee programs. (Based on conversations with representatives of the FDIC on Monday, the FDIC does not expect any institution to opt out of the non-interest bearing transaction account guarantee program.)
Decisions to opt out or remain in are irrevocable, and will be made via the FDIConnect system. Election forms will be available starting November 12, 2008, and will require certification by the institution’s Chief Financial Officer.
All eligible entities within the same holding company structure, including the holding company itself, must make the same decision regarding continued participation in either or both programs. Eligible entities that do not opt out of the debt guarantee program must report the amount of outstanding senior, unsecured debt as of September 30, 2008, that is scheduled to mature on or before June 30, 2009.
The FDIC has also published a Sample Election Form, Election Form Instructions and Guidance for Election Options and Reporting Requirements.