The recent spate of regulatory changes announced by the Federal Deposit Insurance Corporation (FDIC) calls for a large-scale transformation in banking processes. Last year, the FDIC introduced Part 370 of its rules and regulations for "Recordkeeping for Timely Deposit Insurance Determination." Specifically, it brings large banks under the ambit of the new law. The core purpose of Part 370 is to help FDIC fulfill its two mandates related to paying deposit insurance:
So what does this mean for banks?
For now, any banking institution with at least two million deposit accounts must give its customers rapid access to their insured deposits in the event of a bank failure. While failures are few and far between FDIC 370 aims to build a robust preventive structure that would enhance customer trust in the banking and insurance institution as a whole.
Given the complexity of deposit channels and stakeholders, experts estimate that banks will have a tough time adapting to this new mandate. FDIC itself gauges an average cost of $12.6 million to make each eligible institution compliance-ready. Further, the stipulated timelines make it even more difficult -- April 1, 2020, was set as the initial deadline. Considering the level of infrastructure and process change required, the FDIC has decided to offer a one-year optional extension -- but even that may not suffice.
According to the FDIC, the approximately 40 US banks which come under FDIC 370 will need to spend a massive 3-year period on implementation starting 2017.
Several challenges add to the time and cost complexities. To begin with, a large number of accounts do not comprise of traditional deposits. Instead, there is a sizable volume of passthrough accounts, inherited via mergers or acquisitions. Tracing the line of ownership and identifying the deposit holders in these cases is extremely trying.
Accounts managed by third parties on behalf of the principal (for example, a power of attorney leveraged by a commercial banking customer) throws an additional wrench in the works. It may take as much as $30 million per bank to build a framework that can map the entire deposit landscape and report it effectively to the FDIC before April 1, 2021.
One of the critical roadblocks to achieving this is the fragmented nature of data systems in the banking sector. On the one hand, the number of digital touchpoints is continually increasing, leading to a massive data influx. On the other hand, banks often lack the secure, interoperable, and agile capabilities to consolidate all of these touchpoints. With limited visibility, banks would struggle to conduct an audit at the scale mandated by the FDIC.
While the original Part 370 was limited to smaller institutions, the revision announced in July of 2019 deserves immediate attention from the more prominent banking players. By relooking at there existing systems and embracing digitally-empowered agility, banks would be able to keep pace with regulatory change and offer its customers enhanced trust, assured delivery, and continued support. Central to this is a flexible reporting solution that can aggregate data from multiple sources, identify correlations, and generate a comprehensive picture.
READ MORE: Case study | Top US bank revamps regulatory ecosystem to achieve 100% compliance with FDIC rule 370
As the FDIC personnel work with institutions to navigate compliance adherence, new bottlenecks will emerge, thereby birthing recent amendments to FDIC's rules for "Recordkeeping for Timely Deposit Insurance Determination." A flexible solution can quickly adapt to these changes without requiring greenfield implementation efforts or extra costs.
The reporting solution must be integrated with the popular core banking systems available today. Platforms like FinnOne, Temenos T24, etc. must all be compatible with the reporting solution upgrades adopted by banks.
Finally, banks require a robust data governance program that encompasses the end-to-end ecosystem, including traditional and non-traditional deposits, joint account deposits, situations where the depository institution is the trustee (DIT), and other customer types. The governance program would be able to analyze compliance requirements, identify possible relief areas, and position banks in a compliant yet profitable stance.
Any large-scale shift towards better processes and future-readiness depends on how agile is the banking institution. The first step is to conduct a thorough assessment, mapping the distance to cover for reaching compliance. Equipped with the right systems and technologies, banks would be able to quickly identify account owners, calculate insurance payouts, and deliver superior services without impacting their reputation on the rare occasion of a failure.