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Uninsured Deposits at Failed Banks - How the FDIC Has Changed

POSTED ON BY

In my last Friday bank failure summary, there was a comment about deposits above the FDIC limit and what happens to those deposits when a bank fails and is acquired by another bank. Before the financial crisis in 2008, it was common for banks that acquired a failed bank to assume only the insured deposits. Deposits over the FDIC limit would not be assumed and those uninsured deposits would be lost. After the IndyMac Bank failure, this started to change. The buyers were increasingly assuming all deposits including deposits over the FDIC limit. I'm not sure why or how this happened. It appears that a decision was made at the FDIC to insist that the acquiring banks assume all deposits instead of just the insured deposits.

Now it's very rare for the acquiring bank to not assume all deposits even those above the FDIC limit. The only exception is brokered deposits. Most buyers don't assume brokered deposits. Banks probably don't see any benefit for assuming brokered deposits since there are no relationships to be gained.

You can review all my bank failure summaries for the last two years. I did a quick review of these to find what was the last bank failure in which the acquiring bank only assumed the insured deposits. I didn't do a thorough review, but it appears to be Alpha Bank and Trust in Georgia which failed on October 24, 2008. Here's what the FDIC's press release stated about the failure:

To protect the depositors, the FDIC entered into a purchase and assumption agreement with Stearns Bank, National Association, St. Cloud, Minnesota, to assume the insured deposits of Alpha Bank & Trust.

The FDIC also provided an estimation of the uninsured deposits:

At the time of closing, there were approximately $3.1 million in uninsured deposits held in approximately 59 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

When the buyer assumes both insured and uninsured deposits, the FDIC states that it'll "assume all of the deposits". Here's an example from last Friday's failures:

To protect the depositors, the FDIC entered into a purchase and assumption agreement with Centennial Bank, Conway, Arkansas, to assume all of the deposits of Gulf State Community Bank.

Further information is provided in the FDIC's Q&A Guide:

YOUR MONEY IS SAFE! No one lost any money on deposit as a result of the closure of this institution.

However, not all deposits were assumed by the buyer. Brokered deposits (Cede & Co. deposits) were not assumed. Here's what the FDIC's Q&A Guide stated:

As an All-Deposits Transfer transaction, the total of all deposit accounts, excluding the Cede & Co. deposits, have been assumed by Centennial Bank. If you are a customer who has a Gulf State Community Bank deposit through a broker, you must contact your broker with any questions.

Depositors should still make sure they keep their deposits under the insured limit. If the FDIC can't find a buyer, the FDIC will only pay out insured deposits. Uninsured deposits over the FDIC limit will be loss (some may be recovered based on the sale of the failed bank's assets).

I did a quick count of the banks that failed this year that weren't acquired by another bank. There appears to only be 7 banks out of 149. The last one was First Arizona Savings, A FSB, in Arizona which failed on October 22nd. According to the FDIC's press release, there were potentially $5.8 million in uninsured deposits.


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Comments
15 comments.
Comment #1 by Anonymous posted on
Anonymous
Well, as unpopular  an opinion as mine may be, when a bank fails, I do not see any reason for the acquiring bank to take over any uninsured deposits.  Everyone knows the rules (or they should) and if they choose to gamble by deposting an amount above the insured limit, I see no reason those deposits should be protected when a bank fails.  I can see why some banks might wish to do so but I see no reason why anyone should it expect it to happen.  We expect the banks to play by the rules on their end.  I see no reason why bank customers should not play by the rules on their end.  We can hardly crap about banks that do not follow the rules if we don't and then cry foul when push comes to shove.  If consumers wish to gamble with their money, they have that right but they should be ready to pay the piper when they lose the gamble.

12
Comment #2 by Anonymous posted on
Anonymous
You won't get any arguments from me.  I totally agree.

1
Comment #3 by SaveYurMoney posted on
SaveYurMoney
If I didn't know better I would say that the FDIC is holding back on folding some banks because they cannot find a buyer who will assume all deposits of some of those weakest banks. That way the public does not get too concerned with the ever-mounting tally of bank failures going on. I wonder how many banks are on the brink but are allowed to operate because there is no other bank willing to buy them out under the FDIC's current (unwritten) policies.??

6
Comment #4 by Anonymous posted on
Anonymous
The Fed may well be doing just that, but I wonder if it might have been better had the Fed forbidden banks from assuming anything over the insurance limit (assuming they have the power to do that).  I suspect if they had done that, those people who are over the insurance limit at other banks would move quickly to make sure they were within the limit.  When there are so many banks and credit unions around, it seems to me to be the height of irresponsibility to be over the limit at any one institution.  If anyone loses money because they are over the insurance limit, they should not whine and moan about it when it is nobody's fault other than their own.

5
Comment #5 by pearlbrown posted on
pearlbrown
No argument from me on any of comments 1-4.

3
Comment #6 by Anonymous posted on
Anonymous
The rules are simple, stay under the FDIC limit, what is the problem and what is there to discuss.

If some persons are stupid, let them learn the lesson the hard way, period.

