In late July, on a party-line vote, the Federal Deposit Insurance Corp. proposed
The mechanics of these
Funding stability is an important regulatory concern today, as it was 35 years ago when the brokered regime was enacted into law as part of the Financial Institutions Reform, Recovery, and Enforcement Act legislation addressing the savings and loan crisis. For better or worse, I know something about the brokered deposit rules. In 1989, I was privileged to serve then-Congressman Chuck Schumer on banking matters. We worked closely with the FDIC and its then-chair William Seidman on many issues, including brokered deposits, where concerns were focused on funding stability (and imprudent asset growth, now handled directly in supervision).
The deposit market was far simpler in those days. With innovations like mobile banking and real-time payments decades in the future, retail customers generally were granular, had fully insured accounts, had few competing options that offered higher interest rates and faced significant barriers to moving their funds. (Most would have had to wait in line at a branch to get their money out). Given those characteristics, such retail deposits were inherently sticky.
The alternative to retail deposits in the 1980s was multimillion-dollar master certificates of deposit that were cut into pieces by securities brokers and sold to wealthy clients (hence, the "brokered" deposit moniker). These wholesale deposits were typically highly concentrated, with significant discretion resting with the securities firm, not fully insured, very sensitive to alternatives offering a higher rate and subject to lower friction in moving money. Together, those characteristics made such deposits notoriously volatile.
The brokered label was then a convenient proxy for the true sources of potential funding volatility: concentration, lack of deposit insurance, rate sensitivity and lack of operational friction. Even in 1989, Chairman Seidman warned of the potential to confuse the correlation of the brokered label with the underlying risks with causation: "[T]he problem is not brokered deposits per se, but how these funds, like any other funds, are used."
The central bank has been under pressure to modernize its last-resort lending operation since the failure of three large regional banks last year.
Obviously, the deposit market has been utterly transformed since the 1980s, with seismic but largely unexplored implications for funding stability. Retail customers have been empowered through mobile/online banking, rapid movement of money and an explosion of competitors for their accounts. The result is better outcomes in the form of higher yields, lower fees and increased convenience. But it is a reasonable bet that such enhancements for the retail customer are paired with a sharp reduction in stickiness and likely with wide variation in stickiness across retail segments.
At the same time, the once homogenous wholesale deposit market has also been transformed. Once-ubiquitous jumbo master CDs are nowhere to be found. In the 1980s, there were no sweeps (affiliate or otherwise), reciprocal deposit networks, deposit placement websites, fintechs, etc. Many of these new types of deposits functionally are quite granular with decisions to move funds controlled by underlying end customers. Virtually all brokered deposits were not fully insured in the 1980s; today, more than 88% of brokered deposits are fully insured. And the operational challenges inherent in moving, for instance, a fintech program from one bank to another are daunting and time-consuming. It is reasonable to conclude that brokered deposits have become stickier since the 1980s.
Absent the information requested by the FDIC, available data appears to reinforce these observations and raises important questions about historical presumptions about deposit performance. For instance, in 2023, both Silicon Valley Bank and First Republic Bank faced intense bank runs but had almost no brokered deposits (0% and 3%, respectively). Even adjusting for the impact of the FDIC proposal by reclassifying all sweep deposits as brokered, First Republic faced retail outflows at a rate more than twice that of the surprisingly much more stable brokered bucket.
Dramatic shifts in the deposit market and these recent data points call for the rigorous, fact-based analysis of detailed data on deposit performance that the request for information seems designed to facilitate. This is underscored by the fact that the proposed rule explicitly states more than 10 times that the FDIC lacks the data to support a variety of key components of the proposal.
So, we find ourselves with the cart indeed ahead of the horse, heading toward a likely big fight untethered to any facts about funding stability — which is (or should be) the point of this entire exercise. The debate is likely to focus on questions that are unanswerable in the absence of such data. Are we really advancing safety and soundness by debating whether deposits swept from a securities firm with 10% or 25% of its managed assets in deposits are brokered absent analysis of the performance of such deposits?
Funding stability is a critically important supervisory issue, as recent bank failures demonstrate. Given the passage of 35 years, significant changes in the deposit market and surprising insights from recent bank failures, we likely have a lot to learn. Rather than just relitigating old battles, let's get the data the FDIC has so rightly requested. Based on that data on deposit performance, let's then adjust the regulatory regime appropriately to ensure banks have stable funding.
