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Brokered deposits provide an important source of stable funding for community banks. Recently, the FDIC issued its final rule regarding brokered deposits which includes more narrow definitions of “deposit broker” and “facilitating the placement of deposits” than were included in the proposal. Consequently, fewer deposit arrangements will be considered brokered.
For instance, a fintech company with an exclusive deposit placement arrangement with a community bank will not be considered a “deposit broker” under the final rule provided it is not placing deposits with other community banks. Also, companies that advise community banks with respect to marketing of deposit products will not be considered deposit brokers, nor will persons that provide administrative services as part of a deposit sweep program.
A person will be considered “facilitating the placement of a deposit” only if (i) it has legal authority to close a deposit account or move a customer’s funds to another bank; (ii) it is involved in negotiating rates, fees, terms, or conditions for the deposit account; or (iii) it is involved in matchmaking services. In other words, a person will only be considered a deposit broker under this definition if it is engaged in an active role in the opening of a deposit account or maintains an active level of influence or control over the deposit account after the account is open.
Furthermore, there are numerous exceptions under the new rule particularly for entities whose primary purpose is not the placement of funds with banks. Some of these exceptions will only require persons to file a notice with the FDIC regarding the primary purpose exception while others will require an application. However, the notice and application process is complicated and needs to be simplified.
FDIC National Rate Caps
Under the FDIC’s “national rate cap,” less-than-well-capitalized banks may not pay interest rates that significantly exceed the prevailing rate in the institution’s market area or in the market area from which the deposit is accepted. The rate paid on out-of-area deposits cannot exceed the national rate caps. Recognizing that competition for deposit pricing has become increasingly national in scope, in 2009 the FDIC established a presumption that the prevailing rate in all market areas is the FDIC national rate cap.
Also, in 2009 the FDIC decided that its policy of pegging the national rate cap to 120 percent of the current yield on U.S. Treasury obligations with similar maturities was not working due to the extremely low interest rate environment. The FDIC redefined the national rate caps, for deposits of similar size and maturity, to be “a simple average of rates paid by all insured depository institutions and branches for which data is available” plus 75 basis points. Credit unions were not included in the national rate cap.
ICBA commends the FDIC in its final rule for including credit union rates as part its national rate and national rate cap. Furthermore, we commend the FDIC for establishing the national rate cap as being the higher of (i) the national rate, as revised to include credit unions plus 75 basis points or (ii) 120 percent of the current yield on similar maturity U.S. Treasury obligations, plus 75 basis points. ICBA recommended this two-prong approach to allow less-than-well-capitalized banks more flexibility with complying with the national rate cap, except that we recommended adding an additional 100 basis points to the cap rather than 75 basis points.
Furthermore, the FDIC should only enforce the cap on less-than-well-capitalized institutions. Regulators are reportedly still referencing the national rate caps during exams of well-capitalized banks and insisting that bank managers speculate as to what would happen to their deposits if their deposit rates were suddenly lowered. ICBA views this as a misuse of rate cap policy that must be ended.