Why it matters

What is the proper scope of the definition of a "brokered deposit"? Certain industry groups wrote a letter to the Federal Deposit Insurance Corp. (FDIC) expressing concern about the broadened definition adopted by the regulator earlier this year in its FAQ guidance. The American Bankers Association (ABA), the Clearing House Association and the Institute of International Bankers explained that the new definition appears to encompass activities and deposits not previously recognized, reflecting "an overbroad and outdated approach to deposit classification that captures a much broader universe of deposits as brokered than Congress intended." For example, the FAQs appear to include all deposits obtained by contract employees (such as those obtained by customer service call centers) and bank-affiliate relationships. This would classify "a large amount" of activities as brokered deposits and would require alterations to various relationships in a way that "will cause customers significant harm," the groups cautioned. The letter requested that the FDIC provide clarification about the scope of the term or suspend application of the FAQ guidance until further study is completed on the impact of the changes.

Detailed discussion

The FDIC started 2015 by releasing new FAQs for brokered deposits. With the new FAQs, the FDIC expressed concern about the overuse and improper management of brokered deposits.

In a letter from the ABA, the Clearing House Association and the Institute of International Bankers, the industry groups warned that the expanded definition of "brokered deposits" apparently created by the FAQs could have a negative impact on consumers as well as "material implications for banks' organizational customer service arrangements, as well as potential supervisory, examination and reputational implications."

In general terms, a "brokered deposit" is any deposit that is obtained from or through the mediation or assistance of a deposit broker. Thus, the meaning of the term "brokered deposit" depends on the meaning of the term "deposit broker." A "deposit broker" is "[a]ny person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions, or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties." The groups contend that the new FAQs attempt to untether the term "facilitating" from the words "engaged in the business," which they argue "will likely result in core deposits being classified as brokered deposits in an overly broad manner."

The potential overbreadth of the guidance's characterization of certain deposits as brokered—particularly deposits from client-servicing activities performed by dual, contract and affiliate employees—requires additional study and consideration by the FDIC, the groups advised.

Including the activities of dual, contract and affiliate employees within the scope of brokered deposits encompasses a large number of stable deposits that do not trigger the same concerns about brokered, volatile, "hot money" deposits the FAQs were intended to address, the letter explained. Modern banking organizations have adopted the widespread use of dual and contract employees, as well as affiliations with nonbanking entities, in an attempt to meet the needs of customers by offering one-stop shopping.

Categorizing all of these transactions as brokered deposits "will ultimately lead [insured depository institutions] to alter their employee and affiliate relationships in a manner that will cause customers significant harm," the groups warned. Disincentivized to continue using dual, contract and affiliate relationships by the FAQs (by having to pay additional deposit insurance assessments for brokered deposits, among other operational challenges), financial institutions will likely stop offering one-stop shopping for financial services. Particularly in lower-traffic or rural areas where customers may need such services, such a "result would inhibit customers' ability to access a full complement of banking and other financial services," according to the letter.

The groups suggested the FDIC provide clarification and limit the scope of what constitutes a brokered deposit. According to the letter, only those "dual, contract or affiliate employees whose actions are driven by the prospect of direct pecuniary gain explicitly tied in a material respect to the volume of deposits placed at the [insured depository institution], or whose primary job function is to actively market deposit products on a programmatic basis rather than to provide customers with information about or access to a variety of financial products, are deposit brokers within the meaning of the statute."

The groups further argue that, at a minimum, the FDIC should suspend application of the FAQ guidance until a study has been conducted of the volume of deposits that would be redefined as brokered deposits under the new guidance, as well as the level of stability and the rates of interest that would apply to these deposits and whether banks could afford to accept such deposits if they were classified as brokered.

"With this information, the FDIC could make an informed, reasoned judgment as to the impact of the Guidance as it could presently be interpreted and revise or enhance the Guidance accordingly," the groups wrote.

To read the letter from industry groups, click here.