The End of Unlimited FDIC Insurance: How Banks Can Retain—and Depositors Can Protect—Their Uninsured Deposits

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In an attempt to limit the flight of deposits from insured depository institutions resulting from the 2008 fiscal crisis, Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provided temporary, unlimited deposit insurance coverage for non-interest bearing transaction accounts (“Transaction Accounts”) at all depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) for a period of two years starting December 31, 2010 (the “Dodd-Frank Deposit Insurance Program”). Effective January 1, 2013, the Dodd-Frank Deposit Insurance Program expired and, as a result, deposits in excess of $250,000 in Transaction Accounts maintained by banking customers at FDIC-insured depository institutions will no longer be insured by the FDIC in the event that the insured institution fails.

Following the termination of the FDIC’s unlimited deposit insurance program, certain insured depository institutions (smaller or lower-rated institutions, for example) may be concerned that non-interest bearing demand deposit account customers will seek shelter by withdrawing their deposits and transferring them to an institution perceived to be “safer.” Insured depository institutions (“Insured Institutions”) can limit deposit flight by offering a product that provides a practical solution to the loss of unlimited FDIC insurance: an internal repo sweep account in which the swept funds are invested in US government securities. An internal repo sweep arrangement that is “properly executed” will ensure that the dollar amount of the customer’s swept funds is fully protected (up to the value of the repo securities) in the event that the Insured Institution fails, and should encourage Transaction Account customers to maintain their deposits with the Insured Institution.

To understand why swept funds in an internal repo sweep arrangement will be fully protected (up to the value of the repo securities) in the event an Insured Institution fails, one needs to understand how the FDIC, upon institution failure, (i) treats internal repo sweep arrangements compared to external repo sweep arrangements, (ii) establishes a failed institution’s end-of-day ledger balance, and (iii) processes claims made against the receiver.

Please see full advisory below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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