WASHINGTON — Following industry objections to how the Federal Deposit Insurance Corp. defines brokered deposits, a House panel heard testimony Tuesday on a series of bills that would amend the definition.
The FDIC raises premiums for banks with a high level of brokered deposits, reflecting the agency's view that such funds are less "sticky" than a traditional deposit account and could fuel overly risky growth. Yet some banks have protested recent FDIC's revisions to the brokered classification, which they say expand the definition to those that do not deserve it. Those affected include prepaid card accounts and reciprocal deposits.
"Inevitably this leads to an increase in costs and less choices for consumers as banks commit additional resources to compliance rather than their customers," Rep. Scott Tipton, R-Colo., said of classifying certain prepaid accounts as brokered at the hearing of the Housing Financial Services Committee. He has authored a bill to exempt prepaid card funds deposited at a bank from the brokered definition.
In 2014, the FDIC released a Frequently Asked Questions document clarifying its position on which deposits are brokered, but the industry claimed that in some cases the guidance revised the definition and in effect penalized certain forms of funding that are actually stable. Some banks, such as MetaBank — a subsidiary of Meta Financial Group headquartered in Sioux Falls, S.D. — with a large prepaid card operation reported having to reclassify deposits as brokered.
Banks have also criticized the FDIC's recent treatment of reciprocal deposits. Reciprocal deposit services such as Promontory Interfinancial Network allow banks to insure deposits greater than the FDIC's $250,000 maximum by participating in a network in which funds are placed in smaller increments at participating institutions.
"The bank gets the benefit of obtaining a large deposit from a local customer, funds that can be put to work in its community," said Ronald Paul, chairman and chief executive of the $6.4 billion-asset EagleBank headquartered in Bethesda, Md., in his prepared remarks on behalf of the Independent Community Bankers of America. "These funds might otherwise go to a large bank outside the community or to a money market fund."
One bill that has gained traction would provide a limited exemption for reciprocal deposits from the brokered definition. The legislation, introduced by Reps. Gwen Moore, D-Wis., and Tom Emmer, R-Minn., has strong bipartisan support, including from the top Democrat on the committee, Rep. Maxine Waters of California.
Yet Norbert Michel, a research fellow in financial regulations at Heritage Foundation, said he objects to the bill. "The bill essentially provides a regulatory carve-out for a type of brokered deposit," he said.
"Markets have evolved such that deposit brokers now use FDIC insurance to back wholesale funding for banks. This sort of operation was clearly not the original intent behind FDIC insurance and perpetuating it suggests that we should federally back all sources of funds for banks simply for the purposes of supplying credit," said Michel.
Meanwhile, Tipton said in a statement that his bill on prepaid card accounts "keeps prepaid products available by excluding the funds from regulations that would make it too expensive for banks to offer the products to consumers."
Brad Fauss, president and CEO of the Network Branded Prepaid Card Association, called the bill "a proactive solution to the improper treatment of prepaid cards by the FDIC."
"We look forward to working with Rep. Tipton and other members of Congress to see this important bill become law," Fauss added.
The hearing also included discussion of a bill introduced in July by Moore and Rep. Roger Williams, R-Texas, that would benefit Kasasa, an Austin, Texas, company that connects customers to community banks. The bill would exempt certain retail deposits from the brokered deposit definition if the customer has another account with the bank.
"This common-sense bill provides a simple clarification that enables community banks to offer advanced banking services and innovative financial products via third-party service providers without the fear of increased regulation or having those customer deposits be deemed brokered," Williams said during the hearing.
