FDIC Deposit Insurance Coverage

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FDIC DepositInsurance Coverage

• Changing Values, Steadfast Purposes

Africa Regional Committee Workshop on DIS
Coverage and Public Awareness, Abuja, Nigeria, 13
15 August 2008
Slides and data from FDIC staff and www.fdic.gov
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FDIC Deposit Insurance CoverageMajor moments in
deposit insurance history
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Basic Coverage LevelsChanging Values, Steadfast
Purposes

• Deposit insurance coverage set at 2,500 as a
  temporary measure permanent plan called for
  10,000 coverage to start in July 1, 1934
  permanent plan never took effect.
• 2,500 coverage limit was first proposed as a way
  of competing with the US Postal Savings Banks,
  which had become a safe haven to depositors, but
  offered no intermediation value to the broader
  economy 2,500 also proposed as a temporary
  measure to provide FDIC time to evaluate
  appropriate coverage.
• Deposit insurance legislation enacted in 1933
  following the failures and suspensions of over
  6,000 banks between 1929 and 1933 deposit
  insurance created, in part, to restore
  confidence in banking system.
• Providing a limited guarantee was critical in
  getting political and industry support.
  Unlimited protection provided by some State
  deposit insurance systems lacked credibility and
  proved ultimately unsuccessful.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes
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Basic Coverage LevelsChanging Values, Steadfast
Purposes
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Basic Coverage LevelsChanging Values, Steadfast
Purposes
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Basic Coverage LevelsChanging Values, Steadfast
Purposes
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Basic Coverage LevelsChanging Values, Steadfast
Purposes
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Basic Coverage LevelsChanging Values, Steadfast
Purposes
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Basic Coverage LevelsChanging Values, Steadfast
Purposes

• The Deposit Insurance Reform Act of 2005 (enacted
  in 2006) allowed deposit insurance coverage to
  keep pace with inflation
• Most domestic deposits insured up to 100,000
  deposits in certain retirement accounts are
  insured up to 250,000
• foreign deposits held in foreign branches are
  not insured by the FDIC.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes
Future Coverage Levels can be increased to keep
pace with inflation

• Beginning in 2011, coverage may be increased in
  10,000 increments every five years using an
  inflation index published by the US Department of
  Commerce.
• FDIC Board to consider  
• The overall state of the Deposit Insurance Fund
  and the economic conditions affecting insured
  depository institutions
• Potential problems affecting insured depository
  institutions
• Whether the increase will cause the reserve ratio
  of the fund to fall below 1.15 percent. 
• Coverage can only be increased, and adjustments
  are rounded-down 

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Basic Coverage LevelsChanging Values,
Steadfast Purposes
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Basic Coverage LevelsChanging Values, Steadfast
Purposes

• The Latest Data
• FDIC publishes extensive information on the
  banking industry and Deposit Insurance Fund each
  quarter
• http//www4.fdic.gov/QBP/qbpSelect.asp?menuItemQB
  P
• As of 31 March 2008, FDIC insurance covered about
  62 percent
• Deposits in Domestic Offices 7.1 Trillion
• 4.4 Trillion is covered by FDIC insurance
• 2.7 Trillion uninsured
• Well over 90 percent closer to 98 percent -- of
  all domestic deposit accounts are insured by the
  FDIC
• FDIC does not insure or assess deposits held in
  foreign offices of U.S. banks -- 1.5 Trillion

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Basic Coverage LevelsChanging Values, Steadfast
Purposes

• While coverage limits have changed eight times
  since1933, the principles guiding these changes
  have been steadfast
• Protect small savers
• Preserve confidence in the banking system.
• Promote a level playing field for small banks
• Limit moral hazard
• Promote market discipline

• Protecting depositors with small balances, which
  represent the majority of American depositors,
  has been a fundamental goal of deposit insurance
  in the US

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Basic Coverage LevelsChanging Values, Steadfast
Purposes

• While coverage limits have changed eight times
  since1933, the principles guiding these changes
  have been steadfast
• Protect small savers
• Preserve confidence in the banking system.
• Promote a level playing field for small banks
• Limit moral hazard
• Promote market discipline

• Both in times of prosperity and stress, deposit
  insurance and an appropriate level of coverage
  have served as a reminder to the public of the
  resiliency of the US banking system and the
  framework that supports it.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes

