Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions

FEDERAL DEPOSIT INSURANCE CORPORATION <CFR>12 CFR Parts 303 and 337</CFR> <RIN>RIN 3064-AF99</RIN> <SUBJECT>Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Federal Deposit Insurance Corporation. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Federal Deposit Insurance Corporation (FDIC) is inviting comment on proposed revisions to its regulations relating to the brokered deposits restrictions that apply to less than well-capitalized insured depository institutions. The proposed rule would revise the “deposit broker” definition and would amend the analysis of the “primary purpose” exception to the “deposit broker” definition. The proposed rule would also amend two of the designated business relationships under the primary purpose exception and make changes to the notice and application process for the primary purpose exception. In addition, the proposed rule would clarify when an insured depository institution can regain status as an “agent institution” under the limited exception for a capped amount of reciprocal deposits. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Comments must be received by the FDIC no later than October 22, 2024. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> You may submit comments on this document using any of the following methods: • <E T="03">Agency Website: https://www.fdic.gov/resources/regulations/federal-register-publications/.</E> Follow the instructions for submitting comments on the agency website. • <E T="03">Email: comments@fdic.gov.</E> Include RIN 3064-AF99 in the subject line of the message. • <E T="03">Mail:</E> James P. Sheesley, Assistant Executive Secretary, Attention: Comments—RIN 3064-AF99, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. • <E T="03">Hand Delivery:</E> Comments may be hand delivered to the guard station at the rear of the 550 17th Street NW Building (located on F Street) on business days between 7 a.m. and 5 p.m. • <E T="03">Public Inspection:</E> Comments received, including any personal information provided, may be posted without change to <E T="03">https://www.fdic.gov/resources/regulations/federal-register-publications/.</E> Commenters should submit only information that the commenter wishes to make available publicly. The FDIC may review, redact, or refrain from posting all or any portion of any comment that it may deem to be inappropriate for publication, such as irrelevant or obscene material. The FDIC may post only a single representative example of identical or substantially identical comments, and in such cases will generally identify the number of identical or substantially identical comments represented by the posted example. All comments that have been redacted, as well as those that have not been posted, that contain comments on the merits of the notice will be retained in the public comment file and will be considered as required under all applicable laws. All comments may be accessible under the Freedom of Information Act. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> <E T="03">Division of Risk Management Supervision:</E> Thomas F. Lyons, Associate Director, 202-898-6850, <E T="03">TLyons@fdic.gov;</E> Karen J. Currie, Chief, 202-898-3981, <E T="03">KCurrie@fdic.gov;</E> Judy E. Gross, Senior Policy Analyst, 202-898-7047, <E T="03">JuGross@fdic.gov.</E> <E T="03">Legal Division:</E> Vivek Khare, Senior Counsel, 202-898-6847, <E T="03">VKhare@fdic.gov;</E> Chantal Hernandez, Counsel, 202-898-7388, <E T="03">ChHernandez@fdic.gov;</E> Ryan McCarthy, Counsel, 202-898-7301, <E T="03">RyMccarthy@fdic.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Introduction and Policy Objectives</HD> The FDIC's mission is to maintain stability and public confidence in the nation's financial system by, among other things, overseeing financial institutions for safety and soundness and insuring deposits. Since the enactment of section 29 of the Federal Deposit Insurance Act (FDI Act), <SU>1</SU> <FTREF/> which prohibits less than well-capitalized  <SU>2</SU> <FTREF/> insured depository institutions  <SU>3</SU> <FTREF/> (IDIs) from accepting brokered deposits, the FDIC has continued to study the role of brokered deposits in the performance of IDIs, their impact on the safety and soundness of IDIs, and how they affect losses to the Deposit Insurance Fund (DIF) when an IDI fails. <FTNT> <SU>1</SU>  12 U.S.C. 1831f. </FTNT> <FTNT> <SU>2</SU>  For purposes of section 29 of the FDI Act and 12 CFR 337.6 of the FDIC's Rules and Regulations, the terms “well capitalized,” “adequately capitalized,” and “undercapitalized” have the same meaning as to each IDI as provided under the regulations implementing section 38 of the FDI Act issued by the appropriate Federal banking agency for that institution. <E T="03">See</E> 12 CFR 