The Federal Deposit Insurance Corporation (FDIC) Board of Directors has issued a final rule to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). This rule provides temporary unlimited insurance coverage for noninterest-bearing transaction accounts at all FDIC-insured depository institutions (IDIs).
This unlimited coverage is separate from, and in addition to, the coverage provided to depositors with other accounts held at an IDI, offering businesses and consumers more protection than before. For example, if a depositor has a $250,000 certificate of deposit and a no-interest checking account with a balance of $75,000, both held in a single ownership capacity, he or she would be fully insured for $325,000 (plus interest accrued on the CD).
Section 343 defines a “noninterest-bearing transaction account” as “a deposit or account maintained at an insured depository institution with respect to which interest is neither accrued nor paid…and on which the IDI does not reserve the right to require advance notice of an intended withdrawal” (FDIC.gov). The separate coverage for noninterest-bearing transaction accounts becomes effective on December 31, 2010, and ends on December 31, 2012.
The Dodd-Frank Act provision is very similar to the FDIC’s Transaction Account Guarantee Program (TAGP), which was effective in December 2008 and expires on December 31, 2010. However, two key differences between the two rules are: 1) all non-interest and low-interest transaction accounts were included, and 2) financial institutions could “opt out” of participation.
The Dodd-Frank Act defines noninterest-bearing transaction accounts as only traditional noninterest-bearing transaction accounts. Unlike the TAGP, the Dodd-Frank Act definition of noninterest-bearing transaction accounts does not include either Negotiable Order of Withdrawal (NOW) accounts or Interest on Lawyer Trust Accounts (IOLTAs). Furthermore, all federally-insured financial institutions are required to participate-there is no option to opt out of providing this unlimited coverage.
All affected are not happy by this new rule. The FDIC received ninety-three comments from trade associations, insured depository institutions, and law firms, among others during the comment period. Several commenters expressed concerns over the unintended consequences of providing unlimited deposit insurance coverage for noninterest-bearing transaction accounts, contending that providing such coverage for these accounts promotes moral hazard.
Banks will be required to disclose and notify depositors of this new rule by December 31, 2010.