The recently enacted 21st Century ROAD to Housing Act contains important provisions affecting community and regional banks that have received considerably less attention than the legislation’s broader housing-related initiatives. Among the most significant are provisions expanding the treatment of reciprocal deposits under federal banking law and creating a new framework for certain custodial deposits. These changes could have meaningful implications for banks seeking stable sources of funding and for businesses, municipalities, and other depositors seeking the security of expanded FDIC insurance coverage.

In this week’s episode of the Consumer Finance Monitor Podcast being released today, Alan Kaplinsky (founder, former leader for 25 years and now Senior Counsel of the Consumer Financial Services Group) is joined by Rob Blackwell, Chief Content Officer and Head of External Affairs and host of the podcast show, Banking with Interest (on which Alan was a recent guest to discuss developments at the CFPB at IntraFi and former Editor-in-Chief of American Banker. Rob brings a particularly valuable perspective to the discussion, having spent nearly two decades covering the banking industry and Washington before moving to IntraFi, where he has played an important role in advocating for the recent legislative changes affecting reciprocal deposits.

The discussion begins with an overview of IntraFi’s business and the reciprocal deposit network it pioneered. Rob explains how reciprocal deposits enable customers to obtain FDIC insurance coverage substantially exceeding the ordinary $250,000 insurance limit while maintaining their banking relationship with a single local financial institution. The arrangement also enables community and regional banks to attract and retain substantial deposits that they can use to support lending in their communities. Rob discusses the principal users of reciprocal deposits, including small businesses, municipalities, nonprofits, and wealthy individuals, and explains why these deposits are fundamentally different from traditional brokered deposits.

A particularly timely portion of the discussion focuses on the 21st Century ROAD to Housing Act and its amendments to the federal treatment of reciprocal deposits. Rob explains the limitations imposed by the 2018 legislation, why the rapid growth in reciprocal deposits following the 2023 failure of Silicon Valley Bank made those limitations increasingly problematic, and how a bipartisan effort led by members of Congress resulted in the Keeping Deposits Local Act, which ultimately became part of the broader housing legislation. Notably, the standalone reciprocal deposit legislation passed the House by an extraordinary 405-0 vote. Rob walks through the new tiered formula for determining how much in reciprocal deposits banks may hold without those deposits being classified as brokered deposits. The conversation also examines the legislation’s separate treatment of custodial deposits, an area where further FDIC rulemaking will be important.

The conversation then turns to several other developments with potentially far-reaching implications for the banking industry.

First, Alan and Rob examine the proposed CLARITY Act, which would establish a comprehensive federal regulatory framework for cryptocurrency and allocate regulatory responsibilities between the SEC and CFTC. Rob discusses the banking industry’s concerns about stablecoin companies offering economic incentives resembling interest payments despite restrictions in the GENIUS Act. He explains why banks fear that stablecoins could draw deposits away from traditional financial institutions, potentially impairing their ability to make loans, particularly to small businesses. The discussion also addresses the political and ethical issues complicating the legislation, including concerns about the cryptocurrency industry’s influence in Washington and the involvement of the President’s family in cryptocurrency businesses. [The bill did not pass before Congress adjourned for the Midterm Elections.  In light of the fact that the Elections have resulted in the Democrats obtaining control of the House and the Senate, the prospects for enactment of the CLARITY Act are unclear.]

Second, the discussion explores the growing role of artificial intelligence in banking, including the potentially transformative implications of agentic AI. Rob describes a particularly troubling hypothetical scenario in which AI agents, acting independently on behalf of customers, simultaneously move deposits away from a bank based on information suggesting that the institution is experiencing financial difficulties. Could AI-driven deposit movements trigger a bank run on a scale and at a speed that traditional banking systems have never experienced? The discussion also considers how AI-generated search results could affect the competitive position of community banks by directing prospective customers toward larger institutions, as well as the need for regulatory guardrails and clarity concerning responsibility when AI systems make consequential financial decisions.

Finally, Alan and Rob briefly discuss the longer-term implications of quantum computing, including the potential threat it poses to existing data security and encryption systems.

This episode offers listeners a particularly informative perspective on the intersection of banking, technology, legislation, and public policy. Rob’s experience as both a leading banking journalist and an industry participant provides a valuable vantage point on the legislative developments and emerging challenges facing financial institutions.