Are you ready for FDIC Part 370?

September 12, 2017

Introduced in April 2017, FDIC Part 370 is designed to facilitate prompt payment of insured deposits in the event that a large depository institution fails. The new rule helps to ensure stability of the financial system and economy. However, it also has significant IT implications for insured depository institutions (IDIs) with 2 million or more deposit accounts as well as their customers. Are you ready to comply?

From April 2020, IDIs are required to configure their depositary information in a system that can calculate the insured and uninsured amounts in each deposit. The FDIC will use these calculations to make deposit insurance determinations in the event an institution fails. Institutions must maintain complete and accurate information that the FDIC needs to determine deposit insurance coverage with respect to each deposit account. Although April 2020 is the official effective date, the FDIC will be making inquiries on progress even before then. To this end, banks need to be ready to begin test runs soon.

To pay deposit insurance, the FDIC uses a failed IDI’s records to aggregate the amounts of all deposits that are maintained by a depositor in the same right and capacity (ORC). There are 14 ownership right and capacity groups. These include: single; joint; certain retirement; revocable trust; irrevocable trust; employee benefit plan; corporation, partnership or unincorporated association; and government accounts. Each right and capacity has its own set of rules for applying insurance coverage. It generally relies on the failed institution’s deposit account records to identify deposit owners and the right and capacity in which deposits are maintained.

Each covered institution must have an IT system that can accurately calculate the deposit insurance of each beneficial owner of funds within 24 hours of the appointment of an FDIC receiver. The system must be able to create a record of the deposit insurance calculations showing how much of the deposit account is insured or uninsured as well as the ownership privileges. The entire account and customer relationship must be identified and put into required FDIC regulatory outputs.

Complying with FDIC Part 370 is a huge undertaking. To prepare, banks will need to determine what information they need, what they already have, and what is missing – and that is no easy feat. After many years of consolidation in the banking industry, information is often held in disparate systems that do not communicate well, and some records are still paper based. Banks may lack certain information required by the FDIC, in which case they need to figure out how to get it from customers or a third party.

One of the biggest problems for banks is accounting for incomplete or missing signature cards because that could have a significant impact on insurance payouts. To illustrate, if only one person on a joint account has signed the signature card, the account will be defaulted to a single account. That could affect the payout a person would receive if they already have a single account with that bank because the two accounts would be aggregated for insurance calculation purposes.

Moreover, for various reasons it may be challenging to collect information on pass through accounts from third parties such as custodians, fiduciaries and brokers. These entities will often open an account and manage the funds on behalf of sub accounts. The sub account information may be held at a branch whose systems are not up to date, for instance, or the third party firm may be closed for a holiday.

Another issue is that the information in their own systems may not necessarily have been updated to reflect changes pertaining to certain accounts. A revocable trust account, for example, could have multiple beneficiaries and varying ownership percentages. The owner of the trust has the right to change or cancel the trust at any time unbeknownst to the bank.

Other complexities exist as well. Insurance money could be assigned to a person who resides in a sanctioned country. In addition, it may be difficult to identify who is the actual beneficiary in an employee benefit plan account.

But there is a way to help address these challenges. By loading all the information into AxiomSL’s ControllerView platform, their FDIC Part 370 solution will help banks determine which required attributes of data are present and which are missing. Banks can identify, source and normalize key data elements that are required for the insurance calculation algorithm, output files and accompanying analytic reports. Account classifications and calculations are done at the deposit, account owner and beneficiary owner levels, depending on the ORC. The solution will determine the uninsurable amounts by account owner and apply the amounts to account owners’ deposits.

Using the AxiomSL solution, banks are able to fulfill the requirements to provide an IT control framework, standardize data attributes, generate the four FDIC output files and produce required control, summary and reconciliation reports (ex: Call Report). Visualization tools not only make the process completely transparent, but they also make it easier to sign off and attest the results. An added benefit is that the data can be re-used to produce other regulatory reports.

Going forward, banks will be scrutinized carefully to ensure that they are complying with FDIC Part 370. Senior managers who must sign off on regulatory reports are taking this matter very seriously. The best practice is for banks to move as quickly as possible to understand how much and what data is relevant. The faster they start to clean up their data, as well as identify and collect missing data, the smoother the compliance process will be.