On July 30, 2024, the Federal Deposit Insurance Corporation (FDIC) approved a notice of proposed rulemaking relating to the agency’s safety and soundness rules on brokered deposits and issued a request for information (RFI) on deposit data that is not currently reported in the required regulatory reports. The proposed rule would:
- Revise certain provisions of the “deposit broker” definition.
- Amend certain aspects of the primary purpose exception (PPE).
- Eliminate the exclusive placement arrangement exception.
- Revise or eliminate certain designated business exceptions.
- Provide guidance on how FDIC-insured institutions can regain their lost “agent institution” status.
Through the RFI, the FDIC is seeking information on certain characteristics that the agency believes affect the stability and franchise value of different types of deposits to determine whether more detailed or more frequent reporting on these characteristics or types of deposits would enhance regulatory risk oversight.
The Proposed Rule
The FDIC previously updated its brokered deposit rules in 2020. The 2020 rule broadened and clarified several exemptions to the brokered deposit definitions and, as a result, allowed banks to classify many deposits as “core” deposits that might have previously been classified as brokered deposits. According to FDIC data, insured depository institutions (IDIs) reported a 31.8 percent decline (nearly $350 billion) in brokered deposits between the first and second quarters of 2021 after the 2020 rule became effective. The proposed rule would roll back many of the 2020 rule’s provisions, with the stated objective of broadening what constitutes a brokered deposit.
IDIs that are less than “well capitalized” are subject to limits on the acceptance, renewal, or rollover of brokered deposits. Further, regardless of capital level, the prudential agencies generally expect that the acceptance of brokered deposits will be a component of a diversified funding strategy and not a tactic to generate funding for rapid expansion or to engage in risky banking activities.
Under the current regulatory framework, a “brokered deposit” means any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker. A “deposit broker” is defined broadly to include:
- Any person engaged in the business of (1) placing deposits of third parties with IDIs; (2) facilitating the placement of deposits of third parties with IDIs (which includes “matchmaking activities”); or (3) placing deposits with IDIs for the purpose of selling those deposits or interests in those deposits to third parties.
- An agent or trustee who establishes a deposit account to facilitate a business arrangement with an IDI to use the proceeds of the account to fund a prearranged loan. The lion’s share of the proposed rule focuses on changes to the definition of “deposit broker” and exceptions thereto.
The proposed rule includes several significant changes, the most notable of which are:
- Eliminating the exclusive deposit arrangement carveout so that any third party that meets the definition of “deposit broker,” including those involved in placing deposits at only one IDI, would be subject to the FDIC’s brokered deposit restrictions.
- Reverting the PPE analysis to its status before the 2020 rule so that the PPE would only apply when an agent or nominee’s primary purpose in placing customer deposits at IDIs is for a substantial purpose other than to provide a deposit-placement service or FDIC deposit insurance for particular business lines.
- Eliminating the ability of third parties to apply for a PPE. Each IDI wishing to rely on a PPE would be required to submit an application for the specific deposit placement arrangement that it has with the third party.
- Removing the term “matchmaking activities” from the definition of “deposit broker” and replacing it with a “deposit allocation” standard, which can include the provision of services to affiliates.
- Adding new factors to be considered as part of the PPE application, including whether:
- The IDI or customer pays fees or other remuneration to the agent or nominee for deposits placed with the IDI and the amount of such fees or other remuneration, including how the amount of fees or other remuneration is calculated.
- The agent or nominee has discretion to choose the IDIs at which customer deposits are or will be placed.
- The agent or nominee is mandated by law to disburse funds to customer deposit accounts.
- Requiring IDIs to provide copies of all contracts relating to the deposit placement arrangement.
- Changing the 25 percent designated business exception to a 10 percent broker-dealer sweep exception that would:
- Only apply to a broker-dealer or registered investment adviser that, as agent or nominee, has less than 10 percent of its total assets under management in a particular business line placed into nonmaturity accounts at one or more IDIs.
