WASHINGTON — Federal Deposit Insurance Corp. Vice Chair Travis Hill Wednesday joined a chorus of banking industry allies calling for the three major federal banking agencies to repropose the Basel III endgame capital standards and solicit further feedback on changes they've since made to the draft.
In the remarks at the American Enterprise Institute Wednesday afternoon, Hill stressed that any such reproposal must be advanced jointly by all three agencies and allow for an additional comment period when the industry and other interested parties may weigh in.
"For just one agency to repropose — but with an expectation that a future final rule will be issued jointly by the three agencies — would be unprecedented, sow confusion and lead to a number of practical and legal questions," Hill said. "For example, under such a scenario, if the final rule were challenged, and a court determined the final rule lacked logical outgrowth from the original proposal, would the court strike down the FDIC and OCC rules but uphold the Federal Reserve rule?"
Hill's call comes after similar calls from various other top bank regulators, including
Fellow Republican member of the FDIC board Jonathan McKernan
"The Fed may put out something that basically looks like a reproposal but is called something else and allows the public to comment without starting the process from scratch," said Katz in June. "If the Fed were to do that in the fall — before the elections — it could finalize the Basel endgame rule next year, probably in the first half."
Also echoing other Basel skeptics, Hill focused much of his ire on a proposal to reform capital treatment of operational risk. The first proposed draft of Basel endgame requires banks to base their capital requirements on business volume and historical operational losses, and shifts to using a standardized approach instead of banks' internal models.
Along with reforms to capital treatment of market risk, Hill noted the frameworks "rest on a complicated set of formulas and metrics that would be challenging to amend in a broad, material and rational way without receiving additional feedback."
Hill also said he believes regulation of brokered deposits is out of date. Unlike traditional deposits, brokered deposits — sometimes known as "hot money" — move from bank to bank in search of higher returns while maximizing deposit insurance coverage.
Banks favor these deposits because they can quickly attract large sums of money in times of distress, but such sums can be less reliable than traditional retail deposits, particularly if brokers find better deals elsewhere and withdraw en masse. Skeptics of brokered deposits argue they lead to increased interest rate sensitivity, liquidity risk and asset-liability mismatches.
Congress passed laws governing brokered deposits with the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 in response to the savings and loan crisis of the 1980s. The law prohibited undercapitalized banks from accepting brokered deposits and limited the interest rates that banks could offer on brokered deposits.
Former FDIC Chair Jelena McWilliams and Hill — who served as one of her top deputies when she was in office — developed and finalized an FDIC rule on brokered deposits in 2020. The Trump FDIC's rationale for the revision was in part to acknowledge that certain arrangements conventionally considered brokered deposits may pose less flight risk. Exclusive deposit-taking arrangements between fintechs and banks, for example, often hinge less on maximizing deposit returns, they argued, and thus should not be regulated in the same way as traditional brokered deposits.
Critics of the rule say it created loopholes in the definition of deposit broker and brokered deposits. The rule limited the definition of someone facilitating a brokered deposit arrangement and exempted the activities of agents whose "primary purpose" is not the placement of deposits with banks and credit unions as long as agents or money managers deposit no more than 25% of the money they manage for customers.
Hill defended the rule and argued that brokered deposits are not inherently risky, pointing to the fact that other risks like lack of insurance are the real root causes of such deposit risk. He noted that prior to the 2020 rule, the FDIC evaluated the compliance of new brokered deposit arrangements "on a one-off basis, resulting in an unwieldy, opaque regime inconsistently applied across the industry."
Hill said while he would not equate the risks posed by a bank that heavily relies on traditional brokered deposits to that of a firm which relies on retail deposits from a diverse branch network, he argued regulators should think "holistically" about how to regulate deposits at modern banks.
"[While] some types of brokered deposits raise safety and soundness concerns … traditional brokered deposits present the opposite concern — the deposits have no franchise value because the depositors have no relationship with the bank, earn high rates, are fully insured, generally cannot withdraw before maturity, and thus are generally indifferent to the condition of the bank, but are incredibly stable," he said. "I would also consider retiring the use of the term 'brokered deposits' to refer to deposits beyond traditional brokered certificates of deposit."
