WASHINGTON — The Federal Deposit Insurance Corp. board on Tuesday issued a proposed rule regarding custodial deposit accounts and finalized its policy on bank merger transactions.
The FDIC's proposal requires banks holding custodial deposit accounts used for transactions to maintain records that clearly identify the beneficial owners of those deposits and the account balance for each owner.
"Given the rapid growth and increased complexity of these third-party deposit arrangements, instituting requirements to strengthen record keeping in order to ensure knowledge of the actual owner of the deposits and to support the prompt payment of deposit insurance in the event of a bank's failure is necessary and past due," FDIC Chairman Martin Gruenberg said. "[The rule] is an important step to ensure that banks know the actual owner of deposits placed in the bank by a third party, whether the deposit actually has been placed in the bank, and that the banks are able to provide the depositors their funds even if the third-party company fails."
The proposal comes after third-party custodial arrangements — where fintech companies and other non-bank entities serve as intermediaries between consumers and FDIC-insured banks — have come under scrutiny in the wake of the
If finalized, the proposed rule would require banks to maintain detailed and accurate records identifying the beneficial owners of such custodial accounts so that, in the event of a bank's failure, the FDIC can promptly identify customers' funds and process deposit insurance claims. Banks would also be required to update the balance attributable to each owner. If a bank relies on a third-party entity to manage these records, it would need to ensure uninterrupted access to these records, even in the event of the third party's business disruption or failure. Banks would be required to conduct an annual independent validation of third-party relationships to ensure the accuracy and completeness of records and reconcile custodial deposit accounts daily, to ensure that balances accurately reflect individual ownership,
Accounts already subject to other robust record-keeping requirements — such as trust deposits and accounts established by brokers or investment advisers under securities laws — would be exempt from the requirement, as would cases in which transactions involved are minimal.
The proposal was unanimously approved by the bipartisan FDIC board, but not without some minor disagreements among the members. FDIC Board Vice Chair Travis Hill said while he approves the issuing of the proposal he voiced several concerns about its potential burdens on banks.
"While the Synapse story is still unfolding, these problems could have been identified much sooner if the partner banks maintained better records and conducted frequent, routine reconciliations," Hill said. "[However,] I strongly believe we should consider a minimum threshold for when the requirements of the rule apply … I encourage comments on what type of threshold we should consider — specifically, what metric and at what amount, and why?"
The FDIC also approved a final statement of policy on bank merger transactions, reflecting updates from the proposed
The FDIC's final statement emphasizes a thorough review of statutory factors like competition, financial resources and community impact. The policy introduces more rigorous standards for mergers involving banks with more than $50 billion of assets, including the expectation of public hearings, and it mandates heightened scrutiny for combinations that result in the creation of institutions with more than $100 billion of assets.
One of the notable updates from the proposal is the removal of the language suggesting that the FDIC would not approve mergers that result in a "weaker" institution. The final statement now clarifies that mergers will only be approved if the combined institution presents less financial risk than the separate entities. Additionally, while the policy still retains a focus on the competitive effects of mergers — especially in rural areas — it now accounts for the role of non-bank competitors, such as credit unions and Farm Credit System institutions, in assessing the impact a merger would have on market concentration in an area.
The final statement, however, retains the requirement for public hearings for mergers involving institutions that would result in a combined bank with more than $50 billion in total assets. In addition, merging parties must affirmatively demonstrate the transaction would benefit the resulting firm's community. The FDIC said examples of community benefits could include the resulting firm's ability to expand local access to financial services, new or improved banking products, increased lending to underserved populations, or lower fees for consumers.
The FDIC said while the size of a post-merger firm alone does not categorically disqualify the transaction, it will apply greater scrutiny to mergers involving institutions that would result in particularly large firms — like those with $100 billion in assets — that can pose systemic risks.
"The final statement emphasizes that size alone is not dispositive for determining the risk to the United States financial system's stability," the FDIC said in a release accompanying the rule. "[The proposal] nonetheless recognizes that transactions that result in a large IDI are more likely to present potential stability concerns."
Both Hill and fellow Republican FDIC board member Jonathan McKernan opposed the policy, with the latter saying the final statement maintained an inherent bias against bank mergers. He said his concerns — which include what he sees as the proposal's absence of metric-based safe harbors and a lack of clear and tailored guidelines for rural market mergers — had not been adequately addressed in the proposed rule.
The banking industry also came out against the merger policy revamp. Bank Policy Institute President and CEO Greg Baer said the policy would make merger consideration even less timely and less objective.
"The bank M&A market is already mired in regulatory uncertainty, and today's agency policy changes exacerbate it," Baer said. "The agencies' merger approval process needs a shot clock; instead they give us the Four Corners, extend the time for the game and create strange new rules."
