FDIC's Account-Linking Proposal Threatens Financial Privacy

by Bert Ely

The Federal Deposit Insurance Corporation (FDIC) has issued for comment an Advance Notice of Proposed Rulemaking (ANPR) that will threaten financial privacy if it becomes an official regulation. This regulation would cost the banking industry millions of dollars annually to implement without delivering any benefit whatsoever to the FDIC. It is a solution looking for a problem to solve, which raises this question: What is the real rationale for this proposal?

Called the "large-bank deposit insurance determination modernization proposal," this seeming stab at increasing the efficiency with which the FDIC applies federal deposit insurance limits in failed banks in fact addresses a non-problem -- large banks rarely fail and when they do, the FDIC has ample time to determine which deposits are insured. Instead, this proposal represents the first step towards the federal government aggregating banking information across the entire U.S. banking system.

Initially, the country's largest banks and savings institutions (145, as of last June 30) would have to link together in their computer databases all accounts held in a bank by a single customer. Possibly this linkage would require the use of "a unique identifier for each depositor" and it might even require the largest 10 or 20 banks to maintain this account linkage on a real-time basis. For those interested in learning more, the ANPR was published in the

Once all accounts in a bank are linked by owner, then the next obvious steps are to require all banks to link their accounts by depositor and then to link accounts across banks. The "unique identifier" the FDIC envisions (think Social Security number or business tax ID number) could be the device for linking accounts across banks. Once in place, and with on-line access to bank databases (almost all of which already are on-line), the FDIC, or another government agency working through the FDIC, could at any time access all U.S. bank accounts of an individual, a business, or a non-profit organization, such as an advocate of financial privacy.

While the FDIC has only proposed to aggregate bank deposit balances, once account linkages have been established, then it becomes quite easy to monitor transactions in each account -- deposits made, checks paid, wire transfers to other parties, etc. -- in the same manner that the National Security Agency now screens electronic communications of all kinds in the usually futile attempt to identify evildoers. The reader can easily envision where this leads.

The ANPR states that "the FDIC is aware of the potential privacy issues surrounding the holding of depositor information and has in place strict safeguards to protect these data." The FDIC can provide absolutely no assurance, though, that those safeguards won't be violated when it suits the government to do so. Once data has been gathered, or can easily be accessed, then the ability to tap into that data often becomes too tempting.

Although the ANPR comment period closes on March 13, it is not too late to sink this data-gathering proposal before it gains much headway.

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Bert Ely is a financial institutions and monetary policy consultant in Alexandria, Virginia. He has been analyzing deposit-insurance issues and predicting bank failures for over 30 years.