On July 30, 2024, the FDIC proposed substantive changes to the 2020 Brokered Deposit Rule (2020 Rule) that, if finalized, could meaningfully impact a wide group of bank and nonbank stakeholders who rely on the current rule’s definition of “deposit broker,” related exceptions, and Q&As. Many of the proposed changes effectively reverse the 2020 Rule.
Brokered deposits are any deposits that are obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker. Historically, the deposits stemming from these third-party funding arrangements were termed “hot money” as they were driven by the pursuit of high interest rates and are, therefore, a less stable form of funding compared to core deposits. Section 29 of the Federal Deposit Insurance Act allows the FDIC to restrict brokered deposits, including the banks that can accept them (i.e., insured depository institutions (IDIs) that are less than well-capitalized).
The stated concerns in the FDIC’s notice of proposed rulemaking (Proposal) are that adoption of the 2020 Rule has led to certain deposit arrangements no longer being classified as brokered, even though “the FDIC believes such deposits present similar risks as brokered deposits and could pose serious consequences for IDIs and the [deposit insurance fund (DIF)].”[1] The Proposal also maintains that entities misunderstand and inconsistently interpret the 2020 Rule and, therefore, misreport deposits.
The Proposal rests almost entirely on observation and conjecture; it lacks any recent and relevant qualitative data and analysis. For example, the FDIC asserts without evidence that there is a low level of “stickiness” associated with exclusive deposit arrangements. Moreover, the only statistical analysis cited in the Proposal is a study on core and brokered deposits from 2011, with data updated through 2017, predating the 2020 Rule by three years.
The Proposal seeks to undo large chunks of the 2020 Rule by, among other things:
- Amending the definition of “deposit broker”
- Eliminating the exclusive deposit placement arrangement exception
- Eliminating the enabling transactions designated business exception
- Amending the broker-dealer designated business exception to reduce the 25% limit to 10%
- Updating notice processes to the primary purpose exception and restricting applicants to only IDIs
- Clarifying how an IDI that loses its “agent institution” status regains that status.
A broad array of banks and nonbanks would be impacted in different and potentially significant ways if the Proposal were to be finalized in its current form:
- Banks: The Proposal would apply to all IDIs and affect any IDI that currently holds brokered deposits or holds deposits that could be reclassified as brokered under the Proposal, including IDIs that are less than well capitalized. Therefore understanding the potential impact of the Proposal is critical for many banks, especially those who rely on brokered deposits as an important source of funding. Expanding the scope of what constitutes brokered deposits could make it more difficult for banks to find adequate funding and liquidity at a time when the cost of funds is exceptionally high.
- Nonbanks: A broad array of nonbanks also would be impacted. These include investment advisors, broker-dealers, payment processors, global cryptocurrency exchanges, and fintechs whose deposits at banks rely on the current definition of deposit broker, the exclusive deposit placement arrangement exception, the primary purpose exception, and related staff Q&As stemming from the 2020 Rule. Fewer entities are likely to be exempt from the definition of deposit broker if the Proposal is adopted. Moreover, concurrent with the finalization of the Proposal, the FDIC would rescind existing primary purpose exceptions and notices granted under the 2020 Rule.
A more detailed analysis of these anticipated changes—including potential impacts on relevant stakeholders—are described in the accompanying comparison chart. A redline comparing the Proposal against the 2020 Rule is also provided for reference.
We highly recommend that both bank and nonbank stakeholders review the Proposal and related materials below, conduct an internal impact analysis involving key stakeholders, and consider submitting comments.
Comments on the Proposal are due 60 days after publication in the Federal Register (which likely means a due date of early October).
[1] Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions, 77 (proposed July 30, 2024) (to be codified at 12 C.F.R. pts. 303 & 337)