Information Leaflet – How Bank Account Holders in Puerto Rico are Protected against the Failure of their Bank or Credit Institution
The Commonwealth of Puerto Rico has a semi-sovereign status aparte as an unincorporated territory of the United States of America. Even though close ties remain with the USA, Puerto Rico is not governed by the US Office of Insular Affairs. Puerto Ricans are thus placed in a peculiar situation where some US-based codes apply to them while others do not. The legal system combines inherited and codified civil law with US common law interpretation. As for the financial system and central banking activities, the territory relies on the US Federal Reserve System. Local Acts are therefore combined with international codes and other regulation. This legal framework applies to commercial banks, state-owned development banks, mortgage institutions, international banking entities, savings and loan associations, investment banks, finance companies and other financial institutions.
Throughout the past decade, Puerto Rico’s government struggled to match income with expenditures. This led to an increase in public debt and several defaults on bond payments. As a result, the United States implemented the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The program aimed to restructure public debt and prevent the territory from being sued. Austerity measures and cumbersome debt restructuring plans have not yet produced the desired results. Even though not considered an international financial center, the government seeks innovative ways to advance this position.
Deposit Guarantee Scheme Puerto Rico: The government of Puerto Rico does not operate a bank deposit guarantee program. However, the financial industry is part of the Federal Reserve System of the US and subject to its federal regulations, supervision, the US Patriot Act and bank secrecy laws. Financial institutions can opt-in to be subject to further US oversight, alongside the Office of the Commissioner of Financial Institutions of Puerto Rico, for example by applying to the FDIC deposit insurance framework.
Distinction of Financial Institutions: Non-resident entities dealing with international clients and their affairs are separated from resident entities dealing with the local market in Puerto Rico. Another dimension is provided by commercial banks, International Financial Entities (IFE), trust companies, and money transfer businesses.
FDIC Secured Deposit Limit: Following the FDIC framework, bank deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, and per ownership category.
FDIC Member Banks in Puerto Rico: Banco Popular de Puerto Rico, Banco Santander Puerto Rico, Firstbank Puerto Rico, Oriental Bank and Scotiabank de Puerto Rico.
Alternatives to Bank Deposit Protection: The largest domestic banking institutions participate in the FDIC framework and therewith provide traditional deposit insurance. International Financial Entities are governed by the International Banking Center Regulatory Act and to a lesser extent Title Seven of the Laws of Puerto Rico.
Capital Requirements: Banks in Puerto Rico confirm to the Basel capital standards as well as the FDIC requirements. Levels of capitalization are above these requirements. Offshore and international banks that operate in Puerto Rico refrain from making loans to domestic persons. Consequently their loan books contain a different, lower risk profile.
Resolution Procedures for FDIC insured banks: The failure of an FDIC member results in resolution. The FDIC takes over management and control and investigates the most feasible route for resolution. This can be a restart of the operations, a sale to another institution, or dissolution. Deposit insurance is paid out. It may take up to 3 months for the resolution to be completed. In matters of dissolution, the FDIC is appointed as the official receiver and manages the collection of assets and the settlement of claims against the institution.
IFE Resolution Procedures: The Commissioner may revoke or suspend the license of an IFE. A statutory administrator or receiver is then appointed. The duties of the receiver are then to:
- Take possession of the assets and liabilities, books, records, documents and files which
belong to the international banking entity;
- Collect all loans, charges and fees owed to the international banking entity;
- Pay all obligations and debts of the international banking entity, after having paid the
necessary costs of the receivership; and
- Supervise the dissolution and liquidation of the international banking entity.
Applicable Timeframes: As soon as a FDIC member fails, the corporation acts quickly to protect insured deposits. This is done by selling the failed institution to another bank or by repaying depositors directly up to their insured limits. Such repayment is executed by bank check on the name of the creditor.
Repayment Conditions: FDIC reimbursements to depositors are limited by federal law. Banks that fail can be sold to another institution, restructured, or dissolved. New corporate ownership voids deposit contracts under US law. As a result, comprehension of the FDIC framework is needed to avoid disappointment.
Claim Rejections: The FDIC must confirm claim eligibility prior to reimbursement. Records of the bank are compared with the facts presented by the claimant to verify eligibility. It is possible to object to DGS claim rejections by providing the FDIC with sufficient evidence of claim eligibility to justify reinspection. Civil courts can challenge the persistence of the FDIC in rejecting a claim. However, in order to evaluate a claim’s merits, claimants must substantiate their position.
Excluded Institutions, Ineligible Claims, and High Balances: The regular liquidation procedures apply to unsecured creditors. A fair and impartial process is followed while taking the applicable creditor hierarchy into account. Therefore, civil claims against the institution only have a chance if they outweigh the general legal framework.
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