- Require an application for sweep programs that use one or more third parties, and prior notice where no additional third party is involved in the sweep program.
- Eliminating the enabling transactions PPE and the corresponding notice process, and providing that:
- IDIs currently relying on the enabling transactions PPE via the notice process would be required to file an application under the proposed PPE application process.
- Applications previously approved under the application process for the enabling transactions PPE where interest, fees, or other remuneration is provided to depositors would be rescinded.
The proposed rule also requests comment on two alternatives to the proposed broker-dealer sweep exception:
- Alternative 1: IDIs would be required to report all sweep deposits; however, IDIs receiving sweep deposits could apply for the general PPE. Under this alternative, whether a broker-dealer or registered investment adviser would meet the PPE would not be based on a de minimis amount of customer funds placed at one or more IDIs; rather, an IDI would be required to submit the required information listed under the general PPE application process.
- Alternative 2: Apply the broker-dealer sweep exception only to a broker-dealer or registered investment adviser if:
- The broker-dealer or investment adviser places or facilitates the placement of swept funds into nonmaturity accounts at an affiliated IDI.
- The amount of swept funds is less than 10 percent of the total assets that the broker-dealer or investment adviser has under management for its customers.
- The related fees paid by the IDI to the broker-dealer or investment adviser are flat fees (i.e., a per-account or per-customer fee) as payment for recordkeeping or administrative services and not payment for placing deposits.
Lastly, other than the changes made to the 25 percent designated business exception and the enabling transactions designated business exception, the proposed rule would retain the 2020 rule’s remaining designated business exceptions.
The RFI
The RFI is requesting more granular information on the composition and characteristics of uninsured deposits to help the FDIC determine whether more detailed or more frequent reporting on these characteristics or types of deposits would:
- Enhance offsite risk and liquidity monitoring.
- Inform analysis of the benefits and costs associated with additional deposit insurance coverage for certain types of deposits.
- Improve risk sensitivity of deposit insurance pricing.
- Provide analysts and the general public with accurate and transparent data following the bank failures that occurred in March 2023.
More specifically, the RFI sets out nine substantive questions regarding:
- Current internal deposit information collection and reporting practices (questions 1–4).
- Potential additional deposit data requirements (question 5).
- Potential deposit insurance coverage reform (questions 6–9).
While the RFI does not by itself change any reporting requirements or insurance coverage, the FDIC hopes the information gathered will inform and improve current risk oversight practices and serve as a foundation for future reform.
Commentary and Key Takeaways
Taken together, the proposed rule and the RFI seemingly highlight the FDIC’s heightened concerns with current deposit restrictions and reporting requirements—especially in light of the March 2023 bank failures and subsequent failures thereafter.
The FDIC suggests that the proposed rule will help ensure uniform and consistent reporting of brokered deposits, reduce operational challenges and reporting burdens on IDIs, and further strengthen the safety and soundness of the banking system more generally. However, the proposed rule would walk back the 2020 rule’s provisions upon which the industry has relied. Interestingly, at the time the 2020 rule was approved, then-Director Martin Gruenberg issued a lengthy dissent, certain sections of which track almost verbatim with the preamble to the proposed rule.
In approving the proposed rule, the FDIC relies heavily on its 2011 Study on Core Deposits and Brokered Deposits. The study's data, however, is stale and likely no longer reflects today’s market realities—the FDIC’s issuance of the RFI only bolsters this point. It would seem to be more advantageous for the FDIC to compile and distribute the RFI findings before proposing such substantial regulatory changes.
The proposed rule would narrow key exceptions that many IDIs rely on when determining whether to classify deposits as brokered deposits or nonbrokered deposits. The FDIC projects the proposed rule would substantially increase the number of deposits classified as brokered deposits by roping in deposits the agency believes are currently mischaracterized. An increase in brokered deposits could result in higher FDIC deposit insurance premiums and heightened scrutiny of IDIs, even if “well capitalized.”
Comments on the both the proposed rule and the RFI are due within 60 days of their publication in the Federal Register.
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