WASHINGTON, D.C. – Rep. French Hill (R-AR) and Rep. Andy Barr (R-KY) yesterday led their Republican colleagues on the House Financial Services Committee in urging Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg to withdraw the partisan proposal released in July, which would rewrite the rules governing brokered deposits.
In their letter, Reps. Hill and Barr say, "This FDIC rule would likely force banks, including ones that do not face restrictions on acceptance of brokered deposits, to significantly alter their liability structures. The proposal does not address the actual risks that contribute to bank instability."
To read Reps. Hill and Barr's exclusive with American Banker, please visit HERE.
To read their full letter, please visit HERE.
We write to urge that the Federal Deposit Insurance Corporation (FDIC) withdraw its flawed July 30, 2024 partisan proposal (Proposal) to rewrite the rules governing brokered deposits. The Proposal would arbitrarily and unjustifiably reverse adjustments to the treatment of brokered deposits that were finalized by the FDIC in 2020 following substantial research and analysis. Those adjustments provided much needed clarity around brokered deposits that have fostered innovation in bank deposit funding which has proven beneficial to consumers.
The July 30 Proposal cited the bankruptcy of Synapse Financial Technologies and the banking instability of last March as justifications for the undoing of the 2020 rule on brokered deposits (2020 Rulemaking). These justifications are disingenuous as neither of these situations were caused by brokered deposits. In fact, Synapse is not an insured depository institution. In the Proposal, the FDIC asserts that deposits excluded from the definition of brokered deposits in the 2020 Rulemaking, “present similar risks as brokered deposits and could pose serious consequences.” Instead of performing analysis to substantiate this assertion, the FDIC relies on unsupported conjecture and anecdotal evidence. In fact, the only analytical evidence used to justify this policy reversal is a study on core and brokered deposits conducted in 2011 and updated in 2017, to inform the 2020 rulemaking.
Shockingly, the brokered deposit proposal was initiated concurrently with an FDIC Request for Information (RFI) on deposits and another on bank-fintech arrangements — information that would inform a properly administered new brokered deposit proposal and should be completed first to inform if there is a need for brokered deposit reform.
The Proposal also fails to address the substantially negative impact it will have on consumers and, concerningly, only pays lip service to the consumers who will be harmed, stating only that, “they might experience changes in interest rates on those funds, or costs associated with placing those funds with different entities. The FDIC does not have the information necessary to estimate such changes….” The 2020 Rulemaking gave consumers more choice and control over their financial decisions by supporting fintech and bank partnerships and allowing a wide array of financial products and services to be available in the market, especially for unbanked Americans. Yet the Proposal seeks to make it more difficult and less economical for the partnerships that assist in offering these products and services to consumers.
Further the 2020 Rulemaking understood the changing landscape of consumer financial services in the U.S. and sought to enable expanded access to financial services. In the 1980s and 1990s, when the original brokered deposits regulations were written, banks communicated by phone and fax machine and customers accessed their banking services at physical branches. With the 2020 Rulemaking, the FDIC recognized that technology such as the internet had changed the financial landscape. The rule modified the brokered deposits regime to reflect the need for banks to raise deposits through modern means and the actual risk different types of deposits presented.
This Proposal will also have negative consequences for banks and everyday investors. Without justification, the Proposal would likely force banks, including ones that do not face restrictions on acceptance of brokered deposits, to significantly alter their liability structures. By increasing the share of deposits for many banks that would be classified as brokered deposits, the Proposal also promises to unnecessarily increase deposit insurance assessment rates for those banks. Furthermore, broker-dealers often use deposit sweeps to safeguard their customers’ assets, which is why the 2020 Rulemaking provided tailored exemptions for broker-dealers. This Proposal guts this risk-based approach and would make safeguarding customers’ assets more expensive and less efficient with no benefit to the safety and soundness of banks or consumer protection. While the FDIC acknowledges the potential for additional costs to financial institutions in the proposal, it entirely fails to quantify or analyze these costs, let alone explain what perceived safety and soundness benefits justify these purportedly unmeasurable costs.
