March 23, 2011
Authored by: Bryan Cave Leighton Paisner
On March 18, 2011, the FDIC hosted a roundtable discussion on core and brokered deposits as part of a study required by Section 1506 of the Dodd-Frank Act. All members of the FDIC Board of Directors were present. Panelists included former FDIC Chairman Bill Isaac, a cross section of bankers, a university professor, consultant Randy Dennis, vendor representatives such as Mark Jacobsen of Promontory Interfinancial Network, LLC, and one state bank regulator, Sara Cline of the West Virginia Division of Banking.
The roundtable discussion primarily centered on the continued relevance of the current statutory meaning of “brokered deposit” and the policy behind restrictions on the use of such deposits. It was clear from the FDIC’s comments and their choice of speakers that they continue to believe that brokered deposits raise significant policy concerns. Bill Isaac discussed the “massive abuse” of brokered deposits by many of the failed banks and savings associations in the late 1980s, and noted that curbing these abuses was even more important today given the higher FDIC insurance coverage. Likewise, Dr. Haluk Unal, from the University of Maryland, cited statistical evidence that high levels of brokered deposits reduce a bank’s franchise value and make it less likely the bank, if it fails, will be acquired by a healthy bank. While other participants argued that these statistics are skewed by a small percentage of failed banks, FDIC Chairman Sheila Bair noted that the use of brokered deposits can be costly to the taxpayer and reduce franchise values.
With regard to the effect of brokered deposits on liquidity, the FDIC suggested that the primary question is whether the deposits are volatile or stable. FDIC Deputy Director Diane Ellis said that the FDIC had identified three characteristics that affect stability—customer relationship, the depositor’s location, and interest rates—and asked the panel to comment on each of these characteristics.
Several participants suggested that although the term “brokered” has come to be synonymous with “volatile” and contrasted by “core,” the statutory definition has been simultaneously read very broadly. As a result, the regulatory result has been the prohibition of a wide variety of funding sources as “brokered deposits” that, in the view of several bankers on the panel, are in fact stable funds. The panel focus was on what attributes truly make a deposit stable, what retention record banks have actually had with particular deposit types, and just how much more costly these various funding sources have been. Panelists discussed business practices and technological advances to which they felt the statutory meaning of brokered deposit was not attuned.
Chairman Bair noted that the FDIC does not have the flexibility to eliminate or modify the definition of brokered deposit without Congress first amending the statute. However, she also suggested that the FDIC could have significant flexibility in how they evaluate a bank’s liquidity and brokered deposit risk exposure during the examination process. On that point, Promontory’s Mark Jacobsen said that, while the customer’s relationship with the bank is an important factor when valuing the deposit, this relationship should not be the determinative factor. He noted deposits with long durations and modest rates can be very valuable regardless of the bank’s relationship with the customer.
Many of the banker panelists agreed that the reciprocal CDARs program was a stable and reasonably priced source of funding; it enabled them to stay competitive for larger local depositors and to nurture long-term relationships with those customers. Participants generally felt that regulators should be able to assess volatility on the basis of deposit characteristics—the true nature of the customer relationship and actual stickiness of funds—rather than on the way in which the deposit originates.
Participants also suggested that restrictions on the use of brokered deposits should not be tied to capital levels and should depend on a more holistic review of a bank’s condition. Banker panelists explained that the bank’s business model and mission should drive the liquidity analysis and that key funding sources should not be mechanically cut off from the bank on the basis of rigid definitions and capital levels.
Chairman Bair closed the discussion by saying that the meeting had given her and the FDIC board much to think about but that the road forward was still not clear to her. She said that another roundtable discussion was probably needed, and that one topic to be explored would be the extent to which the FDIC could use the insurance assessment process to discourage risky brokered deposit activity. The Dodd-Frank Act requires the FDIC to submit its report on core and brokered deposits to Congress by July 21.