Banks Call FDIC Definition of Brokered Deposits Outdated, Costly

WASHINGTON — The Federal Deposit Insurance Corp. is using outdated methodologies to define "brokered deposits," stigmatizing stable sources of funding and forcing banks to pay higher premiums, according to bankers and several outside groups.

The agency released a revised Frequently Asked Questions document in November that was meant to be a summation of previous policy — but many in the banking industry and beyond said it actually constituted new guidance that is causing banks to classify more deposits as brokered. Banks pay more in assessments for such deposits and can be subject to a number of supervisory limitations.

Some argued that the definition of brokered deposit is crimping innovation.

"BBVA Compass is concerned about the interpretations contained in the FAQs that classify brokered deposits in an overly broad manner," wrote Eric J. Dyas, assistant general counsel of the $85 billion-asset BBVA Compass, which is based in Houston. "We believe that this issue is more critical than ever in light of the innovation underway in the financial services arena, the great possibilities that innovation holds for consumers, and the negative impact that such classifications can have on the company's ability to thrive in such an environment."

It's not just bankers who are angry. Outside groups also said the FDIC is making a mistake.

"The revised FAQs continue a trend of expanding the definition of brokered deposits and applying that overbroad definition in a manner inconsistent with both the purpose [of the amended Federal Deposit Insurance Act] and other changes made to federal statutes since the enactment," wrote Andrew C. Svarre, managing director and general counsel for banking and trust of TIAA-CREF.

At issue is how the FDIC defines brokered deposits. The original definition was made in 1989 in the wake of the savings and loan crisis, when deposits placed by third-party brokers into a bank were viewed as "hot money" because they could be rapidly withdrawn if the broker found another institution offering higher rates.

But Dyas said the industry has changed significantly in the past 27 years and many new products technically fit the old definition.

The FDIC itself has acknowledged that defining what is and is not a brokered deposit is not always straightforward.

"In the FDIC's experience, the question of what constitutes a brokered deposit is very fact specific

and can depend upon varying product features, delivery mechanisms, fee structures,

contracts and other governing documents, and evolving technology, among other things," FDIC Chairman Martin Gruenberg wrote in a June letter to members of Congress that was obtained by American Banker.

But Gruenberg maintained that "we continue to believe that we have the necessary flexibility under existing law and implementing regulations to tailor our regulation and supervision of banks that use brokered deposits as the industry continues to change."

The FDIC released two documents related to brokered deposits last year. The first, in January 2015, was meant to be a collection of previous policy in one place so that banks could determine what deposits were considered brokered. After feedback from the industry, the FDIC issued a revamped version in November that gave more specific examples and definitions, added footnotes to advisory opinions throughout and clarified that it was meant to be an informative document and did not represent new guidance.

"The FDIC's proposed update to the FAQs alleviates a number of…concerns," said a joint letter from The Clearing House Association, the American Bankers Association, the Financial Services Roundtable, the Independent Community Bankers of America and the Institute of International Bankers.

But the groups said that further adjustments were needed, including more clarity on how deposits that are facilitated by "dual-hatted" employees are treated.

"We note that the FDIC's FAQs do not explicitly address [insured depository institution] employees that we have described as 'dual-hatted,' meaning those who are employed exclusively by an IDI, but who may perform functions on behalf of, and may be licensed with, an affiliate," such as providing investment advice to a customer, the associations wrote.

They also added that "the classification of deposits as 'brokered deposits' now has substantial implications that go well beyond the restrictions applicable to those deposits under Section 29," which amends the FDI Act to restrict poorly capitalized banks from accepting brokered deposits. A bank's share of brokered deposits now affects capital and liquidity requirements that did not exist when the act was originally amended, the groups argued.

"Accordingly, it is now of far greater importance that the definition of 'brokered deposits' reflect the true nature of the deposits, and thereby provide banks sufficient flexibility to engage in modern banking practices to attract stable deposits without being exposed to undue consequences," the associations wrote.

For example, the Network Branded Prepaid Card Association said the FDIC incorrectly categorizes a number of prepaid card products as brokered when they should qualify for the "primary purpose" exception, which absolves them of their brokered status even though there is a third party facilitating the deposits.

"At a bare minimum, the revised FAQ Answers should be revised further to make clear that the same fact and circumstances test applies to participants in the prepaid card industry as it does in all contexts," wrote two officials from the group: Brad Fauss, president and CEO, and Brian Tate, vice president for government relations.

They argued that prepaid cards used by employers for payroll or to disburse funds for benefits such as health care and transit should qualify for the primary-purpose exception.

The FAQ document says the primary-purpose exception "is applicable when the intent of the third party, in placing deposits or facilitating the placement of deposits, is to promote some other goal" than a pecuniary gain.

But the agency adds that "the primary purpose exception applies only infrequently and typically requires a specific request for a determination by the FDIC."

One example the agency gave would be if a federal or state agency was required to disburse funds and did so to a beneficiary using a prepaid card but did not generate revenue for the state or federal agency sending the funds.

Industry stakeholders also sought answers on how a brokered deposit can transition to a core deposit. For example, what happens if the opening of a checking account was facilitated by a deposit broker but that customer continued to maintain a relationship with the bank?

"It is time that the FDIC directly address how, over time, a non-maturity deposit originally sourced through a referral, absent further involvement by the deposit broker, will become a core deposit," Svarre of TIAA-CREF wrote.

The bank trade associations wrote that "other than any initial deposit that is placed or introduced by a deposit broker, subsequent deposits placed solely by the depositor through use of their transactional accounts should not be deemed brokered where the deposit broker does not continue its mediation or placement of deposits."

The FDIC could make further changes. Though the agency said the FAQ document is based on existing laws, regulations, interpretations and a 2011 study on brokered deposits, it called the FAQ a "living document" that can be revisited continually.