By Chris Cole
The FDIC’s comprehensive review of the regulatory approach to brokered deposits and interest rate caps for banks that are less than well capitalized carries with it two pieces of good news for community banks.
The first piece of good news is contained in the FDIC’s advance notice of proposed rulemaking itself. The ANPR provides new statistics on the beneficial impact of an ICBA-advocated provision of the S. 2155 regulatory relief law that allows well-capitalized and well-rated banks to exclude reciprocal deposits as brokered deposits up to the lesser of 20 percent of total liabilities or $5 billion.
According to the ANPR, brokered deposits reported in quarterly call reports dropped from $48.5 billion on March 30, 2018, to $17.1 billion on June 30 and $13.7 billion on Sept. 30. For banks with less than $1 billion in assets, reciprocal deposits as a percent of brokered deposits declined from 33.7 percent on March 31, 2018, to 15.4 percent on June 30 and 11.5 percent on Sept. 30.
In other words, community banks were able to exclude from their call reports a significant amount of reciprocal deposits as brokered deposits due to this S. 2155 provision—which surely improved CAMELS ratings and FDIC assessment rates for many institutions.
The second bit of good news is the review itself—it’s badly needed. As ICBA wrote in a new comment letter on the review, brokered deposits can be a stable source of funding and a cost-effective way for community banks to meet their funding needs. However, there is an undeserved stigma surrounding brokered deposits that needs to be dispelled.
In our comment letter, ICBA noted that the FDIC has too expansively interpreted the definition of “deposit broker” and too narrowly implemented statutory exceptions. This hinders community banks as they partner with third parties, such as federal or state agencies that use debit or prepaid cards to deliver funds to government program beneficiaries.
Further, the FDIC’s national rate restrictions on less-than-well-capitalized banks are out of step with the market. As we advocated in our letter, rate restrictions should be raised and reformed to ensure the current, faulty methodology doesn’t lead to a liquidity crisis of its own making and doesn’t unnecessarily loop in well-capitalized institutions. (More on that issue is available in this American Banker op-ed.) Together, these reforms will ensure a more sensible regulatory approach to brokered deposits that avoids undue restrictions and stigmas.
Overall, these positive developments reflect the years-long advocacy efforts of ICBA and community banks that have come to fruition with the passage of S. 2155 and the more positive regulatory environment in which we’re operating. Together, we are creating and promoting an environment where community banks flourish!
Chris Cole is executive vice president and senior regulatory counsel at ICBA.