In early July, the FDIC issued a report on an important subject to many community bankers: brokered deposits. The report to Congress, dated July 8, 2011, was required under Dodd-Frank and describes its view of the present role of brokered deposits in banking. Critical, of course, is the FDIC’s observation that bank failures are frequently linked to brokered deposits.

Despite industry concerns that the present regulatory system for brokered deposits is outdated and poorly designed, the report concludes the present statutory scheme should not be amended or repealed.

Here is how the FDIC summarized the industry concerns it heard through the public comment process: (i) the brokered deposit statute creates liquidity problems if a bank becomes less than well capitalized; (ii) a combination of the statute and supervisory practices stigmatizes brokered deposits; and (iii) the brokered deposit statute is outdated and has not kept pace with technological change and innovation.

On the first point, the complaint is the actual operation of the regulatory scheme in that it seems to have an inappropriately adverse impact at a very bad time – when the bank needs more liquidity. If a bank is adequately capitalized, the brokered deposit statute allows the bank to accept, renew or roll over brokered deposits with a waiver from the FDIC (but the bank is subject to interest rate restrictions). If the bank becomes undercapitalized, however, it cannot accept, renew or roll over brokered deposits at all. Bankers argued that liquidity problems inevitably result and contribute to the failure of a bank that would not otherwise have failed.

On the second point, bankers contended that some banks will not accept brokered deposits even when they are an optimal source of funds because examiners tend to criticize those banks that do accept them, regardless of the bank’s capital level or the appropriateness of the deposits as part of the bank’s asset and liability term and rate structure.

On the third point, bankers focused on the definition of brokered deposits, claiming that three types of deposits, reciprocal deposits, deposit sweeps from broker-dealers and referrals from affiliates and agents, are inflexibly defined as brokered deposits when they do not share the same characteristics as traditional brokered deposits. Accordingly, the argument is, they should not be treated in the same way, for supervisory purposes or for assessment purposes. Further, the contention of some bankers is that some deposits, such as high rate deposits and listing service deposits, do not meet the definition of a brokered deposit, but are in fact higher risk and should be included within the definition.

The FDIC’s response – again, a recommendation of no change — was based on a couple of overall conclusions. The FDIC concluded the existing regulatory framework permits enough examiner discretion to make appropriate adjustments in individual cases. The FDIC also concluded that its existing data is incomplete and insufficient to justify further regulatory action. Important here is the FDIC’s observation that under its current system, adequately capitalized banks can seek waivers with respect to the use of brokered deposits. 

However, the summary language used by the FDIC suggests some adjustments to the definition of brokered deposits may ultimately be appropriate:

"Because of the lack of sufficient data, the analysis could not reach firm conclusions, but it suggests that reciprocal deposits based upon real customer relationships, deposits swept from affiliated broker-dealers, and referrals from affiliates appeared likely to pose fewer problems than other brokered deposits, although they should not be considered core deposits. The analysis also suggests that high rate deposits and non-brokered listing services appeared likely to pose problems similar to most brokered deposits." FDIC, Study On Core Deposits And Brokered Deposits, submitted to Congress, July 8, 2011, at 4.

Perhaps the most telling and in some ways useful aspect of the report is the comprehensive description of the legal development of the current system for regulating brokered deposits. The discussion makes it clear that much of the present system is based on a definition of "deposit broker" that was part of an older regulatory system in which deposit brokers registered with the FDIC. That language, part of long out-dated system that has been superseded in many ways, continues to control the definition of brokered deposits and based on this study, it appears likely this situation will continue for the foreseeable future.