WASHINGTON — Industry experts are raising concerns about a recent Federal Deposit Insurance Corp. proposal that would expand the definition of brokered deposits — sometimes known as "hot money" — and likely discourage banks from holding them.
The proposal largely reverses a 2020 Trump-era FDIC rule that narrowed the definition of brokered deposits as well as modestly broadening the initial scope to include more deposit arrangements regulated as brokered deposits.
Other key changes in the proposal include redefining "deposit broker" to include entities receiving fees for deposit placements, revising the primary purpose exception criteria introducing a new broker-dealer sweep exception. The proposal also updates the application process for primary purpose exceptions, requiring that insured depository institutions themselves submit applications, rather than their nonbank partners. Under the most recent 2020 rule, a broker is exempt if less than 25% of its assets under administration for customers are placed with depository institutions. The proposal would lower that threshold to 10%, reducing the number of intermediaries who would qualify for the exception.
The banking industry has voiced concern with the proposal. Rob Nichols, president and CEO of the American Bankers Association, called the measures punitive and unjustified.
"This sweeping measure would restrict access to sources of liquidity while penalizing banks for pursuing funding sources that enable them to meet the needs of their communities," Nichols said in a statement after the proposal's unveiling. "Given the pending change in FDIC leadership, we question the need to advance an array of unrelated regulatory changes — with unusually short comment periods — that clearly lack consensus support within the agency."
Congress first directed bank regulators to crack down on brokered deposits in 1989 with the passage of the Financial Institutions Reform, Recovery, and Enforcement Act — often abbreviated as FIRREA.
Matthew Bornfreund of Troutman Pepper says such "hot money" — as it was later dubbed — was viewed by skeptics as one of the major causes of the
"At the time, it wasn't really possible for an individual depositor to shop around the country to find the highest interest rates," Bornfreund said. "Now you just go online and you can deposit the money wherever you want, anywhere in the country, anytime."
FIRREA established a definition of deposit brokers and restricted banks from receiving brokered deposits if they were less-than-well-capitalized. Those deemed adequately but not well-capitalized could receive brokered deposits with a waiver approved by the FDIC. The statute did not explicitly define brokered deposit, but rather classified deposits placed by deposit brokers as brokered.
"From '89 all the way through 2020 the FDIC determined that a deposit group was based on a series of interpretations and guidance that they issued … and if you had a question of whether or not your deposits were broker deposits, you had to check against these various opinions," he said. "The purpose of the 2020 rulemaking was to give some very clear guidance as to what actually is a deposit broker."
The 2020 rule included carve-outs beneficial to third parties partnering with banks. A major carve-out was the exemption from definition of brokered for "exclusive deposit placement arrangements." Although not explicitly named in the rule, this carve-out defines a deposit broker as someone working with more than one bank. Therefore, under the 2020 standard, if a party worked with only one bank, they escape the deposit broker classification under the 2020 rule.
"That's now been changed in the [recent] proposal," said Bornfreund. "From 'more than one bank' to 'one or more banks' — essentially getting rid of the whole exception."
Another 2020 carve-out was for deposits used for enabling payments accounts — which involve credit card products or apps where funds briefly pause in a bank account before moving to the destination payee, typically within a day or two, without earning interest or seeking better rates. The new proposal would likewise remove this exemption.
An FDIC
"There are lots of fintechs that are going to be very much hurt by this," said Bornfreund.
Opponents of the 2020 rule, notably FDIC's current Chair Martin Gruenberg, say the current standards introduce undue risk to the financial system.
"Under this change, a bank could rely for 100% of its deposits on a sophisticated, unaffiliated third party without any of those deposits considered brokered," Gruenberg said in 2020. "The bank could fall below well capitalized and still rely on those third party placed deposits for one hundred percent of its funding without any of those deposits considered brokered … a bank could [also] form multiple 'exclusive' third party relationships to fund itself without any of those deposits considered brokered."
FDIC Vice Chair Travis Hill — a former top aide in the Trump administration FDIC and the principle architect of the 2020 rule —
Others, like Jonah Crane at Klaros, say the proposal is overly calibrated, failing to adapt to evolving customer interactions with financial services.
"The brokered deposit proposal also ignores a wealth of recent evidence that deposits sourced through fintech partnerships are actually quite stable," said Crane. "Instead,
Synapse Financial Technologies, a fintech intermediary, filed for Chapter 11 bankruptcy in April 2024, with reportedly an $85 million shortfall between the funds held by Synapse's partner banks and what was owed to depositors. This discrepancy created a severe crisis, freezing the bank accounts of tens of thousands of U.S. businesses and consumers.
Gruenberg has since cited synapse — as well as the failures of
Proponents of the pre-2020 standards — like Shayna Olesiuk, director of banking policy at consumer advocacy group Better Markets — say the 2020 rule created a dangerous workaround, allowing the level of brokered deposits systemwide to increase after the 2023 banking crisis and reach an all-time
"The loophole was unjustified, dangerous and increased the likelihood of liquidity crises, bank failures and taxpayer bailouts including what we saw in spring 2023," she noted. "We support making the definition of brokered deposits more inclusive of all types of risky 'hot money' that could amplify or aggravate a crisis, and impose supervisory penalties on banks that overly rely on brokered deposits."
The FDIC's 2020 changes to brokered deposit rules also faced scrutiny after Silvergate Bank amassed volatile deposits from crypto firms without adequate safeguards. During the collapse of crypto exchange FTX, Silvergate experienced significant deposit withdrawals and sought emergency funding.
Bornfreund says while brokered deposits did present significant risks at one time, he believes the proposal might treat certain arrangements as riskier than they are in practice.
"Deposit brokers were an actual thing that were definitely driving the financial crisis of the '80s, the savings and loan crisis," he said. "That kind of deposit brokering is now actually relatively rare because users can just directly themselves find the best interest rates. Just because there's a third party involved in the deposit does not necessarily mean it is more risky than a deposit that the user opens directly themselves."
