Figuring out how to update rules for banks that buy and sell deposits is proving to be more complicated than federal regulators had expected.
The Federal Deposit Insurance Corp. has been working on a proposal for rewriting its rules governing so-called brokered deposits, which some banks sell to third-party brokers, who then place them with other banks. The FDIC is asking whether it needs to update those rules in order to allow banks to more easily partner with financial technology firms, health savings account providers and other third-party companies that sweep deposits onto banks’ balance sheets.
Figuring out how to do that while remaining true to existing statutes is proving to be a bigger puzzle than anticipated, FDIC Chairman Jelena McWilliams said in an interview with Bloomberg Law.
“It’s a complicated and complex statutory language” and applying our current to interpretations of the statute to current practices has been hard, McWilliams said.
“There is just a lot of dichotomy,” she said Nov. 6.
Brokered deposits gained an infamous reputation during the 1980s, particularly around the savings & loan crisis. Many small savings & loans struggling to boost their capital levels offered vastly inflated interest rates on certificates of deposit and other products in order to attract deposit brokers.
The movement of those deposits to other banks offering higher rates contributed to many bank and thrift failures during the S&L crisis of the late 1980s and early 1990s. Those failures ultimately cost U.S. taxpayers around $132 billion.
In response, Congress instructed the FDIC to put together rules for brokered deposits in the 1989 Financial Institutions Reform, Recovery and Enforcement Act. The FDIC followed up by only allowing banks that are rated “well-capitalized” to get involved in the brokered deposits market.
The FDIC said in December that it would release an advanced notice of proposed rulemaking seeking information about whether it should update its brokered deposits rules, and if so, how to do it.
The key question, according to a Federal Register notice published in February, is whether there have been “specific changes that have occurred in the financial services industry since the brokered deposits regulation was adopted that the FDIC should be cognizant of as it reviews the regulation?”
New Deposit Tools
For banks, the answer is clearly yes.
Banks are more likely to engage in a partnership with a fintech where the fintech provides deposit or payments services, and then deposits customer money into an account at a bank. Other types of newer accounts include HSAs.
While those accounts do not look like the brokered deposits of old, they do raise concerns for some examiners, according to Alison Touhey, the American Bankers Association’s vice president for bank funding policy, said.
Any new FDIC rules should recognize the differences, she said.
“It’s a recognition that there are a lot of ways to gather deposits, and just because you’re gathering deposits in a way that’s different than the 1980s doesn’t make those deposits riskier,” she said.
The other concern for banks is that, just because the rules state that brokered deposit rules apply only to banks that are not well-capitalized, examiners have a lot of discretion in scrutinizing partnerships, Touhey said.
“It’s not as if well-capitalized banks can just ignore brokered deposit rules,” she said.
‘Hottest of Hot Money’
Advocates for tighter bank rules see the review of brokered deposit rules as a way to bring back the bad old days where banks would offer high rates to depositors that could move on quickly, putting the banks, the FDIC’s Deposit Insurance Fund and ultimately taxpayers at risk.
“Brokered deposits, the hottest of hot money, are incredibly destabilizing because they chase the highest rates at the flash of a keystroke,” said Dennis Kelleher, the president and chief executive of Better Markets, a financial reform advocacy group.
Kelleher noted that the 2010 Dodd-Frank Act required regulators to review brokered deposit rules. In July 2011, the FDIC released a study that said that Congress should not ask for changes to brokered deposit regulations.
Well-capitalized banks are already doing deals with fintechs, HSA providers and brokerage houses that offer IRAs, but that doesn’t mean there is a meaningful difference between the new types of arrangements and the older iterations of brokered deposits, Kelleher said.
“If there is, I can’t tell what it is. They all facilitate the movement of money in and out of banks, chasing the highest rates and maximizing the risk to the Deposit Insurance Fund,” he said.
The 1989 law that resulted in the FDIC’s brokered deposits rules may ultimately prove to be a block on the agency loosening up definitions of brokered deposits that banks want to see.
“Some of the statutory language is not as broad in allowing some of the current activities. And also over time, the deposit taking and our FDIC approach to it has kind of morphed,” McWilliams said.
The FDIC chairman did not discuss what a proposal for brokered deposits will ultimately look like, but she said that her agency was hard at work to get it done by the end of the year.