WASHINGTON — Federal Deposit Insurance Corp. Chairman Jelena McWilliams announced a revamp of how the agency defines brokered deposits and called on Congress to change the law restricting use of brokered funds by troubled institutions.
The steps, which McWilliams previewed one day before the FDIC board will formally propose them, appear aimed at giving banks more flexibility to raise funds amid broad industry changes since brokered deposit rules were first implemented 30 years ago.
“The emergence of the internet and other technological innovations has fundamentally changed how banks interact with their customers,” McWilliams said Wednesday in a Brookings Institution speech. “While some depositors still walk into a local branch, many customers now access banking services solely through the internet or smartphones, and today customers are increasingly utilizing channels such as prepaid cards and third-party fintech apps.”
McWilliams said the proposal focuses on four main goals. One is to clarify that deposits are not brokered when the consumer has a direct relationship with the bank. The second is a “balanced approach” to implementing the statute, including reexamining the FDIC’s interpretation of an exemption from the definition of “deposit broker.”
The final two goals are ensuring that certain types of funds still do not put the FDIC’s own finances at risk, and establishing a better administrative process for determining an institution’s compliance with the rules.
“Since becoming chairman, I have prioritized establishing a regulatory approach that encourages, rather than stifles, innovation,” McWilliams said. “Striking the right balance in how we interpret the brokered deposits statute is key to this goal, as we seek to remove regulatory hurdles to innovative partnerships between banks and nonbanks, and avoid discouraging banks from offering products and services through online and mobile channels.”
But even as she outlined her vision for an updated framework, McWilliams said that the law itself — passed 30 years ago in the midst of the savings and loan crisis — complicates the FDIC’s job in implementing brokered deposit rules.
“The statute mandates that the FDIC use a blunt tool to address an important policy problem,” McWilliams said. “We lack the congressional guidance to make it perfect.”
Under the current rules, a bank with a weakening capital position cannot accept brokered deposits. The intent is to discourage struggling banks from using quick cash to fund risky asset growth, which was blamed in failures during the earlier thrift crisis and more recent mortgage debacle. The FDIC also includes penalties for banks relying on brokered funds in their deposit insurance assessments.
McWilliams’ remarks echo
Under the proposal, McWilliams said that the agency would reexamine its process for determining if an entity meets the “primary purpose” exception, a legal definition referring to whether an entity’s main function is to place deposits in an insured institution.
The FDIC’s new process would consider “the business relationship between the third party and the customers for whom it is placing, or facilitating the placement of, deposits, consistent with the plain meaning of the statute,” McWilliams said, a nod to the increasingly integral role that fintech companies have in the way consumers handle their money.
At the same time, McWilliams said the agency is seeking to ensure that certain types of funds still do not threaten the Deposit Insurance Fund. As a result, brokered certificates of deposit would still fall under the brokered definition. Meanwhile, she said the agency is “considering changes to its deposit insurance assessment pricing to address concentrations in funding that are correlated with higher losses to the DIF.”
“This could include unaffiliated sweeps that qualify for the primary purpose exception under the proposal and certain listing service deposits, which, in many cases, are not considered brokered today,” she said.
“The changes the FDIC is considering to its brokered deposits regulation should not be interpreted to mean the FDIC is ignoring the potential risks associated with different forms of funding. For large banks, a modification to address these types of funding concentrations is one of several changes the FDIC is considering to make its pricing more risk-sensitive.”
But after laying out the basic components of the coming revamp, McWilliams spent the latter portion of her speech with a new focus: Congress.
“It is of course up to Congress to decide whether and when a holistic review of the brokered deposits statute is warranted,” she said. “But if Congress were to undertake such a review, there might be better ways to accomplish the worthwhile public policy goal Congress intended to address.”
McWilliams laid out two ways in which the law governing the FDIC’s framework for brokered deposits could be improved. First, McWilliams asked Congress to consider removing Section 29 of the Federal Deposit Insurance Act, the provision restricting brokered funds, entirely and replacing it with “a simple restriction on asset growth for banks that are in trouble.”
“This would be a far easier regime for the FDIC to administer, would at the very least limit the size of the FDIC’s potential exposure, and would more directly address the key goal of preventing troubled banks from using insured deposits to try to grow out of their problems,” McWilliams said. “A simple limitation on asset growth would also be more durable and should retain its effectiveness as the industry evolves and as banks change the way they attract deposits over time.”
However, if Congress opted not to remove Section 29, McWilliams asked Congress to consider repealing the primary purpose exception, “which puts the FDIC in the challenging position of trying to decipher the purpose of every potential deposit broker in the country,” she said. That exception could be replaced “with a more flexible exception based on actual risk to the DIF.”
“If Congress chooses to tackle these issues, the FDIC stands ready to provide assistance,” McWilliams said. “In the meantime, we will implement the law as it exists today.”