Importantly, the Proposal does not address the actual risks that contribute to bank instability. The proposal aims to restrict brokered deposits for less than well-capitalized insured depository institutions (IDIs), arguing that such deposits increase an institution’s risk profile. However, by focusing too heavily on the source of deposits, the proposal fails to adequately address the characteristics that determine deposit stability “in a fair and risk-sensitive way”. Deposit risk is not merely a function of whether deposits are brokered or non-brokered but based on other attributes as well. The gutting of the primary purpose exemption and the enabling transactions test shows a clear disregard for actual deposit stability considerations. For example, a long-term deposit such as a 10-year Certificate of Deposit (CD) is inherently stable and presents minimal liquidity risk, regardless of third-party involvement. Moreover, given the broad scope of the Proposal it would act as de facto regulation on well capitalized banks, which is beyond what Congress intended.
If finalized as proposed, this rule would impose broad, poorly crafted, and unnecessary restrictions on brokered deposits and limit the ability of banks, especially community and regional institutions, to access diverse funding sources. This could exacerbate liquidity issues rather than mitigate them, as banks may be forced to turn to more expensive or less reliable funding sources. A more effective regulatory approach from the FDIC would have considered a wider set of factors affecting bank liquidity, such as concentration risk; large, uninsured deposits; and deposit term maturity.
Finally, you announced your intent to resign nearly six months ago, and in our view, it is inappropriate and unprecedented for a resigning Chairman to attempt to force through a major and controversial rulemaking before their departure, especially one that does not have the support of the entire FDIC’s board of directors. As such we recommend that the FDIC withdraw the Proposal to allow a fresh perspective to guide the agency forward rather than finalizing this controversial proposal in the final months of your tenure.
We write to urge that the Federal Deposit Insurance Corporation (FDIC) withdraw its flawed July 30, 2024 partisan proposal (Proposal) to rewrite the rules governing brokered deposits. The Proposal would arbitrarily and unjustifiably reverse adjustments to the treatment of brokered deposits that were finalized by the FDIC in 2020 following substantial research and analysis. Those adjustments provided much needed clarity around brokered deposits that have fostered innovation in bank deposit funding which has proven beneficial to consumers.
The July 30 Proposal cited the bankruptcy of Synapse Financial Technologies and the banking instability of last March as justifications for the undoing of the 2020 rule on brokered deposits (2020 Rulemaking). These justifications are disingenuous as neither of these situations were caused by brokered deposits. In fact, Synapse is not an insured depository institution. In the Proposal, the FDIC asserts that deposits excluded from the definition of brokered deposits in the 2020 Rulemaking, “present similar risks as brokered deposits and could pose serious consequences.” Instead of performing analysis to substantiate this assertion, the FDIC relies on unsupported conjecture and anecdotal evidence. In fact, the only analytical evidence used to justify this policy reversal is a study on core and brokered deposits conducted in 2011 and updated in 2017, to inform the 2020 rulemaking.
Shockingly, the brokered deposit proposal was initiated concurrently with an FDIC Request for Information (RFI) on deposits and another on bank-fintech arrangements — information that would inform a properly administered new brokered deposit proposal and should be completed first to inform if there is a need for brokered deposit reform.
The Proposal also fails to address the substantially negative impact it will have on consumers and, concerningly, only pays lip service to the consumers who will be harmed, stating only that, “they might experience changes in interest rates on those funds, or costs associated with placing those funds with different entities. The FDIC does not have the information necessary to estimate such changes….” The 2020 Rulemaking gave consumers more choice and control over their financial decisions by supporting fintech and bank partnerships and allowing a wide array of financial products and services to be available in the market, especially for unbanked Americans. Yet the Proposal seeks to make it more difficult and less economical for the partnerships that assist in offering these products and services to consumers.
