U.S. banks face complex compliance challenge with FDIC rules on deposit insurance

NEW YORK (Thomson Reuters Regulatory Intelligence) - Some of the largest U.S. banks are grappling with a relatively new regulatory requirement that forces them to identify all of their insured depositors in the event of a bank failure. While banks have until early 2020 to meet the Federal Deposit Insurance Corporation’s rules, called Part 370, experts say evidence on the ground suggests many fail to recognize how challenging it will be for them to comply.

Signs explaining Federal Deposit Insurance Corporation (FDIC) and other banking policies are shown on the counter of a bank in Westminster, Colorado November 3, 2009.

The final rule(here), which emerged last year, applies to banks with at least 2 million deposit accounts. That works out to about 40 banks covered by the rule, the largest of which has 87 million accounts, say experts.

The regulation aim is to ensure that bank-account holders have access to their insured deposits in the event of a bank failure. The FDIC requires that the institutions have the technological capability to quickly determine depositor insurance payouts should the bank face failure. From the FDIC’s perspective, providing funds to insured depositors should take no longer than one day, or a weekend at most, in the event of failure.

While traditional deposits should be easy to identify, there are complex structures – so called “pass through” accounts -- often inherited through past mergers or acquisitions that make identification of deposit holders more difficult.

“Most institutions don’t have a handle on who their customers are if they are not on deposit in their shop,” said Harry Chopra, chief client officer at AxiomSL, an industry solutions provider.

“The rationale is very sound, but banking used to be simple,” he added. “Today, you have a lot of deposit taking in different functions that fit in different places.”

Uncovering where those deposits are in the organization and their beneficial owners can be a logistical challenge, say Chopra and others, who see banks at different stages in determining the scope of the problem.


The accounts presenting the extra challenge in identifying beneficial owners are “pass-through” or “fiduciary accounts,” which are established and maintained by third parties on behalf of the actual owner, often referred to as the principal. Some examples are escrow, power of attorney, attorney trust accounts, agency and brokered CD accounts.

For the largest U.S. organizations there are many such accounts, making a proper reckoning of the beneficial owners a daunting exercise. Analysts estimate that the costs for larger institutions may be as much as $30 million per bank to develop systems that can identify the vast scope of required deposits and stand ready to report them to the FDIC.

“There is an enormous amount of work that needs to be done and most of the banks haven’t scratched the surface yet,” said Ed Probst, Head of North America Product at AxiomSL. “The largest of the banks have at least a program in place and have designated funding (for the project). But if you move down market and below the top five or eight banks, they are still figuring out what this means for them.”

“They know it’s enormous which is why the FDIC is paying them a visit and trying to understand where they stand,” he added.

FDIC officials are aware of the challenges involved and have been in consultation with many of the banks affected by the rule, according to those familiar with the process.

“The agency has devoted staff to the problems some banks are facing and have been very open to addressing their questions,” said one New York attorney working with several institutions.


When designing a reporting system for Part 370, analysts say it’s important to have a flexible system in place, one that is able to adapt to future changes of the rule which are more than likely.

“When it does go live there are bound to be changes,” added Chopra of AxiomSL. “If you are locked in an inflexible system there is going to be trouble.”

Meanwhile, for banks that find themselves still struggling towards the finish line, official sources say there will be various forms of regulatory relief provided to aid the transition process. This will be particularly the case for various types of deposits that are more complex in nature and more difficult to ascertain the beneficial owners.

(Henry Engler, Regulatory Intelligence, New York)