FDIC Proposes Revisions to Brokered Deposit Restrictions
Commentary by Thomas Delaney
The FDIC proposed amending rules concerning restrictions on brokered deposits for insured depository institutions ("IDIs") that are not well-capitalized.
Explaining the need for the amendments to FDIC Rules 303.243 and 337.6 ("Brokered Deposits"), the FDIC argued that "less than well-capitalized IDIs may rely on less stable third-party deposits for rapid growth that could ultimately expose the [Deposit Insurance Fund] to increased losses." The FDIC asserted that "many IDIs do not correctly apply the definitions in the rule, particularly with respect to the involvement of additional third parties within a deposit placement arrangement, ... [which] has led to a number of IDIs misreporting brokered deposits as nonbrokered." In addition, the FDIC said that current regulations do not address "how an IDI that no longer meets the definition may regain its status as 'agent institution' to qualify for the exception."
The FDIC proposed:
- modifying the definition of "deposit broker" and revising the interpretation of the "primary purpose" exception related to this definition;
- updating two specific business relationships under the primary purpose exception and altering the notification and application procedures for this exception; and
- clarifying when an insured depository institution can regain its status as an "agent institution" under the limited exception for a capped amount of reciprocal deposits.
Comments are due within 60 days of the proposed rule's publication in the Federal Register.
Commentary
For 50 years, the FDIC has been concerned about the correlation of brokered deposits and high-risk lending by insured institutions in troubled condition.
The FDIC found that brokered deposit use is associated with a higher probability of failure by insured institutions. When such institutions fail, the payouts can be substantial. For instance, when IndyMac bank failed in 2008, 30 percent of its deposits were brokered deposits. The estimated loss to the FDIC from IndyMac alone was $12 billion. While the FDIC has the authority to restrict the amount of brokered deposits that can be received by institutions considered to be less than well capitalized, the FDIC's ability to clamp down more effectively has been limited by the absence of a clear definition of what is a brokered deposit.
The revisions proposed by the FDIC are designed to address this deficiency. In particular, the proposal focuses on exclusive broker relationships and other arrangements that are excluded from the definition of brokered deposits. Brokered deposits can play an important role in the financial system, both as a source of liquidity to well-run institutions and as a means for depositors to diversify deposits in FDIC insured institutions. As a result, brokered deposits increase FDIC insurance coverage. However, the regulatory scheme governing brokered deposits is unnecessarily complex and overdue for improvement.