Fdic Brokered Deposits Overview and Key Considerations

FDIC brokered deposits can be a convenient option for individuals and businesses looking for a safe place to park their funds.

The FDIC insures deposits up to $250,000 per depositor, per insured bank.

Brokered deposits allow banks to raise capital and make loans, helping to stimulate economic growth.

The FDIC's deposit insurance fund is used to reimburse depositors if a bank fails, providing an added layer of security for those with brokered deposits.

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The FDIC has established a set of regulations to govern brokered deposits, which are outlined in Section 337.6 of the FDIC's Rules and Regulations. This section defines a "brokered deposit" as a deposit obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.

The regulations also provide for several exceptions to the definition of a "deposit broker", including insured depository institutions, employees of insured depository institutions, and certain trusts and pension plans. These exceptions are outlined in Section 337.6 of the FDIC's Rules and Regulations.

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To determine whether a deposit is a brokered deposit, the FDIC uses a definition of "deposit broker" that includes any person engaged in the business of placing third-party deposits with IDIs or facilitating the placement of third-party deposits with IDIs. This definition is subject to nine statutory exceptions, which are listed below.

National Rate Regulations are in place to ensure stability and fairness in the financial industry. These regulations apply to less than well-capitalized institutions.

National Rates are governed by specific caps to prevent excessive rates from being charged. As of my knowledge cutoff, the caps are applicable to less than well-capitalized institutions.

Here are the current National Rates and Rate Caps as of my knowledge cutoff:

It's worth noting that these rates and caps are subject to change, so it's essential to stay up-to-date on the latest information.

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The statutory and regulatory framework for brokered deposits is governed by section 29 of the Federal Deposit Insurance Act (FDI Act). This section imposes restrictions on less than well-capitalized institutions from accepting brokered deposits.

Section 29 defines a "brokered deposit" as a deposit obtained directly or indirectly from or through the mediation or assistance of a deposit broker. A deposit broker is any person engaged in the business of placing third-party deposits with insured depository institutions (IDIs) or facilitating the placement of third-party deposits with IDIs for the purpose of selling interests in those deposits to third parties.

The deposit broker definition is subject to nine statutory exceptions, which include insured depository institutions, employees of insured depository institutions, and certain trust departments. These exceptions are designed to exempt certain entities from the definition of a deposit broker.

Here are the nine statutory exceptions to the deposit broker definition:

These exceptions are designed to provide a clear understanding of which entities are exempt from the definition of a deposit broker and to ensure that the regulatory framework for brokered deposits is applied consistently and fairly.

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The FDIC is considering a significant change in how it treats sweep deposits. They're thinking of eliminating a designated business exception for sweep deposits. This means that broker-dealers or investment advisers would no longer be exempt from reporting sweep deposits as brokered.

Under the proposed rule, IDIs would be required to report all sweep deposits as brokered because the broker-dealer or investment adviser would meet the "deposit broker" definition. This would be the case even if the broker-dealer or investment adviser is placing or facilitating the placement of less than 10 percent of the total assets it has under management for its customers at one or more IDIs.

To be exempt, an IDI would need to apply for the general primary purpose exception, demonstrating that the deposit-placement activity of the sweep arrangement is for a substantial purpose other than to provide deposit insurance or a deposit placement service. This would involve submitting the required information listed under the general primary purpose exception application process.

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A deposit broker is a person or entity that receives third-party funds and deposits them at more than one insured depository institution (IDI).

The FDIC defines a deposit broker as a person engaged in the business of placing deposits or facilitating the placement of deposits of third parties. This includes activities such as receiving third-party funds and depositing them at multiple IDIs, having legal authority to close accounts or move funds, and negotiating or setting rates, fees, terms, or conditions for deposit accounts.

The FDIC has proposed an amendment to the deposit broker definition, which would combine the "placing" and "facilitating" prongs into a single definition. This change would make the definition more straightforward for IDIs and other stakeholders to apply.

