Brokered deposits help banks help their communities

As a bank serving a low- to moderate-income customer base with many as net borrowers and a large portion of that being minorities, we’ve seen firsthand how the brokered deposit rule directly affects them.

These customers typically do not have the deposits to support their loan demand, and the current rule hampers the efforts of banks to serve LMI consumers when plentiful local deposits aren’t available.

As the CEO of The Peoples Bank in southern Arkansas, I’ve watched this 110-year-old institution grow by catering to people who don’t have a lot of deposits or high net worth, and are often underbanked or previously unbanked.

We’ve reached out to the previously unbanked with free accounts, opened for a penny, and offer no-interest/no-fee loans to anyone who becomes overdrawn and can’t escape the cycle.

We have one of the lowest local non-sufficient funds fee and no daily overdraft fee. We treat our customers with dignity, respect and appreciation.

For years, we tried to increase core deposits, and in 2013 we hired a consultant to help us. In five years, the bank’s demand deposit accounts doubled, but these new customers brought few deposits and high loan demand.

For example, last year the bank had 3,459 “totally free checking” accounts with an average balance of $707. But on the lending side, there were 4,476 consumer loans with an average balance of $10,424 — indicating a much higher demand for loans.

Peoples Bank began issuing brokered certificates of deposit in 2008 as a great liquidity and funding tool. These brokered CDs were stable, low-cost compared with core deposits, convenient and nonvolatile. They were readily available, simple to obtain with no collateral required and were callable at our option.

It also enhanced profit strategies that were not possible with the price and term of core deposits, and allowed us to more easily structure asset/liability management.

The bank’s use of brokered deposits and wholesale funding is vital to our customers and to us. The current stigma and restrictions on wholesale funding discriminates against customers like ours. And given the heightened emphasis on economic inclusion, greater efforts should be made to consider the needs of these targeted demographics.

Some have asserted that brokered deposits are inferior to core deposits, and have been a factor in bank failures, causing excess losses to the Deposit Insurance Fund.

However, studies have also shown that brokered deposits are correlated to safer and more profitable banks. Excessive risk-taking involving questionable investments is to blame for failures and losses.

The decadeslong stigma against brokered deposits is the reason they are devalued during a failed bank resolution. The negative view of brokered deposits by regulators makes such deposits undesirable to acquirers of troubled banks.

However, even the Federal Deposit Insurance Corp. noted in a July 2011 deposit study that “there should be no particular stigma attached to the acceptance of brokered deposits per se and the proper use of such deposits should not be discouraged.”

Yet it’s hard to find any banker or examiner who believes this statement is being followed.

Concerned by the pressure from regulators about our high use of brokered deposits — even though we have always been well-capitalized — we began to migrate the brokered deposit portfolio into core deposits.

We increased the rates offered for local deposits, which increased the cost of existing accounts. Local competitors matched our rates, which increased our cost of funds without adding new funds. In the end, we would have been better off replacing our maturing brokered deposits with new ones.

It’s clearly understandable why volatility is a concern among regulators and bankers. But because of the terms available through the brokered deposit market, liabilities and assets can be matched, reducing volatility.

A deposit is volatile if it can disappear unexpectedly. All core deposits can be volatile in this way, while brokered deposits are not.

Brokered deposits are predictable: You know when they will mature or become callable. If a bank needs to extend the average life of the liabilities side, it can add up to 30-year-term brokered deposits — terms impossible to find in local deposits.

The recently renewed attempt to classify which deposits should be considered brokered, is complicated. As the FDIC Chairman Jelena McWilliams has stated, a proposed asset-growth restriction “would be a far easier regime for the FDIC to administer” than the current restriction on brokered deposits for troubled banks. This simple alternative “more directly addresses the key goal,” she added.

Regulation does not need to be more complicated. Brokered deposits can be a valuable tool when used properly. If rapid growth is a problem, limit the growth. But don’t turn a bad situation into a disaster by cutting off liquidity.

A proposal by Sen. Jerry Moran, R-Kan., that would replace the restriction on brokered deposits with limits on asset growth for troubled banks is simple and effective. It directly addresses the problem of rapid growth.

Sometimes the best solution is the simplest. This bill will be effective, less confusing and less complicated, unlike the current rules governing brokered deposit usage. There will be no losers; only winners: LMI and minority consumers, regulators, the Deposit Insurance Fund and banks.