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The federal agency that insures bank deposits says it does not have the authority to seize deposits to stabilize failing banks, though finance experts warn the agency can impose losses on large depositors through other means.
The issue has come to the forefront due to a measure proposed by the government of Cyprus that would impose a one-time tax on all deposits in the country’s ailing banks.
The proposal is intended to stabilize the Cypriot banking sector, which has been exposed to major losses due to the southern European nation’s proximity to Greece.
The measure would “claw back” 6.7 percent of deposits under 100,000 euros ($130,000) and 9.9 percent of deposits above that threshold, using the revenue to stabilize failing banks’ balance sheets.
American officials say the Federal Deposit Insurance Corporation (FDIC), which regulates and insures American bank deposits, does not have the authority under current law to undertake a measure as radical as the one proposed in Cyprus.
“There is no way [the FDIC could implement similar measures to backstop the American banking sector],” said agency spokesman Greg Hernandez. “The FDIC does not claw back any insured deposits.”
He added that banks typically take on the entirety of deposits of financial institutions they merge with or purchase.
“In a whole bank transaction, the acquiring institution of the failed bank will assume all deposits no matter if they are above the deposit insurance limit,” Hernandez said.
The 2008 Troubled Asset Relief Program temporarily increased the deposit insurance threshold from $100,000 to $250,000; the Dodd-Frank financial regulation package made that increase permanent.
If a failed bank’s acquiring entity does not accept deposits above the insurance threshold, those depositors become creditors of the FDIC, Hernandez said.
In that case, he explained, “the FDIC will then make payments to depositors who are owed money that had been above the insurance limit.”
However, some financial experts warned that the FDIC can still take steps that leave some bank depositors out in the cold.
“The FDIC usually creates a merger of the failed bank, so all depositors are covered, but there have been cases where losses were taken by large depositors,” said Alex Pollock, a resident fellow at the American Enterprise Institute and former president and CEO of the Federal Home Loan Bank of Chicago.
Pollack noted two examples: Oklahoma City-based Penn Square Bank, which, legal scholars noted was “the largest bank failure in the FDIC’s history in which uninsured depositors suffered losses”; and IndyMac Bank, whose uninsured depositors were given dividends equal to half of their uninsured deposits.
John Berlau, senior fellow for finance and access to capital and the Competitive Enterprise Institute, noted that while FDIC cannot claw back deposits, it “has the authority to seize banks and ‘impose losses’” on uninsured depositors.
“Arbitrarily ‘imposing losses’ can be similar to claw backs,” Berlau said.
The American banking sector sought to reassure depositors on Monday in the face of potential bank-runs in Cyprus.
"Simply put, U.S. insured depositors are safe and their deposits are protected by a strong FDIC fund, a financially secure banking system and the full faith and credit of the U.S. government," James Chessen, chief economist for the American Bankers Association, told the Hill.