WASHINGTON — The Federal Deposit Insurance Corp. issued two proposals Tuesday, one to revise its standards on banks accepting brokered deposits and another on approvals of new industrial loan company, or ILC, charters.
FDIC Chair Gruenberg noted that the proposed changes — which Republican members Travis Hill and Jonathan McKernan opposed — aim to mitigate funding risks associated with brokered deposits that were exacerbated with
"The proposal would reduce operational challenges and reporting burdens on insured depository institutions by simplifying certain definitions, help ensure uniform and consistent reporting of brokered deposits and strengthen the safety and soundness of the banking system," Gruenberg said. "I am pleased to support this proposed rule and its publication for a 60 day comment period."
Brokered deposits — funds obtained by a bank through a third-party broker or agent, rather than from direct depositors and sometimes known as "hot money" — can be more volatile and less stable than traditional retail deposits because they are often driven by the pursuit of higher interest rates. Section 29 of the Federal Deposit Insurance Act allows the FDIC to restrict brokered deposits at banks as well as restricting less-than-well-capitalized banks from accepting brokered deposits.
The proposal effectively reverses the 2020 Trump-era FDIC rule, which narrowed the definition of deposit brokers and exempted certain types of deposits previously considered brokered from those rules.
The proposal would classify sweep deposits as brokered regardless of whether the deposits were placed on behalf of an affiliate of the partner bank or not. Sweep deposits are an arrangement where funds are automatically transferred between a customer's primary account and a secondary account in search of maximizing interest or minimizing fees. The proposal would also eliminate the exemption of third parties with exclusive arrangements with one bank from brokered deposit rules.
The current rules state that a broker is considered exempt if less than a quarter of its assets are placed at banks or when "all customer deposits placed at depository institutions are placed into transaction accounts and no fees, interest or remuneration are being paid to the depositor." The proposal would narrow that primary purpose exemption to those broker-dealers or investment advisors placing less than 10% of their managed assets at firms.
The proposal also consolidates the definition of deposit broker to more clearly delineate which firms are subject to the rules. For example, the proposal would no longer differentiate between the "placement" and "facilitation" of deposits, considering an entity a broker if it meets either of these criteria. The proposal also considers a third party a deposit broker if it proposes or determines deposit allocations through the "operation or use of an algorithm or functionally similar program or technology." The proposal also adds fees to the criteria used to define deposit brokers, meaning individuals that receive fees from customers — often banks — for deposit placement could be classified as deposit brokers.
It also adds new criteria to the definition, such as whether brokers are paid fees for placing deposits. Banks will need to provide more detailed information about their deposits, especially when working with third parties, including filing applications with the FDIC to get approval for specific arrangements.
Gruenberg noted in today's meeting that recent experiences, including the bankruptcy of
"Voyager was not considered a 'deposit broker' — and therefore deposits it placed in its partner bank were not considered brokered — merely because it had an exclusive deposit placement arrangement with one bank," Gruenberg noted. "Such exclusive deposit placement arrangements were specifically excluded from the definition of a 'deposit broker' under the 2020 final rule even though they plainly met the definition of deposit broker."
New ILC rules
The FDIC also issued a proposal Tuesday editing Part 354 of the FDIC rules and regulations to enhance oversight and risk management at industrial loan companies and their parent companies.
The proposal introduces three key changes to address the special chartered financial institutions, of which the Biden
The proposal revises application requirements for industrial loan companies and their holding companies, including stricter criteria for ILCs to demonstrate their ability to operate independently from their parent companies. Business models that rely heavily on the parent company for funding, lending or operational support will be subject to closer examination and potential rejection if they are deemed to pose significant risks. The FDIC will also evaluate whether ILCs adequately serve the convenience and needs of their communities, ensuring that their products are not limited to a narrow customer base. Additionally, the proposal says the FDIC may hold public hearings for further input on applications and will require parent companies to make commitments to maintain financial strength. Gruenberg — widely seen as an ILC skeptic — said that the agency must be vigilant in ensuring that ILCs it approves are viable businesses on their own and meet customer needs so that they do not pose a risk to the taxpayer and the Deposit Insurance Fund.
"Business models where there is significant or material dependence by the industrial bank on the parent company — referred to as shell or captive structures — raise significant concerns about the viability of the industrial bank's proposed business model on a standalone basis, the industrial bank's franchise value in the event the parent organization experiences financial difficulty or failure, and how such business models serve the convenience and needs of the community," Gruenberg said. "The proposed revisions to the rule would clarify and enhance the supervisory framework that the FDIC formalized in Part 354 to supervise industrial banks, mitigate risk to the Deposit Insurance Fund, and provide necessary transparency for market participants."
