The FDIC board on July 30 approved a notice of proposed rulemaking intended to strengthen the prudential protections of the agency’s safety and soundness rule for brokered deposits (12 CFR 337.6).

The proposal would subject brokered deposits to heightened regulation as well as expand the definition of brokered deposits, including by eliminating certain exceptions to the rule.

The board approved the notice of proposed rulemaking 3-2, along party lines, with Democratic members of the board supporting the proposal.

The proposed rule would:

• Eliminate the “exclusive deposit placement arrangement exception”;
• Revise the interpretation of the primary purpose exception (PPE) to consider the third party’s intent in placing customer funds at a particular Insured Depository Institution;
• Allow only IDIs to file notices and applications for PPEs;
• Revise the “25 percent test” designated business exception for a PPE to be available only to broker-dealers and investment advisers and only if less than 10 percent of the total assets that the broker-dealer or investment adviser has under management for its customers is placed at one or more IDIs;
• Eliminate the enabling transactions designated business exception; and,
• Clarify when an IDI, which has lost its agent institution status, can regain that status for purposes of the limited exception for reciprocal deposits.

In proposing these rules that FDIC cited to the recent failure of a nonbank deposit broker, and cited the possible risk to banks of relying on brokered deposits as funding sources.

Rob Nichols, president/CEO of the American Bankers Association expressed his trade group’s opposition to the proposal.

“This sweeping measure would restrict access to sources of liquidity while penalizing banks for pursuing funding sources that enable them to meet the needs of their communities,” he said. “Additionally, we are skeptical about the FDIC’s plan to use the brokered deposits framework to regulate bank partnerships with crypto and fintech companies.”

The brokered deposit rules remain a poor proxy to regulate risk in financial institutions.  The problem is not whether the deposits are brokered, but whether an institution is growing too quickly or whether there are deposit concentrations that increase risk.

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