WASHINGTON — Despite protests from the financial services industry, the Federal Deposit Insurance Corp. said Tuesday that it would go ahead with a plan to require millions of dollars of system upgrades at large banks to prepare the agency to handle a colossal failure.
The FDIC's board unanimously finalized a rule that will require 159 institutions to bring customer data systems in line with the agency's and to be able to freeze certain deposits automatically while it completes a resolution.
The vote ended a nearly three-year process that included three different proposals and industry opposition at every turn.
Industry representatives continued to assail the plan Tuesday, saying its costs would far outweigh the likelihood of a large failure. By some estimates, the upgrades will cost banks $2 million to $10 million.
"They have to come up with some very expensive changes to their systems for the remote chance that any one of them will fail," said Rob Strand, a senior economist for the American Bankers Association. "This is a difficult time right now for banks to pay this cost for internal systems which very likely will never be needed, and the resources could be better employed. Certainly, we've seen banks fail, but we've seen very few."
FDIC officials said that better preparation is crucial, and that the industry got its chance to weigh in.
"We certainly went through extensive processes to make sure the industry had lots of input on the final rule," FDIC Chairman Sheila Bair said at the board meeting.
Vice Chairman Martin Gruenberg said the rule gives the agency "critical authority that we need to deal with the eventuality of a large-bank failure."
The rule will apply to banks with at least $2 billion of domestic deposits that have more than 250,000 accounts or assets of $20 billion.
These banks must adopt a standard format for recording customer information. The data format is meant to help the agency link multiple accounts for a single customer quickly, enabling it to assess whether a customer's deposits fall above or below the insurance limit. Linking such accounts manually would be difficult, since the nation's largest banking companies have more than 50 million accounts.
The more demanding requirement is that banks enable their systems to put a hold on a small portion of deposits in the event of a failure. The FDIC will set the amount held according to an estimate of the bank's losses at the outset of the resolution. The hold is intended to block customers from withdrawing funds before the agency can conclude whether they are insured.
If a customer's frozen funds are determined to be insured, the bank's system must be able to release the hold, so the customer can regain access to the money.
James Marino, a project manager in the FDIC's division of resolutions and receiverships, said the hold system will prevent major disruptions in the deposit operations of a large bank that fails.
"For these larger institutions, they could fail any day of the week," Mr. Marino said. "You can't rely on an orchestrated Friday closure for these institutions. Also, for these larger institutions, you can't shut down their deposit operations pending the FDIC's insurance determination. You really have to have the bridge bank open the next day."
The final rule lightened the load for some institutions. It created an exemption for banks specializing in credit card lending, since their deposit holdings typically are more straightforward than those of other institutions. The rule also allowed banks and thrifts to apply for a longer implementation period. (The standard period is 18 months from the rule's effective date, which is 30 days from its publication in the Federal Register.)
The agency also can accelerate the implementation time for institutions that have Camels ratings of 3 or worse or show other signs of financial distress, such as liquidity stress.
Mr. Marino said the FDIC worked to minimize the burden of the rule.
"We believe we've arrived at the least costly proposal for the industry," he said.
The FDIC estimated that the plan will cost regional banks $2 million to $4 million. In its comment letter, Bank of America Corp. said the proposed rule would cost the Charlotte company $8 million to $10 million.
Mr. Marino said the rule will be less burdensome on institutions that manage their deposit account systems through a third-party vendor, rather than those that do the work in-house.
"Typically the larger institutions have in-house, custom systems, and so they will have to do this themselves," he said. "On the smaller end, typically you will find the bank works with a vendor."
Industry observers said the agency had not adequately shown the cost benefit of the plan.
"They have yet to demonstrate that there is any financial benefit for the FDIC," said Bert Ely, an independent consultant based in Alexandria, Va.
As part of the board vote, the FDIC approved an interim rule clarifying that the agency will use the deposit balance the bank posts at the end of each day to determine which deposits qualify for insurance if the bank fails.
That rule aims to resolve confusion over certain sweep accounts by reinforcing that deposits moved into offshore sweep accounts for the purpose of generating higher yields are not insured. A recent court ruling forced the FDIC to pay insurance on such funds, because the agency had not spelled out the policy in regulation.