10
Comment #7 by me1004 posted on
me1004
First, I disagree with the suggestion of the situation prior to IndyMac, that depositors over the limit routinely lost that extra money when a bank was shut down. It seems to me that prior to IndyMac, the Fed normally did try to save all depositors -- but there was no presumption that it would do so. One reason IndyMac was such a big deal was that it was such a big bank and the Fed chose NOT to protect all the depositors -- which was not the norm prior to that. It was sending a message because it saw the depletion of the insurance fund in the not too distant future and was trying to reduce any further loses.

As I recall, prior to IndyMac, the Fed was paying out of the insurance fund. Now, post IndyMac, it is trying to avoid that by transferring all the deposits to other banks, including those over the limit. The Fed then deals with liquidating or closing down the rest of the failing bank, including any delinquent loans. The loses to the business are in the delinquent loans, not in the deposits. And it is the shareholders who are going to be the big losers.

I think everyone is presuming this means the Fed is losing more money, paying out for something that was never paid in for. This has many complications, but I'm not so sure this doesn't mean the Fed is MAKING more money. 

Can the Fed not sell $1.5 billion of deposit assets for more than $1 billion worth of deposit assets? Thus, the Fed is making more money on the sale, but has no additional expense. And the depositors don't lose money. 

But those depositors have no guarantee that is what will happen. In fact, the Fed every once in a while has NOT sold a bank's assets and has just paid out on its insurance. 

Thus, those over the limit will not automatically lose all. But it is a risk that they might. Is there anything wrong with the Fed arranging that no depositors lose money as long as neither does the Fed?

3
Comment #8 by Anonymous posted on
Anonymous
I think that a lot of people are conflating the Federal Reserve ("the Fed") with the Federal Deposit Insurance Corporation ("the FDIC").  These are not the same thing.

16
Comment #9 by Anonymous posted on
Anonymous
m1004:  Nope, nothing "wrong" with doing it and I don't see where anyone was implying that the Fed was losing money when they arranged for all of the deposits to be taken over.  BUT they are most definitely encouraging people to keep money over the insurance limit by pressuring the new bank to take over deposits above the limit.  They are encouraging bad behavior which is what consumers have accused them of doing for the banks.  My point is, why should consumers expect banks to play by the rules if we don't do so ourselves?  If I were all-powerful, every penny that was over the insurance limit would be lost whenever a bank failed.  If it is not happening, there is not much I can do about it, but I think anyone who loses money BECAUSE they were over the limit (which is more than DOUBLE what it used to be) and has the audacity to complain or whine about it should be banned from using banks completely.

3
Comment #10 by Anonymous posted on
Anonymous
Sometimes depositors may not be aware they are over the limit.  The rules get pretty complicated, especially when there are trusts involved.  The beneficiaries of the trust are counting on the trustee to keep their money safe.   I do a lot of banking, and I have never met a bank employee who was knowledgable about the insurance limits and trusts.  I will not open an account if it is not insured by the FDIC.  The best I have encountered is we can let our legal dept. look it over.  I go to the FDIC website and calculate my own insurance amounts based on their online calculator.  I know this opinion is not a popular one.

3
Comment #11 by me1004 posted on
me1004
Anon #8: right you are. I meant to say FDIC, but accidentally said Fed. 

Anon # 9: I don't think the FDIC is "pressuring" other banks to buy all the deposits. The other banks WANT the deposits, its how they build their business. 

This is no guarantee that depositors over the limit will be rescued. And that means risk to those depositors, unlike to those within the limits. But risk does not mean you must always lose. 

The deposit limits are to protect the FDIC fund, not as some kind of rule of safety and responsibility for depositors. If the fund is not hurt by this practice, and in fact I think it is saved, then I see nothing wrong with it. But in some cases, it might be expedient to merely liquidate the bank rather than sell off the deposits, or there might not be any immediate buyers for the deposits in that area -- and in that case, the over-limit depositors face a loss. 

While the over-limit depositors are not guaranteed to be saved, I don't see need to guarantee that they will lose. I don't see any harm to the system in them having more than the limit in a bank, if they want to take that risk. The only issue is that to bail them out via the FDIC fund would be too heavy a burden on the fund.

(Just FYI. no, I am not over limit in any bank.)

3
Comment #12 by macinfla (anonymous) posted on
macinfla
Sorry if I missed the answer to this in the article, but who does pay off brokered CD's in a failed bank? "See your broker" isn't too comforting. Would the FDIC pay those accounts off directly?

2
Comment #13 by pearlbrown posted on
pearlbrown
@macinfla  The FDIC pays those accounts as well (to the extent they are insured, and depending on whether non-insured deposits are assumed by the acquiring bank).  However, it is my understanding that there may be a slight delay in doing so as there are extra steps that must be taken in order to determine the amount that is fully insured for an individual. 

The FDIC has a great article "Certificate of deposit: tips for savers" which may be of general interest and the section titled "For brokered CDs identify the issuer" may be especially relevant.

http://www.fdic.gov/deposit/deposits/certificate/index.html

 

2
Comment #14 by pearlbrown posted on
pearlbrown
@macinfla  Here is another reference which may also be helpful:

http://www.fdic.gov/bank/individual/failed/indymac_q_and_a.html#Deposit%20Broker

It is Q&A for the IndyMac failure, and unfortunately it does include the phrase "you must contact your broker with any questions". 

As a point of interest, it also explains why there might be some slight delay in paying off insured funds.  The article indicates that the broker must provide a balanced investor file and additional documentation to the FDIC for use in paying insured funds. 

HTH ~

2