Comments on a proposed rule that would tighten up some of the easing provisions of the federal bank deposit insurer’s 2020 brokered deposits rule will be due no later than Oct. 22, according to a notice in Friday’s Federal Register.
The Federal Deposit Insurance Corp. (FDIC) Board, on a party-line vote of 3-2, on July 30 issued a proposed rule that the agency said would, among other things, simplify the definition of “deposit broker” as well as the analysis of the “primary purpose” exception to the deposit broker definition. The proposal also, according to the notice, would revise two of the designated business relationships under the primary purpose exception and revise the notice and application process for that exception.
In addition, it said the proposal 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.
In a supplementary information section of the Federal Register notice, the FDIC said it has found that significant reliance on brokered deposits increases an institution’s risk profile, particularly as its financial condition weakens. In general, it said, its statistical analyses and other studies have found that an IDI’s use of brokered deposits is correlated with a higher probability of failure and, when the institution fails, higher losses to the Deposit Insurance Fund (DIF).
The agency found a significant decline in the amount of reported brokered deposits after implementation of the final rule, with a nearly $350 billion, or 31.8%, decline in the amount of reported brokered deposits between the first and second quarters of 2021 after the rule went into effect. It called this the largest quarterly decline since brokered deposit reporting began in 1983.
This decline, it said, can be interpreted as IDIs reclassifying a considerable amount of deposits from brokered to not brokered as a result of the 2020 final rule. While the rule narrowed the types of deposit-related activities that are considered brokered, the FDIC said it holds that they “continue to present the same risks” as prior to the 2020 rule.
As to its impact on individual institutions, the agency noted that, among other things, the proposed rule could affect FDIC deposit insurance assessments at certain small IDIs. “Under the FDIC’s assessment regulations, IDIs with a significant concentration of brokered deposits may pay higher quarterly assessments, depending on other factors,” it noted.
The agency also issued a financial institution letter (FIL-47-2024) July 30 on the proposal.