Matthew Bornfreund, a partner in Troutman Pepper’s Corporate Practice Group, was quoted in the August 7, 2024 American Banker article, “Bank Allies Say FDIC Brokered Deposit Plan Reflects Outdated Thinking.”
Matthew Bornfreund of Troutman Pepper says such “hot money” – as it was later dubbed – was viewed by skeptics as one of the major causes of the savings and loan crisis of the 1980s. Prior to the widespread adoption of the internet, deposit brokers offered to take consumer deposits and “shop” them around from bank to bank, chasing the highest interest rate possible, he said.
“At the time, it wasn’t really possible for an individual depositor to shop around the country to find the highest interest rates,” Bornfreund said. “Now you just go online and you can deposit the money wherever you want, anywhere in the country, anytime.”
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“From ’89 all the way through 2020 the FDIC determined that a deposit group was based on a series of interpretations and guidance that they issued and if you had a question of whether or not your deposits were broker deposits, you had to check against these various opinions,” he said. “The purpose of the 2020 rulemaking was to give some very clear guidance as to what actually is a deposit broker.”
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“That’s now been changed in the [recent] proposal,” said Bornfreund. “From ‘more than one bank’ to ‘one or more banks’ – essentially getting rid of the whole exception.”
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“There are lots of fintechs that are going to be very much hurt by this,” said Bornfreund.
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Bornfreund says while brokered deposits did present significant risks at one time, he believes the proposal might treat certain arrangements as riskier than they are in practice.
“Deposit brokers were an actual thing that were definitely driving the financial crisis of the ’80s, the savings and loan crisis,” he said. “That kind of deposit brokering is now actually relatively rare because users can just directly themselves find the best interest rates. Just because there’s a third party involved in the deposit does not necessarily mean it is more risky than a deposit that the user opens directly themselves.”
