FDIC Bows to Industry on Reciprocal Deposits

WASHINGTON — The Federal Deposit Insurance Corp. handed community bankers a critical win on Thursday by rescinding a plan to treat reciprocal deposits as brokered deposits in the calculation of small-institution assessments.

The agency's board voted unanimously to reissue a proposal that would revamp the insurance assessment rate for banks with less than $10 billion of assets. The initial plan, which was unveiled in June, would have effectively penalized reciprocal deposits — which allow banks to offer additional deposit insurance beyond the $250,000 limit — by treating them the same as riskier brokered deposits in determining premiums.

But in response to more than 400 public comments criticizing the plan, the FDIC backed down, issuing a new proposal that would treat reciprocal deposits the same as core deposits.

"Community banks scored a major victory," said Bert Ely, an independent banking consultant in Alexandria, Va.

Christopher Cole, the senior vice president and senior regulatory counsel for the Independent Community Bankers of America, agreed, saying the new plan is "going in a positive direction."

At issue is how the FDIC calculates assessments on small banks. The agency's June proposal was designed to alter premiums so that riskier banks would pay more while the overall level of premiums paid by the industry remained static. As part of that calculation, brokered deposits were viewed as a higher-risk category, forcing banks that held more such deposits to pay higher premiums.

But the industry argued that reciprocal deposits were not higher-risk and should be treated the same as core deposits. During the board meeting, regulators said they were persuaded by the hundreds of commenters on the issue.

"Given the number of comments received on the first [proposal] on the changes that you're offering today, I do think it's appropriate to go out for a new or second [proposal] for an additional 30-day comment period," Comptroller of the Currency Thomas Curry said during the board meeting.

The revised proposal also modified the assessment formula to increase rates only as a result of growth if a bank's assets rise by more than 10% within a year.

Still, other unpopular aspects of the plan survived, including a loan-mix index designed to force banks with riskier loans to pay higher premiums. Under the plan, banks with large amounts of commercial real estate loans are expected to pay more.

"The conspicuous thing that was missing [to the modified rule] was any change to a loan-mix index," Cole said.

The revised proposal is open for comment for 30 days. The agency has also provided a calculator tool for banks to evaluate what they would pay under the revised plan.

If approved, the final rule would go into effect a quarter after the FDIC's Deposit Insurance Fund reaches 1.15%, which is expected soon. Alongside an assessment reduction for small banks required by the Dodd-Frank Act, the proposal could cause a drop in premiums for more than 93% of small banks, the FDIC said.

Separately, the FDIC board also voted to fast-track the implementation of a portion of the transportation bill signed late last year that would extend the exam cycle for some small banks.

Institutions with assets of $500 million to $1 billion — 617 banks, according to the FDIC — could qualify to space out exams to every 18 months, rather than every year.

Instead of awaiting public comment, the FDIC voted unanimously to push the measure through as an interim final rule, which will be implemented on the day it is published in the Federal Register.

Regulators praised the rule, saying it made sense for supervisors and banks alike.

"While the 18-month cycle will reduce the burden on well-managed community banks and thrifts, it will also allow the federal banking agencies to focus our supervisory resources on those institutions that need it most—those that present capital, managerial or other issues of significant supervisory concern," Curry said. "We don't have unlimited supervisory resources, and it's important that we manage those resources wisely. This rule will help greatly in that effort, and I'd like to thank the staff at the OCC, the FDIC and the other agencies for the work they've done to move it forward."

Curry said he signed a letter making the change effective immediately on Thursday for federally chartered banks and thrifts.

Consumer Financial Protection Bureau Director Richard Cordray noted that it was a measure with little to no political opposition.

"[T]he agencies were able to express their support for a measure of this kind in Congress with virtually no dissenting voices," he said. "That's a great example of how we can speak back and forth and reach constructive results."

Industry representatives were also pleased.

"My hat's off to the FDIC and now to the other agencies implementing this quickly," Cole said.