• While coverage limits have changed eight times
  since1933, the principles guiding these changes
  have been steadfast
• Protect small savers
• Preserve confidence in the banking system.
• Promote a level playing field for small banks
• Limit moral hazard
• Promote market discipline

Small bank, those under 1 billion, make up the
majority (92 percent) of banks in the United
States and have been steadfast supporters of
deposit insurance and appropriate coverage limits
as it helps them better compete with large banks
for deposits.
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Basic Coverage LevelsChanging Values, Steadfast
Purposes

• While coverage limits have changed eight times
  since1933, the principles guiding these changes
  have been steadfast
• Protect small savers
• Preserve confidence in the banking system.
• Promote a level playing field for small banks
• Limit moral hazard
• Promote market discipline

Since coverage is not excessive and losses can be
incurred, bankers and depositors alike are
discouraged from excessive risk-taking.
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Basic Coverage LevelsChanging Values, Steadfast
Purposes

• While coverage limits have changed eight times
  since1933, the principles guiding these changes
  have been steadfast
• Protect small savers
• Preserve confidence in the banking system.
• Promote a level playing field for small banks
• Limit moral hazard
• Promote market discipline

Market discipline is a primary force that
influences bank risk-taking behavior. Explicit,
limited deposit insurance coverage create
incentives for sophisticated depositors to exert
discipline while providing easy-to-understand
protection to unsophisticated small savers.
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Basic Coverage LevelsChanging Values,
Steadfast Purposes

• FDIC Insurance Coverage The Basics

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Basic Coverage LevelsChanging Values, Steadfast
Purposes FDIC Insurance Coverage Basics

• The basic insurance limit is 100,000 per
  depositor, per insured institution.
• Depositors eligible to receive insurance coverage
  include
• natural persons (individuals)
• corporations
• partnerships and unincorporated associations
• public units (state and local governments).

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Basic Coverage LevelsChanging Values, Steadfast
Purposes FDIC Insurance Coverage Basics

• Insurance coverage is based on the concept of
  ownership rights and capacities.
• Deposits maintained by a person or entity in
  different ownership rights and capacities at one
  institution are separately insured up to the
  insurance limit.
• Depositors may qualify for more than 100,000 in
  coverage at one insured bank if they own deposit
  accounts in different ownership categories.
• The most common ownership categories are
• Single Accounts
• Self-Directed Retirement Accounts
• Joint Accounts
• Revocable Trust Accounts

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Basic Coverage LevelsChanging Values, Steadfast
Purposes FDIC Insurance Coverage Basics

• Types of Deposit Accounts that FDIC Insures
• FDIC insurance covers all types of domestic
  deposits received by a bank in its usual course
  of business, including
• Checking accounts
• Demand deposit accounts (DDAs)
• Negotiable order of withdrawal (NOW) accounts
• Money market deposit accounts (MMDAs)
• Passbook and statement savings accounts
• Time deposits, including certificates of deposit
  (CDs)
• Official items such as
• Money orders
• Interest checks
• Travelers checks
• Expense checks
• Official checks/cashier's checks

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Basic Coverage LevelsChanging Values, Steadfast
Purposes FDIC Insurance Coverage Basics

• Cross-boarder Implications
• By law, the FDIC insurance only protects deposits
  held in domestic offices of banks chartered in
  the US
• Deposits in foreign offices of US banks are not
  insured and are not assessed for deposit
  insurance, and are not included in reserve ratio
  calculation
• Deposits in wholesale US branches operated by
  foreign banks are not covered by FDIC insurance
• Foreign banks that wish to conduct retail deposit
  operations in the US must charter a bank in the
  US and comply with US laws and regulations
  applicable to all domestic banks
• The Basel Committee on Banking Supervision has a
  Cross-Boarder Resolution Subcommittee that is
  assessing practices conducted by member
  countries

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Basic Coverage LevelsChanging Values, Steadfast
Purposes FDIC Insurance Coverage Basics

• Types of Bank Products that FDIC Does not Insure
• Many banks offer their customers a range of
  investment products that are not deposits and
  therefore are not covered by FDIC insurance.
• Examples of non-deposit products that are not
  insured by the FDIC include
• Investments in mutual funds, including money
  market mutual funds and mutual funds that invest
  in stocks, bonds, and other securities
• United States Treasury securities (Note United
  States Treasury securities are backed by the full
  faith and credit of the United States
  government.)
• Annuities, which are contracts underwritten by
  insurance companies guaranteeing income in
  exchange for a lump sum or periodic payment
• Stocks, bonds or other securities
• Insurance products, such as automobile and life
  insurance
• Safe deposit boxes (Note The contents of safe
  deposit boxes may be covered by the bank's hazard
  insurance and/or the boxholder's homeowners or
  renters insurance.)

