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Brokered Deposits

Enacted in 1989, Section 29 of the Federal Deposit Insurance Act (FDIA) sets restrictions on the acceptance of certain deposits by institutions with weakened capital positions. In adopting Section 29, Congress intended to prevent struggling banks from accumulating expensive funding that provided little franchise value to the bank and could be at greater risk of flight if that bank’s condition deteriorated. However, in the three decades since Section 29’s enactment, the FDIC has created an overly broad interpretation of who is considered a “deposit broker,” and by extension what is classified as a brokered deposit.

National Rate Cap

In addition to setting restrictions on brokered deposits, Section 29 also directs the FDIC to calculate a national rate cap on the interest rates less than well capitalized institutions may offer on deposits.

The national rate cap was intended to prevent less than well capitalized banks from offering excessively high rates in an effort to grow themselves out of trouble. However, the national rate cap calculation doesn’t take into account the interest rates being offered on deposits in local markets or modern developments in banking such as the evolution of branchless banks. By not taking into account these additional factors and instead relying on a national average of rates being offered at branches to calculate the national rate cap, the rates that certain banks can offer are artificially suppressed.

ABA Position

ABA believes that the FDIC should modernize and significantly narrow its approach to designating of a deposit as “brokered.” The FDIC’s ever broadening interpretation of what deposits are considered “brokered,” unnecessarily subjects a broad swath of deposits to supervisory stigma, limits, and additional regulatory costs, even when held by well-capitalized banks.

Section 29 is currently a key driver of supervisory thinking on what constitutes a volatile deposit. This broad, outdated understanding of brokered deposits has led to supervisory bias against what, as a practical matter, is stable funding. The FDIC’s approach discourages banks from seeking funding from sources other than those historically perceived as being the most stable. ABA believes the extent to which deposits are stable or volatile varies across institutions and are based on demographics, location, relationships and experience with certain customers and products. Instead of using static definitions of liquidity, supervisors should asses a bank’s funding mix based on its business model and measurement and mitigation of its risks.

ABA also believes that the FDIC can use a more appropriate and dynamic calculation to determine the national rate cap which takes into account the markets in which banks compete.

 

 Newsbytes

 
 

 Comment Letters

 
 

 Letters to Congress / Regulators

 
 

 Other Resources

 

​Questions? Please contact Alison Touhey for more information.

 

 ABA Staff Contact

 
  • Alison Touhey,
    Vice President and Regulatory Advisor, Office of Regulatory Policy
 

 Brokered Deposits Working Group

 

The working group identifies issues, helps draft comment letters and provides input on ABA’s advocacy strategy. Please contact Alison Touhey to join.

 

 ABA Resources