July 18 (Bloomberg) -- The Federal Deposit Insurance Corp. set a rule for banks to improve its ability to determine whether a customer's deposits are insured and speed up payouts in a bank failure. The U.S. banking industry said the rule is a burden.

The FDIC is requiring that 159 banks with at least $2 billion in U.S. deposits, and either $20 billion in assets or 250,000 account holders, keep records that will give quick access to customer information, the Washington-based regulator said in a notice to banks published yesterday on its Web site.

``Given that few banks will fail, this rule will impose a lot of burden on a lot of banks for no reason,'' said Mark Tenhundfeld, senior vice president of regulatory policy at the American Bankers Association, a Washington-based industry group.

The FDIC took over IndyMac Bancorp Inc., with $19 billion of deposits, July 11 after the bank failed to raise cash amid the worst housing crisis since the Great Depression. The collapse of the Pasadena, California-based bank threatens to spur withdrawals from banks ranging from First BanCorp in Puerto Rico to Los Angeles-based Nara Bancorp Inc. as customers trim accounts to below the $100,000 limit on deposit insurance, according to Sandler O'Neill & Partners LP.

The action will help pay off insured deposits as soon as possible and help ``maintain public confidence in the banking industry,'' the regulator said. It will also ``mitigate the spillover effects of a failure, such as risks to the payments system, problems stemming from depositor illiquidity and a substantial reduction in credit availability.''

18 Months

Banks have 18 months to comply with the rules that go into effect on Aug. 18.

The FDIC hasn't signaled that it will increase the insurance coverage prior to a scheduled adjustment in 2010. The limit was raised in 1980 to $100,000 from $40,000. The policy covers checking, savings and money market accounts as well as certificates of deposit. William Isaac, FDIC chairman from 1981 until 1985, said the regulator should resist pressure to raise the amount, suggesting consumers read the rules and avoid banking with risky institutions.

``We really do want people to pay attention to where they're putting their money,'' said Isaac, now chairman of LECG Corp.'s Secura Group, a consulting firm in Vienna, Virginia. Protecting everybody ``just erodes the discipline of the marketplace and creates a moral hazard that could bring us bigger problems later.''

Retirement Accounts

Three years ago, the FDIC raised the protection for some retirement accounts to $250,000. While the regulator doesn't guarantee that any uninsured funds get recovered, consumers can protect more money by opening up accounts with family members or at different banks. In 2010, the $100,000 limit will rise at a level tied to inflation, said spokesman Andrew Gray.

The new FDIC rules will require banks to standardize the information they provide on deposit accounts and to establish systems to automatically place holds on accounts with large deposits, the Wall Street Journal reported. The FDIC also proposed rules for how it determines the value and nature of claims against a failed bank, the newspaper said.

Banks and brokers have taken more than $435 billion of writedowns and credit losses since the beginning of last year as mortgage-backed securities, collateralized debt obligations, leveraged loans and other fixed-income assets lost value.

The FDIC had 90 banks on its ``problem list'' with $26.3 billion in assets as of March 31, up from 76 banks and $22.2 billion in assets at the end of December.

To contact the reporters on this story: Vernon Wessels in London at vwessels@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net.

Last Updated: July 18, 2008 14:23 EDT