WASHINGTON — The Federal Deposit Insurance Corp. for decades has overreached in interpreting what deposits are deemed brokered, according to a legal memo conducted on behalf of the American Bankers Association.
The 30-page memo, which was drafted by the Jones Day law firm and which the ABA plans to release Monday, says the FDIC has gone beyond the 1980s law meant to restrict problem banks from using brokered deposits to fund risky loans. Instead, the policy has placed undue limits on the deposit practices at healthy banks, according to the memo.
As a result, well-capitalized banks have struggled to employ innovative deposit-gathering methods, the ABA said in a Feb. 28 letter sent to FDIC Chairman Jelena McWilliams along with the legal memo.
“Over time a gulf has grown between that focused intent of Congress and the broad scope of the FDIC’s regulation of brokered deposits, particularly as applied to healthy banks. That gulf has been widening,” Rob Nichols, the ABA's president and chief executive, said in the letter.
“Increasingly, these efforts and the FDIC’s treatment of brokered deposits —particularly as the FDIC has been applying its policy to healthy banks — have come into conflict, frustrating the ability of banks to innovate and to be competitive in serving financial customers.”
McWilliams has appeared intent on making changes to the agency's brokered deposits policy, and is accepting public comments until May 7. (The ABA separately plans to submit a comment letter in addition to the legal memo.)
Jones Day argues in its memo that the FDIC interpreted the statutory definition of “deposit broker” too broadly, and so included more deposit types than the law intended. This penalizes even well-capitalized banks as regulators base deposit insurance premiums, a bank's compliance with liquidity rules and other considerations in part on high volumes of brokered funds.
“Broad interpretations of the restrictions” in the law “combined with integrating those interpretations into other rules, may have a significant adverse impact on well-capitalized insured depository institutions ... because the amount of brokered deposits can affect the deposit insurance assessment rate of an IDI, and also the liquidity coverage ratio requirement and contingency funding plans for an IDI,” said the memo, which was written by Lisa Ledbetter, a partner at Jones Day.
The Jones Day memo also notes that the FDIC has issued a slew of different notices on brokered deposits in the past 30 years, creating industry confusion in how to interpret the agency's policy.
“Staff of the FDIC has issued more than 80 separate and distinct public advisory opinions regarding brokered deposits,” the memo said. “These staff advisory opinions predominantly construe the definition of ‘deposit broker’ expansively and/or the exclusions to the definition of ‘deposit broker’ narrowly.”
