The Federal Deposit Insurance Corporation (FDIC) recently issued an advance notice of proposed rulemaking (ANPR) inviting public comments on how best to modernize its approach to brokered deposits. Banks and fintech companies alike have been clamoring for the agency to revise its treatment of brokered deposits, and, as we previously discussed, even Congress has asked the FDIC to "update [the rule] to reflect technological, legal, business model and product range changes."
The FDIC's mandate to address brokered deposits was added to the Federal Deposit Insurance Act (FDI Act) as section 29 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). FIRREA was, in part, a response to the 1980s savings and loan crisis, which was exacerbated by deposits chasing high interest rates. Some banks seeking to rapidly expand their assets (often by lending into high-risk segments) funded their expansion by offering above-market interest rates to attract deposits. Deposit brokers facilitated this expansion by helping depositors identify banks offering high rates and shifting deposits to those banks to maximize depositor returns.
The ANPR provides an in-depth history of brokered deposits and explains the consequences for the banking system. As described in the ANPR, the FDIC undertook a Study on Core Deposits and Brokered Deposits, which found that "there should be no particular stigma attached to the acceptance of brokered deposits per se and the proper use of such deposits should not be discouraged." However, in practice, the agency's policy does discourage banks from accepting brokered deposits because of the FDIC's broad view of who is a deposit broker. The FDIC believes this view is necessary because brokered deposits are associated with risky growth and volatile deposits.
Because the FDIC views brokered deposits as more volatile than core deposits (i.e., non-brokered deposits), under certain conditions, the agency charges a higher deposit insurance rate for brokered deposits. Small banks (less than $10 billion in total assets) and larger banks that are not well capitalized are subject to a higher assessment rate if their ratio of brokered deposits to core deposits exceeds 10 percent. Even a bank that is not in one of those categories could see unfavorable examination results if its brokered deposits ratio is determined to be a risk to the bank's capital or liquidity.
The ANPR sets forth the FDIC's current case-by-case method for determining whether a person (or company) is a deposit broker. In short, with limited exceptions, the FDIC views any person who facilitates or directs deposits to be placed at an insured depository institution (IDI) to be a deposit broker. Therefore, the receiving bank of any such deposits must treat them as brokered deposits. Fintech companies are often surprised to find that their applications or platforms that have a deposit component (such as account transfers, rate recommendations, or product comparison) cause them to be deposit brokers under the FDIC's interpretation. This is not a problem for the fintech company itself, but it does make it more difficult for these companies to find bank partners willing to accept deposits connected to the fintech product.
The ANPR describes this now common scenario:
Some applications provide customers the opportunity to link their existing bank accounts (and other accounts, such as credit cards, and 401k)—with software applications—in an effort to provide efficiencies in budgeting, bill-paying, and opening up a new deposit account. In some cases, the application aggregates customer information based upon available account balances and spending patterns and provides that information to depository institutions to assist in targeting certain customers with financial products. Once the customer is targeted with a financial product, the customer may be transferred to the bank to open up the deposit account or the application may assist in transferring customer information to the bank for purposes of establishing the deposit account. The software provider may receive compensation from the financial institution based upon the referral. FDIC staff has received inquiries about whether various arrangements between software applications and IDIs should be viewed as brokered.
Unfortunately, the ANPR shows that banks—and the fintech companies developing such applications—currently have no clear answer to whether those would be brokered deposits. Until the FDIC completes this rulemaking process, banks and fintech companies will continue to need the assistance of counsel to determine the application of this 30-year-old statute.
In the meantime, the FDIC is seeking assistance from the industry as it works to update its approach to brokered deposits. Banks, fintechs, and the public are encouraged to respond to these questions:
- Are there types of deposits that are currently not considered brokered that should be considered brokered? If so, please explain why.
- Are there 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? If so, please explain.