How FDIC Is Taking a Tough View of Brokered Deposits

WASHINGTON — The Federal Deposit Insurance Corp. is attempting to clarify its policy regarding brokered deposits after a persistent flood of inquiries from banks and others about what meets the definition.

The criteria are important because the amount of brokered deposits can affect how much institutions pay in insurance assessments, among other things.

The FDIC released guidance last week that consolidated previous interpretative letters and a 2011 study into a single, 15-page Frequently Asked Questions document. The agency said it wasn't trying to create new policy, but instead clarify the issue.

"This guidance is not related to any supervisory concerns with respect to brokered deposits, it is to provide clarity on what is a brokered deposit," said Rae-Ann Miller, the FDIC's associate director of risk management policy.

Many in the industry welcomed the guidance, saying having all the answers in one place is helpful.

"It is actually a good thing they were able to compile it all into one set of guidance because when banks have asked me how you determine whether something is a brokered deposit or not, we have had to rely on these opinion letters and also on this [2011] study," said Chris Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America.

Brokered deposits, sometimes seen as "hot money," were the subject of criticism during the savings and loan and housing crises because they can be an unstable source of funding for banks. They are broadly defined as deposits from a third-party deposit broker that are steered to an insured financial institution by an individual or business.

But determining who fits the criteria as a deposit broker is difficult, and recent innovations have made it tougher. The industry has seen an increase in new products from nonbanks such as listing services of interest rates on certificates of deposit at different insured institutions, reward checking and wealth management tools, that cross-cut more traditional deposit products.

The FDIC's FAQ includes an entire section on listing services in particular because they often walk a fine line between brokered and nonbrokered deposits. Small tweaks can determine on which side of the line they fall.

For example, the FDIC distinguishes between a listing service that would qualify as a deposit broker and one that would not. If a company is simply providing information and does not facilitate the placement of funds, it would not be considered a deposit broker. But if the service is receiving compensation for the amount of funds it is placing with an institution, steering or facilitating the placement of funds, it would be considered a deposit broker.

"Where the only function of a deposit listing service is to provide information on the availability and terms of accounts, we believe that the listing service is not facilitating the placement of deposits," the FDIC says in the FAQ.

But there are other tricky areas as well. The FAQ notes the example of a college ID card that also has a debit card component. If the card were to be marketed strictly as an ID card, those deposits would not be brokered, however, if the financial features of the ID card were promoted and the college received fees or commissions from the institution, those deposits would be considered brokered.

The FDIC also broadly says that an entity could be considered a deposit broker even if it doesn't actually place any funds with an insured institution on behalf of a third party. The FDIC takes into account other factors such as the structure and nature of potential fees a person or business may receive for steering funds to an institution, or the purpose and involvement in directing those funds.

"It does show you how conservatively and strictly the FDIC is interpreting what a brokered deposit is," Cole said. "By putting this all in one place, you get a good idea that the FDIC is not taking a lenient approach to what they consider is a brokered deposit."

But whether a deposit is considered brokered or not can have a significant impact. A number of factors, including how well capitalized the bank is and its risk rating, in some cases could cause its deposit insurance assessments to increase by as many as 10 basis points depending on the ratio of brokered deposits it holds.

In addition, while well capitalized banks are free to accept brokered deposits, banks categorized as adequately capitalized need a waiver from the FDIC to accept or rollover existing brokered deposits and undercapitalized banks are prohibited from accepting or rolling over brokered deposits altogether.

Industry observers said the new guidance would make it easier on institutions to tell what is brokered and what isn't.

"The FDIC has clearly tried to put all its guidance in one place, which is very nice, because the FDIC on brokered deposits has historically operated by a series of interpretive letters — some of which are public and some of which are not public," said Lawrence Kaplan, of counsel at the law firm of Paul Hastings.

Paul Clark, a partner at Seward and Kissel who provides regulatory and transaction advice to financial institutions, agreed that the information wasn't "surprising," but there were some new details included.

"There are one or two new interpretations that have not been previously published" in the FAQ, Clark said.

But Denyette DePierro, vice president and senior counsel of regulatory policy at the American Bankers Association, said the new guidance may ultimately help nonbanks more than banks.

"Nonbanks are probably more of the audience," she said.

The topic has been controversial in the past as some believe the FDIC's definition of brokered deposits is too broad, while the FDIC has pointed to evidence that an overreliance on brokered deposits — which can generally be raised more quickly than core deposits, but also dry up faster — has led to bank failures and losses for the Deposit Insurance Fund.

In the most recent financial crisis, banks tapped brokered deposits in excess to fund real estate projects which led to bank failures when real estate prices plummeted. Others argue that the concentration of assets that brokered deposits enable pose a large risk, and such deposits are also less sticky than core deposits.

In the 2011 study, the FDIC said "A number of costly institution failures, including some recent failures, have experienced rapid asset growth before failure and have funded this growth through brokered deposits," and added that the FDIC's own research shows that "as brokered deposit levels increase, the probability that a bank will fail also increases."

The FDIC said in the FAQ that the overuse and mismanagement of brokered deposits by problem institutions have led to bank failures and losses to the DIF.

"The overarching theme is that the FDIC is trying to limit this type of activity," Stanley Orszula, a financial institutions lawyer and partner at Quarles & Brady, said about banks' reliance on brokered deposits. "They are trying to clamp down on brokered deposits that would cause liquidity problems. … It is a reaction to the last banking crisis."

Kaplan at Paul Hastings said it is essential for a bank to be able to identify what is a brokered deposit and what is not, because if they face a capital-related enforcement action, their business activities related to those brokered deposits could be in jeopardy.

"This is really the FDIC preparing for the next battle when a bank is no longer well capitalized. … Suddenly you have banks that can get troubled and are notched down a capital category, and suddenly they cannot accept brokered deposits," Kaplan said. "It is one of those issues that is really sensitive because it can really throw off a bank's and nonbank's business plans if they are arranging for these deposits."