Board OKs narrowing brokered deposits definition, widening interest rate restriction calculation to include credit unions

A rule narrowing the scope of brokered deposits and redefining market interest rates to include those paid by credit unions (for the first time) when setting restrictions was approved by the board of the federal insurer of bank deposits Tuesday on a split vote.

Federal Deposit Insurance Corp. (FDIC) Board Member (and former chairman) Martin Gruenberg was the lone “no” vote against the rule.

Brokered deposit restrictions

Under the brokered deposits provision, the FDIC said in a financial institution letter (FIL 113-2020) that it:

  • Clarifies when a person meets the “placing deposits” and “facilitation” parts of the deposit broker definition;
  • Provides that a person with an exclusive deposit placement arrangement with one insured depository institution (IDI) will not meet the “deposit broker” definition;
  • Provides that the “primary purpose” exception will apply when, with respect to a particular business line, the primary purpose of the agent’s or nominee’s business relationship with its customers is not the placement of funds with depository institutions;
  • Designates a list of business relationships that meet the primary purpose exception;
  • Requires written notice for certain designated exceptions;
  • Allows entities that do not meet one of the designated business relationships to apply for a primary purpose exception;
  • Restates that brokered CDs will continue to be considered brokered deposits; and
  • Affirms that third parties that either place or assist in the placement of deposits with a primary purpose of encouraging savings will not qualify for the primary purpose exception.

In a release, the agency said the new rule establishes bright-line standards for determining whether an entity meets the statutory definition of “deposit broker”; and identifies a number of business relationships (or “designated exceptions”) that automatically meet the “primary purpose exception.”

“The rule also establishes a transparent application process for entities that seek a ‘primary purpose exception’ but do not meet one of the ‘designated exceptions,’” the agency added. “The new brokered deposit rule reflects technological changes across the banking industry and removes regulatory disincentives that limit banks’ ability to serve their customers. “

National and local market interest-rate restrictions

Under this provision, which applies to banks that are less than well-capitalized, the FDIC said it will define “national rate” as the weighted average of rates paid by all IDIs and – for the first time – credit unions on a given deposit product (for which data are available) based on each institution’s market share of domestic deposits.

Under the provision, the “National Rate Cap” is the higher of (1) the national rate plus 75 basis points; or (2) for maturity deposits, 120% of the current yield on similar maturity U.S. Treasury obligations and, for nonmaturity deposits, the federal funds rate, plus 75 basis points. “By establishing two methods for calculating the national rate cap, the FDIC ensures that deposit interest rate caps are durable under both high-rate or rising-rate environments and low-rate or falling-rate environments,” the agency said.

The FDIC explained that “national rate” – which now includes credit unions rates – is defined as the weighted average of rates paid by all IDIs “and credit unions” on a given deposit product, for which data are available, where the weights are each institution’s market share of domestic deposits. The FDIC, in the final rule, said it was including credit union rates (not weighted, but compared directly) because “credit unions compete with banks on a national scale.”

The FDIC said it was replacing the interest rate average weighted by bank branches with an average where each institution’s interest rate is weighted by its share of deposits, with the addition of credit union rates. “As described in the Interest Rate NPR, calculating the national rate by market share, rather than branch count, more accurately reflects the marketplace, and provides more emphasis on institutions with large or exclusive internet presence as described by commenters.”

The effective date of the final rule is April 1, 2021; an extended compliance date of Jan. 1, 2022, is also included.

Final rule on brokered deposits: Press Release and Financial Institution Letter

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