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Basic Coverage LevelsChanging Values, Steadfast
Purposes FDIC Insurance Coverage Basics
Example Maximum Deposit Insurance Coverage
Family of Four
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Public AwarenessHow does the FDIC inform
depositors about insurance coverage?

• FDIC provides extensive education and training
  for
• bank employees
• depositors
• Banks advertisements are required to include
• Member, FDIC for deposit advertisements
• For non-deposit investments and transactions,
  banks must disclose not insured by the FDIC

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Public AwarenessHow does the FDIC inform
depositors about insurance coverage?

• Extensive information available on
  www.fdic.gov/deposit/deposits/index.html
• Electronic Deposit Insurance Estimator (EDIE)
• Online order form to obtain Publications,
  Videos, CD-ROMS
• Guides
• Insuring your deposits (English, Spanish,
  Chinese, Korean)
• When a bank fails Facts for Depositors,
  Creditors and Borrowers
• Frequently Asked Questions, etc. etc.

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Basic Coverage LevelsChanging Values,
Steadfast Purposes

• FDIC Insurance Coverage Practical Applications
• Responding to a Bank Failure

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Determining insured coverage status is one of the
  most critical functions performed by the FDIC
  after a bank fails.
• Effective management information systems,
  coordination with other safety net participants,
  and timely access to depositor information will
  help promote timely payment of insured deposits.
• When an insured institution fails the FDIC relies
  upon the deposit account records of the failed
  institution to determine the ownership of an
  account and thus the amount of insurance coverage
  available.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• There are two resolution methods that
  fully-protect insured depositors and can impose
  losses on unprotected creditors
• By law, FDIC must use the least cost method
  unless there is a systemic risk determination
• Liquidation and reimbursement of depositors
  claims (FDIC pays insured depositors)
• 2. Purchase and assumption transactions (FDIC
  transfers insured deposit accounts to a healthy
  bank)
• FDIC typically takes over a failing bank COB
  Friday and makes insured deposits fully-available
  the next Monday. For insured depositors, a
  solution may resemble an unassisted bank
  acquisition.
• Open bank assistance likely to require systemic
  determination

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• The Systemic Risk Exception allows the FDIC to
  bypass the least cost method if
• it "would have serious adverse effects on
  economic conditions or financial stability" and
• if bypassing the least cost method would "avoid
  or mitigate such adverse effects
• The systemic risk exception requires the approval
  of two thirds of the members of the FDIC's Board
  of Directors
• two thirds of the members of the Board of
  Governors of the Federal Reserve System
• and the Secretary of the U.S. Treasury, who must
  first consult with the President.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Background
• The deposit insurance determination process has
  several steps
• Each step varies in time and complexity,
  depending on the institutions characteristics
  (primarily the number of deposit accounts and
  deposit systems).

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Current Process
• Close Out the Days Business
• Obtain Deposit Data
• Process Deposit Data
• Place Holds or Debits on Insurance Determination
  Results
• Settle Final Insurance Claims

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Current Process
• Close Out the Days Business
• Obtain Deposit Data
• Process Deposit Data
• Place Holds or Debits on Insurance Determination
  Results
• Settle Final Insurance Claims

• On the day of an institutions failure, all of
  the days check processing and deposit
  transactions are completed.
• The length of this process can vary across
  institutions. For larger institutions this
  process can run into the early morning hours
  possibly ending the next morning

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Current Process
• Close Out the Days Business
• Obtain Deposit Data
• Process Deposit Data
• Place Holds or Debits on Insurance Determination
  Results
• Settle Final Insurance Claims

• A data file is obtained from the institution or
  its servicer.
• Obtaining usable requisite data from the
  institution or its servicer frequently is a
  time-consuming process.
• The FDIC will provide the institution or its
  servicer with a standard data request.
• The standard data request requires the
  institution to provide data for each deposit
  account along with electronic copies of trial
  balances.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Current Process
• Close Out the Days Business
• Obtain Deposit Data
• Process Deposit Data
• Place Holds or Debits on Insurance Determination
  Results
• Settle Final Insurance Claims

• Data are received, validated and
• reconciled to the banks general ledger.
• Using its Receivership Liability System the FDIC
  determines
• which accounts are fully insured,
• which are definitely uninsured and
• which are possibly uninsured (pending the
  collection of further information).