Further the 2020 Rulemaking understood the changing landscape of consumer financial services in the U.S. and sought to enable expanded access to financial services. In the 1980s and 1990s, when the original brokered deposits regulations were written, banks communicated by phone and fax machine and customers accessed their banking services at physical branches. With the 2020 Rulemaking, the FDIC recognized that technology such as the internet had changed the financial landscape. The rule modified the brokered deposits regime to reflect the need for banks to raise deposits through modern means and the actual risk different types of deposits presented.
This Proposal will also have negative consequences for banks and everyday investors. Without justification, the Proposal would likely force banks, including ones that do not face restrictions on acceptance of brokered deposits, to significantly alter their liability structures. By increasing the share of deposits for many banks that would be classified as brokered deposits, the Proposal also promises to unnecessarily increase deposit insurance assessment rates for those banks. Furthermore, broker-dealers often use deposit sweeps to safeguard their customers’ assets, which is why the 2020 Rulemaking provided tailored exemptions for broker-dealers. This Proposal guts this risk-based approach and would make safeguarding customers’ assets more expensive and less efficient with no benefit to the safety and soundness of banks or consumer protection. While the FDIC acknowledges the potential for additional costs to financial institutions in the proposal, it entirely fails to quantify or analyze these costs, let alone explain what perceived safety and soundness benefits justify these purportedly unmeasurable costs.
Importantly, the Proposal does not address the actual risks that contribute to bank instability. The proposal aims to restrict brokered deposits for less than well-capitalized insured depository institutions (IDIs), arguing that such deposits increase an institution’s risk profile. However, by focusing too heavily on the source of deposits, the proposal fails to adequately address the characteristics that determine deposit stability “in a fair and risk-sensitive way”. Deposit risk is not merely a function of whether deposits are brokered or non-brokered but based on other attributes as well. The gutting of the primary purpose exemption and the enabling transactions test shows a clear disregard for actual deposit stability considerations. For example, a long-term deposit such as a 10-year Certificate of Deposit (CD) is inherently stable and presents minimal liquidity risk, regardless of third-party involvement. Moreover, given the broad scope of the Proposal it would act as de facto regulation on well capitalized banks, which is beyond what Congress intended.
If finalized as proposed, this rule would impose broad, poorly crafted, and unnecessary restrictions on brokered deposits and limit the ability of banks, especially community and regional institutions, to access diverse funding sources. This could exacerbate liquidity issues rather than mitigate them, as banks may be forced to turn to more expensive or less reliable funding sources. A more effective regulatory approach from the FDIC would have considered a wider set of factors affecting bank liquidity, such as concentration risk; large, uninsured deposits; and deposit term maturity.
Finally, you announced your intent to resign nearly six months ago, and in our view, it is inappropriate and unprecedented for a resigning Chairman to attempt to force through a major and controversial rulemaking before their departure, especially one that does not have the support of the entire FDIC’s board of directors. As such we recommend that the FDIC withdraw the Proposal to allow a fresh perspective to guide the agency forward rather than finalizing this controversial proposal in the final months of your tenure.
We write to urge that the Federal Deposit Insurance Corporation (FDIC) withdraw its flawed July 30, 2024 partisan proposal (Proposal) to rewrite the rules governing brokered deposits. The Proposal would arbitrarily and unjustifiably reverse adjustments to the treatment of brokered deposits that were finalized by the FDIC in 2020 following substantial research and analysis. Those adjustments provided much needed clarity around brokered deposits that have fostered innovation in bank deposit funding which has proven beneficial to consumers.
The July 30 Proposal cited the bankruptcy of Synapse Financial Technologies and the banking instability of last March as justifications for the undoing of the 2020 rule on brokered deposits (2020 Rulemaking). These justifications are disingenuous as neither of these situations were caused by brokered deposits. In fact, Synapse is not an insured depository institution. In the Proposal, the FDIC asserts that deposits excluded from the definition of brokered deposits in the 2020 Rulemaking, “present similar risks as brokered deposits and could pose serious consequences.” Instead of performing analysis to substantiate this assertion, the FDIC relies on unsupported conjecture and anecdotal evidence. In fact, the only analytical evidence used to justify this policy reversal is a study on core and brokered deposits conducted in 2011 and updated in 2017, to inform the 2020 rulemaking.