A person is considered engaged in matchmaking activities if they propose deposit allocations at or between multiple IDIs based on both the depositor's objectives and the IDIs' objectives. This definition excludes deposits placed by a depositor's agent with an IDI affiliated with the depositor's agent.

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Here are the key factors that determine whether a person is a deposit broker:

The FDIC is responsible for regulating and supervising banks to ensure their safety and soundness. The agency is called the Federal Deposit Insurance Corporation.

The FDIC has specific rules in place to govern brokered deposits, which are deposits made by banks into other banks. One such rule is the Proposed Rule by the Federal Deposit Insurance Corporation on 08/23/2024, which is related to brokered deposits restrictions.

The Proposed Rule is part of 12 CFR Parts 303 and 337, and it has a document number of 2024-18214.

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Between 2007 and 2017, the FDIC and the Deposit Insurance Fund (DIF) were significantly affected by the financial crisis, with 530 institutions failing and causing an estimated loss of $71.9 billion to the DIF.

The financial crisis of 2007-2017 had a profound impact on the FDIC and the DIF. During this time, 530 institutions failed, resulting in a significant loss to the DIF.

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In fact, 47 of these institutions relied heavily on brokered deposits, causing an estimated loss of over $100 million to the DIF each. These 47 institutions held a total of $396.9 billion in assets, but accounted for $27.3 billion in estimated losses to the DIF.

The largest of these 47 institutions was IndyMac Bank, F.S.B., which failed in 2008 and caused an estimated loss of $12.0 billion to the DIF. This loss represented 39% of IndyMac's total assets at the time of failure.

IndyMac's use of brokered deposits increased significantly as its problems mounted. In its last Thrift Financial Report filed before failure, IndyMac reported $5.5 billion in brokered deposits, representing 29% of its total deposits.

Another example is ANB Financial National Association, which failed in 2008 and caused an estimated loss of $1.0 billion to the DIF. This loss represented 54% of ANB Financial's total assets at the time of failure.

ANB Financial's reliance on brokered deposits was also significant, with $1.6 billion in brokered deposits representing 87% of its total deposits in its last Call Report before failure.

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The 25 percent test designated exception is being amended due to its overly broad nature, covering various business lines rather than a narrow set of business lines.

The FDIC has determined that the current 25 percent test and enabling transactions test would not meet the primary purpose exception under the proposed analysis.

These exceptions are being eliminated because the FDIC would likely find that their primary purpose is often not for a substantial purpose other than to provide a deposit-placement service or FDIC deposit insurance.

The notice process for invoking the exception does not allow the FDIC to review submissions before an entity can invoke it, and many submissions have been incomplete, inaccurate, or vague.

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The FDIC is considering several alternatives as part of their proposal. The FDIC is inviting comment on these alternatives.

One of the alternatives under consideration is the FDIC's proposal itself, which is the main focus of the invitation for comment. The FDIC is looking for feedback on their proposal to ensure it meets the needs of all stakeholders.

The FDIC is also considering other alternatives, which are being kept under wraps for now.

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The FDIC is considering various alternatives as part of their proposal. As part of this process, they are inviting comment on these alternatives.

One of the alternatives under consideration is part of the proposal itself. The FDIC is open to feedback on this aspect of their plan.

The FDIC is taking a thoughtful approach to their proposal, considering multiple options. They want to hear from the public about these alternatives.

The FDIC is inviting comment on the alternatives that are under consideration. This is a key part of their proposal.

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The FDIC has found that institutions with significant reliance on brokered deposits are at a higher risk, especially when their financial condition weakens.

Adoption of the 2020 Final Rule led to some deposit arrangements being viewed as non-brokered, even though the FDIC believes they present similar risks.

Entities have struggled to understand certain provisions of the 2020 Final Rule, resulting in inconsistent application of the rule.

The FDIC aims to better align its brokered deposit regulations with the statutory language and purpose of section 29 of the FDI Act.

