The failures of Silicon Valley Bank, Signature Bank and First Republic Bank sent shock waves through the financial world last year, prompting the Federal Deposit Insurance Corporation board, by a 3-2 vote, to recently
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Brokered deposits came to the fore in the 1980s during the worst banking crisis since the Great Depression. I was chairman of the FDIC, Paul Volcker was chairman of the Federal Reserve and Don Regan was secretary of the Treasury. Together, we oversaw some 3,000 bank and thrift failures, including scores of the largest banks and thrifts in the nation, plus the bankruptcy of the Federal Savings and Loan Insurance Corporation, which cost taxpayers some $150 billion.
Massive inflation forced the dismantling of interest rate controls on deposits of $100,000 and over. Large Wall Street firms pounced on the opportunity to acquire vast amounts of dollars and bid them out to deeply troubled banks and thrifts, which bid whatever amount necessary to obtain the funds and loan them to highly risky borrowers at even higher prices.
The FDIC first reacted by adopting a regulation limiting deposit insurance to $100,000 per broker instead of $100,000 for each customer of the broker. When the deposit brokers sued the FDIC and won, the FDIC countered with a regulation placing strict limits and oversight on the volume of brokered deposits a bank or thrift could purchase — and prohibiting purchases by banks and thrifts deemed to be in troubled condition. Those measures significantly curtailed the problems, but not until after brokered deposits had already bankrupted the FSLIC.
In the end, we developed the regulatory tools to keep brokered deposits under control and today they are a very important and safe source of funding, particularly in their support of community banking. While this banking crisis is long gone, the brokered deposit rules remain in place.
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The FDIC's assertion that 2023's bank failures necessitate stricter controls on brokered deposits is mistaken. It was not the presence of brokered deposits that caused the liquidity crisis at those banks but their excessive reliance on large, uninsured accounts that fled at the first sign of trouble.
The liquidity crisis could and would have been prevented by better board and management decisions and by better regulatory oversight and enforcement actions.
Most banks receive the bulk of their funding from retail customers and small businesses through their branch systems. With the growing competition from non-banks and very large regional and money center banks, it is becoming increasingly difficult for community banks to attract enough retail deposits to meet credit needs in their communities. Non-retail deposits, called either wholesale or brokered deposits, play a crucial role in providing community banks an additional source of deposit funding. Responsible use of these alternative sources of funding brings deposits into local markets, enabling community banks to offer much needed new loans.
The FDIC's proposed additional restrictions on brokered deposits are a misstep in the wake of the recent regional bank failures. The proposed regulations address the wrong problem and would bring further harm to an already endangered and diminished community banking system.
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