337.6(a)(3)(i). </FTNT> <FTNT> <SU>3</SU>  Insured depository institutions include banks and savings associations insured by the FDIC. <E T="03">See</E> 12 U.S.C. 1813(c)(2). </FTNT> <FTNT> <SU>4</SU>  The FDIC may, on a case-by-case basis and upon application by an adequately capitalized IDI, waive the restriction. <E T="03">See</E> 12 U.S.C. 1831f(c). </FTNT> The FDIC has found significant reliance on brokered deposits increases an institution's risk profile, particularly as its financial condition weakens. The FDIC's statistical analyses and other studies have found that an IDI's use of brokered deposits in general is correlated with a higher probability of failure and higher losses to the DIF upon failure. <SU>5</SU> <FTREF/> <FTNT> <SU>5</SU>   <E T="03">See</E> FDIC, Study on Core Deposits and Brokered Deposits (July 8, 2011), available at <E T="03">https://www.fdic.gov/regulations/reform/coredeposit-study.pdf. See also</E> 84 FR 2366, 2369 (Feb. 6, 2019). The FDIC updated its analysis in the 2011 Study on Core Deposits and Brokered Deposits with data through the end of 2017. <E T="03">See id.</E> at 2384-2400 (appendix 2). </FTNT> On December 15, 2020, the FDIC Board adopted a final rule that established a new framework for analyzing whether certain deposit arrangements qualify as brokered deposits (the 2020 Final Rule). <SU>6</SU> <FTREF/> After the 2020 Final Rule took effect, the FDIC initially observed a significant decline in reported brokered deposits. IDIs reported a nearly $350 billion, or 31.8 percent, decline in brokered deposits between the first and second quarters of 2021 after the 2020 Final Rule became effective, which is the largest quarterly decline since brokered deposit reporting began in 1983. <SU>7</SU> <FTREF/> This significant decline can be interpreted as IDIs reclassifying a considerable amount of deposits from brokered to not brokered, as a result of the 2020 Final Rule. <FTNT> <SU>6</SU>   <E T="03">See</E> FDIC, Press Release: FDIC Board Approves Final rule on Brokered Deposit and Interest Rate Restrictions (Dec. 15, 2020), available at <E T="03">https://www.fdic.gov/news/press-releases/2020/pr20136.html.</E> The 2020 Final rule was published in the <E T="04">Federal Register</E> on January 22, 2021. <E T="03">See</E> Unsafe and Unsound Banking Practices: Brokered Deposits and Interest Rate Restrictions Final Rule, 86 FR 6742 (Jan. 22, 2021). <E T="03">See also infra</E> section II.B of this document (discussing the 2020 Final Rule). </FTNT> <FTNT> <SU>7</SU>   <E T="03">See infra</E> section II.C of this document. As of December 31, 2023, reported brokered deposit balances have since increased to $1.35 trillion. <E T="03">See infra</E> section II.C of this document. </FTNT> This is because, in large part, the changes made by the 2020 Final Rule have narrowed the types of deposit-related activities that are considered brokered; in the FDIC's view, this narrowing is problematic because these deposits continue to present the same risks as before the 2020 Final Rule. The 2020 Final Rule also expanded the types of business relationships that are eligible to be excepted from the “deposit broker” definition. For instance, the 2020 Final Rule excluded certain factors, such as the payment of fees, from the “deposit broker” definition that had historically been viewed as relevant to whether a deposit is brokered. The 2020 Final Rule also expanded the scope of the primary purpose exception to the deposit broker definition, which has allowed for a significant number of business lines to be excluded from the deposit broker definition. <SU>8</SU> <FTREF/> As a result, this has led to certain deposit arrangements that would have been viewed as brokered prior to the 2020 Final Rule as no longer being classified as brokered, even though such deposits present the same or similar risks as brokered deposits. <FTNT> <SU>8</SU>   <E T="03">See e.g.,</E> FDIC, Public Report of Entities Submitting Notices for a Primary Purpose Exception (PPE). As of March 15, 2024, available at <E T="03">https://www.fdic.gov/resources/bankers/brokered-deposits/public-report-ppes-notices.pdf.</E> </FTNT> Based on the FDIC's experience, the decline in reported brokered deposits is also due, in part, to some IDIs misunderstanding and misreporting deposits under the 2020 Final Rule. Despite the FDIC's efforts in conducting industry outreach and providing clarifying information, <SU>9</SU> <FTREF/> the FDIC has observed a number of challenges with entities understanding certain provisions of the 2020 Final Rule, which has resulted in some level of inaccurate and inconsistent application of the rule. Many of these challenges arise from § 337.6(a)(5)(v)(I)( <E T="03">1</E> )( <E T= ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 228k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━