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The proposed rule on FDIC brokered deposits is likely to affect a significant number of institutions, with 4,577 FDIC-insured depository institutions holding approximately $24.06 trillion in assets and $17.60 trillion in total domestic deposits.

The rule would revise the "deposit broker" definition and amend the analysis of the "primary purpose" exception to the "deposit broker" definition, which could lead to fewer entities being exempt from the definition of deposit broker.

Some 1,237 small IDIs currently report positive amounts of brokered deposits, and the proposed rule could affect all 3,259 small IDIs regarding the types of deposits they choose to accept in the future.

The FDIC believes that under the proposed rule, fewer entities would likely be exempt from the definition of deposit broker than currently, and to the extent such entities continue to place funds at IDIs, the amount of deposits at IDIs considered brokered under the proposed rule is likely to increase.

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Seven IDIs, or 0.15 percent, were considered less than well capitalized as of March 31, 2024, with one of them reporting holding some volume of brokered deposits.

These seven IDIs together report $1.1 billion in total assets, $1.0 billion in domestic deposits, and $137.0 million in brokered deposits.

The proposed rule may affect consumers who utilize brokered deposits, deposit placement services, or arrangements, and could lead to changes in interest rates or costs associated with placing funds with different entities.

Small third parties may incur costs associated with making changes to systems, policies, and procedures involved in the provision of brokered deposits, as well as costs associated with the submission of filings to the FDIC by affiliated IDIs on their deposit placement arrangements.

The proposed rule's criteria for determining whether an entity is a deposit broker are generally stricter than the criteria in the 2020 Final Rule, which could lead to more small third parties being considered deposit brokers under the proposed rule.

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Small entities make up a significant portion of FDIC-insured institutions, with 3,259 out of 4,577 institutions considered small.

These small entities hold a total of 1,237 institutions that report holding some volume of brokered deposits.

The proposed rule may affect certain small entities more than others, including those that are less than well-capitalized based on their reported capital ratios.

Six small institutions are less than well-capitalized and do not report holding brokered deposits.

The proposed rule has five categories of effects on small entities, including effects applicable to potentially any small IDI and effects applicable to nonbank subsidiaries or affiliates of small institutions.

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A person is considered a deposit broker if they receive third-party funds and deposit those funds at more than one insured depository institution (IDI). This is according to the 2020 Final Rule, which further defines the circumstances under which a third party is a deposit broker.

To be more specific, a person is engaged in the business of placing deposits if they receive third-party funds and deposit those funds at more than one IDI. They are also engaged in the business of facilitating the placement of deposits if they engage in certain activities, such as having legal authority to close accounts or move funds, negotiating rates or fees, or proposing deposit allocations.

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The FDIC's proposed amendment to the deposit broker definition combines the "placing" and "facilitating" prongs and removes the term "matchmaking activities", replacing it with a deposit allocation provision. This means that a person is engaged in the business of placing or facilitating the placement of deposits if they engage in one or more of the following activities: receiving third-party funds and depositing them at one or more IDIs, having legal authority to close accounts or move funds, negotiating rates or fees, proposing or determining deposit allocations, or having a relationship with an IDI or customer where the IDI or customer pays a fee or provides other remuneration.

Here are the key factors that determine whether a person is a deposit broker:

The FDIC's proposed rule would also add a new factor related to fees, which means that a person's relationship with an IDI or customer would be considered in determining whether they are a deposit broker. This could include situations where the IDI or customer pays a fee or provides other remuneration in exchange for the placement of deposits.

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Brokered deposits have a long history of concerns among bank regulators and Congress. This concern arose because brokered and high-rate deposits can facilitate a bank's rapid growth in risky assets without adequate controls.

Historically, institutions that use brokered deposits have done so in a prudent manner, measuring, monitoring, and controlling risks associated with them. However, an IDI's use of brokered deposits often raises its risk profile, which has long been a concern among bank regulators and Congress.

The FDIC has noted that customers who use brokered deposits are often drawn to high rates and prone to leave the bank quickly to obtain a better rate or if they become aware of problems at the bank.

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