Though their significance has waned in the smartphone era, branches remain the primary channel that most banks use to gather deposits.
Roughly 88,000 bank branches operate across the 50 states, according to the most recent data — one location for every 2,900 U.S. adults. It remains a rarity for a consumer to open a bank account without stepping foot in a branch.
Whether the branch should retain its central role in the American banking industry is an important subtext of a rulemaking process launched recently by the Federal Deposit Insurance Corp.
Under current FDIC rules, banks often pay a higher price for deposit insurance if so-called brokered deposits make up more than 10% of their total deposits.
Brokered deposits come in many flavors, but do not include any money received from customers who visit a brick-and-mortar office. As of Sept. 30, U.S. insured depository institutions held $986 billion in brokered deposits, which amounted to 8% of all domestic deposits.
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In the fall, FDIC Chair Jelena McWilliams alluded to the impact that the internet has had on banking in explaining the reason for doing a review.
“The banking industry has undergone significant changes since these regulations were put into place,” McWilliams said in congressional testimony, adding that the agency would consider how new technology has affected the sector.
Efforts to discourage the use of brokered deposits date back more than three decades. Such deposits typically offer customers better yields than are otherwise available in the market. Wealthy depositors also use them to spread their savings among multiple institutions, putting $250,000 in each, because of the limit on deposit insurance at a single institution.
Supporters of maintaining strict rules argue that brokered deposits — which are defined, somewhat circularly, as any deposits obtained from or with the assistance of a broker — are hot money that can disappear quickly.
The worry is that without tight restrictions, banks that are already in financial trouble will turn to high-priced brokered deposits as a way to fund risky loans — a strategy known as gambling for resurrection.
“Some people say this is a 35-year-old rule. Well, it’s a 35-year-old rule that’s still much needed,” said William Isaac, who chaired the FDIC from 1981 to 1985, when many savings and loan associations were using brokered deposits to pursue high-risk growth.
But banks that operate without substantial branch operations are expected to call for major changes to the FDIC’s rules. Many of those banks rely heavily on deposits that are classified as brokered. Under the current rules, banks that lean harder on brokered deposits can be charged higher deposit insurance premiums.
At Discover Bank, which is the deposit-gathering arm of the Riverwoods, Ill.-based credit card issuer, 36.5% of domestic deposits were classified as brokered as of Sept. 30, according to call report data. BMW Bank of North America reported that 82.6% of its domestic deposits were brokered.
By contrast, many banks with substantial branch networks, including Bank of America, JPMorgan Chase, Wells Fargo and Citibank, reported that brokered deposits made up less than 10% of their domestic deposits.
Over the years, the brokered deposit restrictions have been used by the FDIC to block the development of nontraditional banks, argued George Sutton, a Salt Lake City lawyer. Sutton frequently represents industrial banks that do not maintain large branch networks and often pay higher deposit insurance premiums.
“They can bear that additional cost, but it’s unfair,” Sutton said.
Advocates for industrial banks have long complained that the FDIC also makes it too difficult to get the specialty charters approved. Since being confirmed as FDIC chair in May, McWilliams
Branchless banks employ a different business model than traditional depositories, said James Barth, an economist who is affiliated with Auburn University and the Milken Institute. While these banks pay more for deposits, they offset those higher expenses by avoiding the costs associated with staffing and operating branches.
“The FDIC ignores those differences in the business models,” Barth said.
He acknowledged that some banks use brokered deposits to fund risky lending, but argued that is not true for all banks that rely heavily on such funding. In a study published last year, Barth found that banks that derive a large percentage of their funding from brokered deposits generally have fewer branches than other depositories. He maintains that such banks are not inherently more risky than traditional institutions.
“It’s a different business model that wasn’t possible 20 years ago,” said Alison Touhey, a senior regulatory adviser at the American Bankers Association. “It’s doesn’t mean there’s anything wrong with it. It just means that the rules haven’t been modernized to accommodate it.”
Touhey noted that if a bank advertises a deposit account on Facebook, deposits by consumers who take advantage of the promotion may be considered brokered because the bank paid a fee to the social media giant. Such online deposits may be more akin to those that were acquired a generation ago from newspaper advertising than they are to funds that were traditionally classified as brokered.
Many small banks would like to see the FDIC take a less strict view of who counts as a deposit broker. But they are expected to resist any revisions to FDIC rules that would undermine traditional branch-based, relationship-oriented banking.
“We would like some changes, but not wholesale changes,” said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America.
“I think there is a group of deposits that are riskier than others. And there’s no question that when an examiner examines an internet bank, those deposits should be considered riskier than those that are coming from brick-and-mortar branches,” Cole said.
The FDIC’s public notice does not mention branchless banking specifically. But the 84-page document does suggest that numerous career staffers at the FDIC remain wary of brokered deposits, which played a role in both the S&L crisis in the 80s and the financial meltdown in 2008.
Some of the current restrictions are written into federal law, which limits the FDIC’s ability to pare them back. For example, banks that are deemed less than well capitalized may be barred from paying interest rates on deposits that are significantly higher than prevailing market rates.
In the notice published in December, the FDIC noted that at least 47 financial institutions that relied heavily on brokered deposits failed between 2007 and 2017. Those banks accounted for 38% of the losses to the deposit insurance fund during that period.
One example is IndyMac Bank in Pasadena, Calif., which was a poster child for high-risk mortgage lending. Brokered deposits rose from 18.4% of the bank’s total deposits in the fourth quarter of 2005 to 29% shortly before its failure in 2008.
After the financial crisis, the FDIC found that higher brokered deposit use is associated with higher probability of bank failure and higher insurance fund loss rates. But proponents of brokered deposits argue that there is no direct evidence that these types of deposits were a causal factor.
What it suggests is that the fight over the shape of the U.S. banking industry’s future will hinge in no small part on which interpretation of the recent past prevails.
