The Federal Deposit Insurance Corporation (FDIC) Board of Directors approved a proposed rule last week to revise its regulations involving brokered deposits, reports Financial Advisor.
These deposits, known within the industry as “hot money”, come from outside firms that funnel large amounts of customers to higher-yielding certificates of deposit offered by banks.
Last year, brokers in the U.S. collected over $1 billion in these funds, which provide a source of funding for banks at a time when customers are seeking the highest interest rates. But regulators consider them risky because the depositors and the banks typically do not have a direct relationship as they do with established customers.
With this in mind, the FDIC is proposing a rule that would simplify the definition of “deposit broker,” eliminate the “exclusive deposit placement arrangement” exception, and revise the interpretation of the primary purpose exception (PPE) to consider the third party’s intent in placing customer funds at a particular insured depository institution (IDI).
The FDIC approved the measure by a 3-2 vote. The board said the revisions would strengthen the safety and soundness of the banking system, help ensure uniform and consistent reporting of brokered deposits and reduce operational challenges and reporting burdens on insured depository institutions (IDIs).
This issue became an even greater concern for regulators following the large bank failures of 2023. The FDIC has noted that failures of banks who rely on brokered deposits create a higher cost for the Deposit Insurance Fund.
“The changes to the brokered deposit rule contained in this proposal address the fundamental relationship between a bank, a depositor, and a third-party intermediary, and the risks the relationship may pose as illustrated by the recent failure of the nonbank deposit broker Synapse Financial,” said FDIC Chairman Martin J. Gruenberg. “The changes would also help strengthen the important prudential protections of the brokered deposit rule required by statutory restrictions and reduce the very serious risks that brokered deposits pose to less than well-capitalized IDIs and the Deposit Insurance Fund.”
Another provision in the proposed rule change would revise the “25 percent test” designated business exception for a PPE to be available only to broker-dealers and investment advisers and only if less than 10 percent of the total assets that the broker-dealer or investment adviser has under management for its customers is placed at one or more IDIs.
The proposed rules also aim at ensuring banks correctly report the levels of brokered deposits in their financial statements. The actions reverse a 2020 rule that made it easier for banks to accept brokered deposits and narrowed the types of deposit-related activities that are considered brokered.
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