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Current Process
• Close Out the Days Business
• Obtain Deposit Data
• Process Deposit Data
• Place Holds or Debits on Insurance Determination
  Results
• Settle Final Insurance Claims

• FDIC places holds or debits based on insurance
  determination results.
• Accounts definitely uninsured are debited for the
  uninsured amount.
• Holds are placed on accounts that are deemed
  potentially uninsured for amounts over the
  insurance limit and the account owner is
  contacted.
• If additional information is required from the
  depositor, a meeting is scheduled.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Current Process
• Close Out the Days Business
• Obtain Deposit Data
• Process Deposit Data
• Place Holds or Debits on Insurance Determination
  Results
• Settle Final Insurance Claims

• Once coverage determinations are final, claims
  that can be settled are settled and other
  resolution activities continue

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• Treatment of insured and uninsured depositors in
  a recent Bank Failure
• The Office of Thrift Supervision closed IndyMac
  Bank, F.S.B. on COB Friday, July 11, 2008 and
  FDIC was named conservator. IndyMac had total
  assets of 32 billion, total deposits of 19
  billion, and Insured deposits of about 18
  billion
• On Monday, July 14, IndyMacs 33 branches
  reopened under FDIC operation as a bridge bank
  with normal hours, services, and on-line
  banking
• ALL Depositors had uninterrupted access to
  insured amounts
• About 10,000 uninsured depositor accounts
  received an advance dividend equal to 50 percent
  of the uninsured amount

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The Number of Accounts in the Largest Banks Makes
Rapid Insurance Determinations Difficult
Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure
Deposits and Deposit Accounts for the Five
Largest Commercial Banks and five Largest
Insurance Determinations
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Larger Banks are More Likely to Pose Systemic
Risk
Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure
10 Largest Banking Organizations
Banks with Assets lt 1 Billion
(7,995 banks or 92)
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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• The Future of Claims Administration and Coverage
  Determination at the FDIC

Making timely insurance determinations is of
critical importance

• Upon the failure of an FDIC-insured depository
  institution, the FDIC must determine the total
  insured amount for each depositor. To make this
  determination, the FDIC must ascertain the
  balances of all deposit accounts owned by the
  same depositor in the same ownership capacity at
  a failed institution as of the day of failure.
• A new rule requires, among other things, the
  largest insured depository institutions to adopt
  mechanisms that would, in the event of the
  institutions failure provide the FDIC with
  standard deposit account and customer
  information and allow the FDIC to place and
  release holds on liability accounts, including
  deposits. The amount held would vary depending
  on the account balance, the nature of the
  liability (whether it is a deposit or non-deposit
  for insurance purposes) and the expected losses
  resulting from the failure.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• The Future of Claims Administration and Coverage
  Determination at the FDIC

• A new rule that becomes effective August 18,
  2008 applies to an estimated 159 covered
  institutions with at least 2 billion in
  domestic deposits and either
• (1) more than 250,000 deposit accounts, or
• (2) total assets over 20 billion.
• Institutions meeting these criteria will be
  required to implement provisional hold capability
  in the event of failure, to provide standard data
  sets, and to automatically remove provisional
  holds and post FDIC insurance determination
  results.

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Basic Coverage LevelsChanging Values, Steadfast
Purposes Practical Applications Responding to a
Bank Failure

• The Future of Claims Administration and Coverage
  Determination at the FDIC

• Improve the timeliness of the FDICs claims
  determination through operational procedure
  streamlining and through the effective
  application of technology, including creating an
  ability to save insurance determination work
  completed before the closing window.
• Maintain or improve deposit insurance
  determination accuracy and improve the FDICs
  ability to measure that accuracy.
• Increase FDIC claims business process and system
  agility to address unpredicted data scenarios
  effectively, regardless of institution size and
  complexity.
• Implement a modular solution hosted in an
  environment consistent with the FDICs technical
  architecture that minimizes maintenance cost yet
  provides the benefit of upgrades to underlying
  hardware and software components.
• Retain high-quality customer service to sustain
  public confidence in the nations financial
  system.

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FDIC DepositInsurance Coverage

• Changing Values, Steadfast Purposes

Thank You