Shockingly, the brokered deposit proposal was initiated concurrently with an FDIC Request for Information (RFI) on deposits and another on bank-fintech arrangements — information that would inform a properly administered new brokered deposit proposal and should be completed first to inform if there is a need for brokered deposit reform.
The Proposal also fails to address the substantially negative impact it will have on consumers and, concerningly, only pays lip service to the consumers who will be harmed, stating only that, “they might experience changes in interest rates on those funds, or costs associated with placing those funds with different entities. The FDIC does not have the information necessary to estimate such changes….” The 2020 Rulemaking gave consumers more choice and control over their financial decisions by supporting fintech and bank partnerships and allowing a wide array of financial products and services to be available in the market, especially for unbanked Americans. Yet the Proposal seeks to make it more difficult and less economical for the partnerships that assist in offering these products and services to consumers.
Further the 2020 Rulemaking understood the changing landscape of consumer financial services in the U.S. and sought to enable expanded access to financial services. In the 1980s and 1990s, when the original brokered deposits regulations were written, banks communicated by phone and fax machine and customers accessed their banking services at physical branches. With the 2020 Rulemaking, the FDIC recognized that technology such as the internet had changed the financial landscape. The rule modified the brokered deposits regime to reflect the need for banks to raise deposits through modern means and the actual risk different types of deposits presented.
This Proposal will also have negative consequences for banks and everyday investors. Without justification, the Proposal would likely force banks, including ones that do not face restrictions on acceptance of brokered deposits, to significantly alter their liability structures. By increasing the share of deposits for many banks that would be classified as brokered deposits, the Proposal also promises to unnecessarily increase deposit insurance assessment rates for those banks. Furthermore, broker-dealers often use deposit sweeps to safeguard their customers’ assets, which is why the 2020 Rulemaking provided tailored exemptions for broker-dealers. This Proposal guts this risk-based approach and would make safeguarding customers’ assets more expensive and less efficient with no benefit to the safety and soundness of banks or consumer protection. While the FDIC acknowledges the potential for additional costs to financial institutions in the proposal, it entirely fails to quantify or analyze these costs, let alone explain what perceived safety and soundness benefits justify these purportedly unmeasurable costs.
Importantly, the Proposal does not address the actual risks that contribute to bank instability. The proposal aims to restrict brokered deposits for less than well-capitalized insured depository institutions (IDIs), arguing that such deposits increase an institution’s risk profile. However, by focusing too heavily on the source of deposits, the proposal fails to adequately address the characteristics that determine deposit stability “in a fair and risk-sensitive way”. Deposit risk is not merely a function of whether deposits are brokered or non-brokered but based on other attributes as well. The gutting of the primary purpose exemption and the enabling transactions test shows a clear disregard for actual deposit stability considerations. For example, a long-term deposit such as a 10-year Certificate of Deposit (CD) is inherently stable and presents minimal liquidity risk, regardless of third-party involvement. Moreover, given the broad scope of the Proposal it would act as de facto regulation on well capitalized banks, which is beyond what Congress intended.
If finalized as proposed, this rule would impose broad, poorly crafted, and unnecessary restrictions on brokered deposits and limit the ability of banks, especially community and regional institutions, to access diverse funding sources. This could exacerbate liquidity issues rather than mitigate them, as banks may be forced to turn to more expensive or less reliable funding sources. A more effective regulatory approach from the FDIC would have considered a wider set of factors affecting bank liquidity, such as concentration risk; large, uninsured deposits; and deposit term maturity.
Finally, you announced your intent to resign nearly six months ago, and in our view, it is inappropriate and unprecedented for a resigning Chairman to attempt to force through a major and controversial rulemaking before their departure, especially one that does not have the support of the entire FDIC’s board of directors. As such we recommend that the FDIC withdraw the Proposal to allow a fresh perspective to guide the agency forward rather than finalizing this controversial proposal in the final months of your tenure.
