ABA Letter to the FDIC on the Proposed Brokered Deposit Restrictions

Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429

Dear Mr. Feldman,

The American Bankers Association (ABA) appreciates the opportunity to comment on the Federal Deposit Insurance Corporation’s (FDIC) notice of proposed rulemaking (NPR or proposal) on the brokered deposit restrictions that apply to less than well-capitalized insured depository institutions (IDIs). The NPR would create a new framework for analyzing certain provisions of the definition of “deposit broker,” including the meaning of the term “engaged in the business of facilitating the placement of deposits.” The NPR would also establish an application and reporting process for IDIs and third parties that seek to utilize the “primary purpose” exception.

The NPR follows an Advance Notice of Proposed Rulemaking (ANPR) to which ABA responded on May 7, 2019.4 In that submission, we expressed our support for the FDIC’s review of the brokered deposit regulations that implement Section 29 of the Federal Deposit Insurance Act (FDI Act). We continue to support this review and appreciate the thoughtful approach the FDIC has taken in modifying its interpretation of the statue to accommodate modern banking, while ensuring that banks are operating in a safe and sound manner. In particular, ABA supports and encourages the increased transparency and objective framework the FDIC is proposing to implement. However, we do not believe that the NPR goes far enough towards solving the current regulations’ fundamental problems.

Section 29 of the FDI Act was enacted in 1989 as part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The statute imposes restrictions on the acceptance of brokered deposits by insured depository institutions (IDIs) with weakened capital positions. Section 29 was adopted in response to concerns that the use of brokered deposits by troubled savings and loan associations fueled rapid growth, and exacerbated the crisis in that industry. Section 29 addressed this concern by preventing troubled IDIs from holding funds placed by third-parties whose primary business is “placing deposits or facilitating the placement of deposits of third parties” with IDIs. Since the enactment of Section 29, there have been significant statutory changes, such as the Riegle-Neal Interstate Banking and Branching Efficiency Act of 19946 and the Gramm-Leach-Bliley Act7, which expanded bank footprints and affiliations. These changes, together with significant technological advances, reconfigured markets, spurred new business opportunities and allowing new banking models and mechanisms for deposit gathering. However, there has been no corresponding statutory or regulatory update to Section 29 to accommodate these changes.

The result of an outdated and broadly interpreted framework is a significant gap has developed between the brokered deposits Congress intended to restrict and those that are currently designated as such. Many of the deposits now classified as “brokered” under the FDIC’s regulations, or that IDIs treat as “brokered deposits” due to the lack of clarity in those regulations and existing FDIC guidance, go far beyond what was intended by Congress. Further, there is no empirical evidence that a deposit that is classified as “brokered” possess enhanced risk to the safety and soundness of IDIs or, by extension, to the Deposit Insurance Fund. Rather, the label is largely a result of an outdated legal construct. The result is a statutory and regulatory framework that discourages well capitalized institutions from holding a diverse, stable funding base or innovating to stay competitive and meet the needs and demands of their customers.

ABA acknowledges that the FDIC recognizes many of these problems and appreciates the effort the FDIC has put into modernizing and clarifying its brokered deposit regulations. Today, depositors arrive at their IDI’s through a variety of partnerships, technology platforms, and general business strategies that are unique to individual IDIs. On an aggregate industry level the combinations of these factors is almost endless. We appreciate, then, that it is extremely difficult for the FDIC to sort the universe of deposit products and relationships into statutorily mandated buckets developed years before the internet or smartphones, and before IDIs were allowed to branch across state lines or permitted to form affiliations with securities and other firms under the umbrella of a financial holding company. However, we do not believe that the NPR sufficiently narrows the definition of “deposit broker.” Thus it fails to resolve the fundamental problem of an overly broad regulatory framework that imposes unnecessary costs on stable funding sources gathered through modern means.

ABA has four major concerns with the framework proposed in the NPR:

• The proposed definition of “facilitation” is overly broad, complex, creates significant grey areas, and will inadvertently increase the scope of deposits classified as brokered;
• The proposed application process combined with significant ambiguity will cause the primary purpose exception to become the rule;
• The NPR does not resolve the question of how current interpretations of the brokered deposit regulations fit under its proposed framework; and
• The NPR does not eliminate the stigma of “classic” brokered deposits.

To address these concerns, ABA recommends that the FDIC:

• Make the definition of “deposit broker” more precise. This may be achieved by modifying the proposed definition of “facilitation” to make discretion over an account the primary factor for determining facilitation;
• Explicitly exempt parties that the FDIC does not deem to be deposit brokers. This would add significant clarity and may be achieved by specifically identifying parties and transactions that fall within statutory exceptions to the definition or that the FDIC does not view as a deposit broker;
• Provide that certain activities that fall within the primary purpose exemption do not require an application. This would reduce some of the uncertainty associated with the proposed application and determination process, as well as operational burdens on the FDIC;
• Require annual re-certification of primary purpose exemptions and publish a list of third parties that have been re-certified. To enhance compliance and transparency, the FDIC should require third parties to annually re-certify that they meet the requirements of the exception and the FDIC should make public a list of the third parties that have been certified;
• Establish a transition period for compliance. It is unknown how current opinions and interpretations will fit into the FDIC’s final framework. We recommend that the FDIC review its prior interpretations and publicly indicate which interpretations will be effective under the final framework. Additionally, we recommend allowing IDIs up to three years following the effective date of a final rule to conform their practices; and
• Mitigate the stigma of “classic” brokered deposits. We encourage the FDIC to take steps, including examiner education, to mitigate the stigma of these deposits.

Collectively, these recommendations would permit the FDIC to meet its statutory requirements and would eliminate much of the ambiguity associated with current regulations and the NPR. In the balance of this letter, we address our concerns with the NPR in more detail, and expand on our recommendations to address those concerns. We also refer to the letter submitted by ABA’s HSA Council, for technical discussion about those products and how they intersect with the brokered deposit framework.

Download the comment letter to read the full text.