The FDIC has issued a final rule that establishes a new framework for analyzing whether deposits made through deposit arrangements qualify as “brokered deposits” and amends the methodology for calculating the interest rate restrictions that apply to less than well capitalized insured depository institutions (IDIs). The final rule, which includes material differences from the FDIC’s proposal, becomes effective April 1, 2021, with full compliance extended until January 1, 2022. Under the final rule, fewer deposit relationships will be deemed brokered deposits.
Brokered Deposits. Section 29 of the Federal Deposit Insurance Act and FDIC regulations restrict the acceptance of deposits by IDIs that are less than well capitalized from a “deposit broker.” While well capitalized IDIs are not restricted from accepting deposits from a “deposit broker,” an adequately capitalized IDI can accept deposits from a “deposit broker” only if it receives a waiver from the FDIC and an undercapitalized IDI may not accept such deposits.
The term “deposit broker” is defined by Section 29 and the FDIC’s implementing regulations (12 C.F.R. Part 337) to include:
- any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with IDIs or the business of placing deposits with IDIs for the purpose of selling interests in those deposits to third parties; and
- an agent or trustee who establishes a deposit account to facilitate a business arrangement with an IDI to use the proceeds of the account to fund a prearranged loan.
Section 29 does not directly define a “brokered deposit.” The FDIC’s regulations define a “brokered deposit” as “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a “deposit broker.” Accordingly, the definition of a “brokered deposit” turns on the definition of a “deposit broker.”
Section 29 contains nine exceptions to the definition of “deposit broker” and a tenth was added by FDIC regulation. Among these exceptions is one for an agent or nominee whose primary purpose is not the placement of funds with IDIs (Primary Purpose Exception).
Key items in the final rule include:
- “Deposit broker” definition.
- Any person that has an exclusive deposit arrangement with one IDI, and is not placing or facilitating the placement of deposits at any other IDI, will not be “engaged in the business” of placing, or facilitating the placement of, deposits and therefore will not be a “deposit broker.” In explaining this change, the FDIC noted that it recognizes that “a number of entities, including financial technology companies, partner with one insured depository institution to establish exclusive deposit placement arrangements. Under these arrangements, the third party has developed an exclusive business relationship with the IDI and, as a result, is less likely to move its customer funds to other IDIs in a way that makes the deposits less stable.”
- A person who, while engaged in business, will be “facilitating the placement of deposits” and be a deposit broker if such person: (1) has legal authority, contractual or otherwise, to close the account or move the third party’s funds to another IDI, (2) is involved in negotiating or setting rates, fees, terms, or condition for the deposit account, or (3) engages in “matchmaking” as defined in the final rule. The matchmaking prong is designed to capture “certain entities that utilize their relationships with prospective depositors or depositor’s agents and banks to propose deposit allocations at particular banks,” including “as part of an unaffiliated deposit sweep program between a depositor, its broker dealer, and various unaffiliated banks.” The prong includes an “anti-evasion provision” that would allow the FDIC to capture an entity’s attempts to evade the matchmaking prong by “modify[ing] its business arrangements in such a way that evades the terms of the regulation while maintaining effectively the same business relationships.”
- Primary Purpose Exception. The final rule identifies 14 specific business relationships as meeting the Primary Purpose Exception (Designated Exceptions). An agent or nominee that does not meet one of the Designated Exceptions can apply to the FDIC for a written determination that a specific deposit-placement arrangement qualifies for the Primary Purpose Exception. The final rule makes the placement of brokered certificates of deposit ineligible for the Primary Purpose Exception. Also, the final rule requires that for two of the Designated Exceptions, a third party relying on either of those exceptions must provide written notice to the FDIC. These two Designated Exceptions are for business relationships where, with respect to a particular business line, an agent or nominee (1) places less than 25 percent of customer assets under administration at IDIs, and (2) places 100 percent of customer funds into transaction accounts that do not pay any fees, interest, or other remuneration to the depositor. The final rule details the notice requirements for relying on one of these Designated Exceptions as well as the application process for entities that seek to qualify for the Primary Purpose Exception but do not meet a Designated Exception.
- Advisory Opinions. Upon the final rule’s full compliance date (January 1, 2022), all previous FDIC staff advisory opinions related to brokered deposits will be moved to inactive status on the FDIC’s website. (These opinions are listed in Appendix 1 to the discussion of the final rule.)
Interest rate limits. IDIs that are less than well capitalized may not pay an interest rate on brokered deposits accepted pursuant to a waiver or on reciprocal deposits excluded by Section 29 of the FDIA from being considered brokered deposits that significant exceeds (1) the rate paid on deposits of similar maturity in the IDI’s normal market area for deposits accepted in the IDI’s normal market area, or (2) the national rate paid on deposits of comparable maturity established by the FDIC for deposits accepted outside the IDI’s normal market area cap. Adequately and undercapitalized IDIs may not solicit deposits by offering rates that are significantly higher than the prevailing rates in the institution’s normal market area.
The final rule includes the following regarding the methodology for calculating the “national rate,” “national rate cap,” and “local market rate cap” for purposes of these limits:
- National rate. The national rate is currently calculated as a simple average of rates paid by all depository institutions and branches that offer and publish rates for specific products. The FDIC received comments that the largest banks with the most branches have a disproportional effect on the national rate and the current methodology does not account for online-focused banks (which have few or no branches but tend to pay high interest rates) or credit unions (unless the institution competed directly with a credit union in a particular market). In response to those comments, the methodology adopted by the final rule is the weighted average of rates paid by all IDIs and credit unions on a given deposit product, where the weights are each institution’s market share of domestic deposits (rather than the institution’s number of branches).
- National rate cap. The national rate cap is set as the higher of (1) (a) for maturity deposits, the rate that is 120 percent of the current yield on similar maturity U.S. Treasury plus 75 basis points, or (b) for nonmaturity deposits, the federal funds rate of interest plus 75 basis points, and (2) the national rate plus 75 basis points. The FDIC will publish the national rate cap on a monthly basis.
- Local market rate cap. The local market rate cap is set at 90 percent of the highest rate paid on a particular deposit product in the IDI’s “local market area” (as defined by the rule.) The final rule also streamlines the process by which a less than well capitalized IDI can offer a rate that is above the national rate cap when an IDI or credit union with a physical presence in the institution’s normal market area is offering a rate on a particular deposit product that is above the national rate cap. The less than well capitalized IDI must notify its appropriate FDIC regional office of its intention to offer a rate above the national rate cap and provide evidence of the rate offered by its competitor. The institution would then be allowed to offer customers physically located in its local market area 90 percent of the rate offered by the competing institution.
The exception for exclusive deposit arrangements, the Designated Exceptions, and the streamlined application process for primary purpose exceptions will be positively received by financial institutions and certain program partners because fewer deposit relationships will be deemed as brokered deposits. Further, the changes made by the final rule to the methodology to calculate rate caps (together with a clarification when nonmaturity deposits are accepted) will assist less than well capitalized institutions to preserve balance sheet liquidity.