WASHINGTON — A coalition of prominent financial industry organizations sent a letter to federal bank regulators showing their disapproval with new restrictions on banks' usage of brokered deposits.
The broad cohort, including 11 trade groups from across the financial industry, urged the Federal Deposit Insurance Corp. to rethink its proposed rulemaking on brokered deposit restrictions. The coalition specifically urged the FDIC to extend the public comment period by an additional 60 days to ensure a thorough evaluation of the rule's potential impact.
"This proposal does a good job of marshaling evidence of the risks posed by brokered deposits. The proposal does not, however, offer any evidence that some of the deposits that this proposal would re-classify as brokered deposits actually present the same or similar risks," the letter notes. "The FDIC should consider revisions to the brokered deposits rule only after robust data and analysis have been provided to support the proposed changes and the public has been given an opportunity to thoroughly review that information."
Signatories include the American Bankers Association, American Fintech Council, Bank Policy Institute, Consumer Bankers Association, Financial Services Forum, Financial Technology Association, Independent Community Bankers of America, Innovative Payments Association, Institute of International Bankers, National Association of Industrial Bankers, and Securities Industry and Financial Markets Association.
The groups express concerns that the changes could lead to higher regulatory costs for banks, disrupt existing business arrangements and negatively affect the availability and costs of financial services for customers — particularly those in underbanked communities.
The proposal in question largely reverses a 2020 Trump-era FDIC rule that narrowed the definition of brokered deposits while also modestly broadening the initial scope to include more deposit arrangements regulated as brokered deposits.
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, or FIRREA. 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. The 2020 rule included carve-outs from that definition that helped third parties partnering with banks avoid the "deposit broker" designation. One such carve-out was the exemption from definition of brokered for "exclusive deposit placement arrangements," thus effectively defining a deposit broker as someone working with more than one bank.
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."
The coalition letter also highlights the overlap between the FDIC's brokered deposits proposal and its concurrent request for information on deposits, emphasizing the need for more comprehensive data and analysis before any regulatory changes are made.
"Without the requisite data and making all of the relevant data and information that the FDIC does have public, it will not be possible for interested parties to assess and provide meaningful comments on the proposal," they said. "It will also be difficult to assess whether or to what extent the changes proposed by the FDIC address the stated bases for the proposal."
