McWilliams lays out four goals of brokered deposits proposal slated Thursday

The chairman of the federal agency that insures bank deposits set the stage Wednesday for a proposed brokered deposits rule queued up for discussion during this week’s open board meeting, with the proposal expected – among other things – to clarify, with more transparency than is provided under the current approach, what does and does not constitute a brokered deposit meriting supervisory restrictions.

Speaking Wednesday before a Brookings Institution meeting in Washington, Federal Deposit Insurance Corp. (FDIC) Board Chairman Jelena McWilliams said the proposal for a new regulatory framework on brokered deposits, slated for board consideration Thursday, was designed with four specific goals in mind:

  • Develop a framework that encourages innovation within the industry and allows banks to serve customers “the way customers want to be served.” McWilliam said the proposal will clarify that various types of existing partnerships in which a consumer maintains a direct relationship with a bank generally would not result in a brokered deposit.
  • Take a balanced approach to interpreting Section 29 of the Federal Deposit Insurance Act that tracks the letter and spirit of the law. Section 29, added to the statute in 1989, ties a bank’s brokered deposits authority to minimum capital levels. McWilliams noted that the law provides that an entity is not a deposit broker, and thus deposits placed by an entity are not brokered deposits if the entity’s primary purpose is not the placement of deposits at depository institutions. “Under our proposal, the FDIC would analyze whether the primary purpose exception was met by looking at the business relationship between the third party and the customers for whom it is placing, or facilitating the placement of, deposits, consistent with the plain meaning of the statute,” she said.
  • Minimize risk to the Deposit Insurance Fund (DIF) and ensure the agency addresses the core problems Congress sought to address in passing Section 29. “In furtherance of this goal, under the proposal, ‘brokered CDs’ would continue to be treated as brokered deposits under the proposal,” she said. “These were the specific products members of Congress explicitly referred to when debating the legislation, and they continue to comprise a large portion of the brokered deposits market today.”
  • Establish an administrative process that emphasizes consistency and efficiency. “First, our proposal would establish an easy-to-understand, bright-line standard for determining whether an entity satisfies the statutory definition of a ‘deposit broker’ or not,” she said. “Second, it would establish an application process for implementing the primary purpose exception.”

McWilliams said the agency is also separately considering changes to its deposit insurance assessment pricing to address concentrations in funding that are correlated with higher losses to the DIF. “This could include unaffiliated sweeps that qualify for the primary purpose exception under the proposal and certain listing service deposits, which, in many cases, are not considered brokered today,” McWilliams said. “The changes the FDIC is considering to its brokered deposits regulation should not be interpreted to mean the FDIC is ignoring the potential risks associated with different forms of funding. For large banks, a modification to address these types of funding concentrations is one of several changes the FDIC is considering to make its pricing more risk-sensitive.”

The brokered deposits proposal is the second item on the FDIC Board’s discussion agenda for Thursday’s meeting. The proposal is sandwiched between a much-anticipated proposal to revise Community Reinvestment Act (CRA) rules and the agency’s 2020 operating budget. The meeting begins at 2 p.m. ET.

Keynote Remarks by FDIC Chairman Jelena McWilliams on “Brokered Deposits in the Fintech Age,” Dec. 11, 2019, at the Brookings Institution, Washington, D.C.

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