Banking and Finance Law Daily FDIC proposes modernization of brokered deposit restrictions
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Friday, December 13, 2019

FDIC proposes modernization of brokered deposit restrictions

By Stephanie K. Mann, J.D.

According to the FDIC, the proposed rule would increase transparency, minimize the risk to the Deposit Insurance Fund, and encourage innovation.

The Federal Deposit Insurance Corporation has initiated a process that would modernize and establish a new framework for analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits. According to the notice of proposed rulemaking and its accompanying factsheet, the current framework was built for a different era to remove regulatory disincentives to offering deposit accounts to customers through different channels. Comments on the proposed rule must be submitted within 60 days after publication in the Federal Register.

Proposed rule. Under the proposed rule, the FDIC would revise the "facilitation" prong of the deposit broker definition so that it applies to any person that engages in specified activities, and provide that a wholly owned operating subsidiary be eligible for the insured depository institution (IDI) exception to the "deposit broker" definition under certain circumstances.

The FDIC also would amend the "primary purpose" exception to apply when the primary purpose of an agent’s or nominee’s business relationship with its customers is not the placement of funds with IDIs. The availability of the primary purpose exception would be clarified for third parties that place deposits through brokerage sweep accounts, under certain conditions, and to third parties whose primary purpose is enabling customers to make payments, under certain conditions. The FDIC would establish an application process for any third party that wishes to use the primary purpose exception, and would require ongoing reporting.

Under the proposal, the FDIC would continue to consider an agent’s placement of brokered CDs as deposit brokering, and such deposits would continue to be reported as brokered. Brokered CDs constitute the core type of brokered deposit that prompted Congress to enact the brokered deposits restrictions thirty years ago.

Support and opposition. Speaking in support of the proposed rule, FDIC Chairman Jelena McWilliams emphasized the primary objectives in producing the rule: creating a more transparent and consistent process; minimizing risk to the Deposit Insurance Fund; ensuring consistency with the statute; and encouraging innovation in how banks offer services and products to customers. She believes that the proposed rule "reflects the transformative changes both in the banking industry and in how consumers interact with banks and access banking services while remaining faithful to the statute."

Noting that the brokered deposit statute was written in 1989 and was not written in anticipation of mobile and digital banking platforms, the American Bankers Association expressed support for the rule and commended McWilliams for prioritizing the issue.

However, FDIC Board Member Martin J. Gruenberg stated his concerns about the rule, noting that experience in two financial crises demonstrate that brokered deposits pose a very serious safety and soundness risk to IDIs and the Deposit Insurance Fund. "Based on limitations with current deposit reporting, the potential impact on how much of the $1.1 trillion of brokered deposits currently reported would no longer be considered brokered is difficult to assess but may be quite large. The exclusion of sweep deposits from unaffiliated third parties could have a particularly large impact. These activities also would seem likely to grow in response to this rulemaking." Gruenberg expressed his belief that the proposed rule will likely reduce the scope of deposits that are considered brokered without adequate justification and expose the banking system to significantly increased risk.

Companies: American Bankers Association

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