What Is A Brokered Deposit?
Banks hold various types of deposits to meet their funding needs. Brokered deposits are one type of deposit, which come from, or with the help of, a third party deposit broker. The FDIC decides what constitutes a “deposit broker.”
Historically, these deposits were more expensive and thought to be riskier in that they would leave the bank quickly in a time of stress. Because of this perceived risk, federal regulations impose restrictions on the acceptance of brokered deposits by banks with weakened capital positions. For all banks, classification of a deposit as brokered can lead to higher deposit insurance assessments, adverse treatment under liquidity and capital regulations, and unnecessarily heightened supervisory scrutiny.
How Does This Affect Banks and Consumers?
Unwarranted negative supervisory treatment of brokered deposits inhibits innovation in the banking industry and limits consumer access to safe financial products via contemporary platforms. Modern technology, including the internet and smart phones, allows banks to gather stable deposits from both affiliates and customers outside of their local markets. Many of these deposits are viewed as “brokered” by the FDIC, as some technology platforms and other third parties are considered “deposit brokers.”
This broad, outdated interpretation of who is a deposit broker has led to increased regulatory costs and supervisory bias from bank examiners against what, as a practical matter, is stable funding. The result is that even well-capitalized banks are strongly discouraged from holding brokered deposits, which limits innovation in how customers can access financial products and services.
Modernize Brokered Deposit Regulatory Rules
Congress and the FDIC should modernize the laws and regulations that define brokered deposits so they reflect modern deposit gathering and fit how bank customers want to handle their money.
The FDIC issued a long-awaited proposal to modernize the existing brokered deposit rules.
Learn more in-depth information about brokered deposits here.
National Rate Cap
What Is the National Rate Cap?
Federal regulations also direct the FDIC to calculate a national rate cap that limits the interest rates that banks with weaker capital positions may offer on deposits. The way the FDIC currently calculates the national rate is not a proportional, market based approach. As a result of that flawed methodology, the rate stands significantly below the actual cost of deposits and artificially suppresses the interest rates that some banks can offer their customers.
The FDIC issued an NPR on the national rate cap, which can be viewed here.