On January 5, 2015, the FDIC issued Financial Institution Letter FIL-2-2015 updating its guidance and Frequently Asked Questions (“FAQs”) on identifying, accepting, and reporting brokered deposits. This guidance appears to reflect the FDIC’s concern that the use of brokered deposits resulted in bank failures and significant losses to the Deposit Insurance Fund during the Great Recession.
Traditionally, banks have used brokered deposits as a higher-cost, immediate funding source to expand loan and investment portfolio. However, brokered deposits are not seen as a permanent source of funding. Moreover, if significant brokered deposits are withdrawn, it can cause severe liquidity issues, especially in light of the recently revised Basel III rules (see here).
As set forth in the FAQs, the FDIC appears to restrict the use of brokered deposits by, among other things, broadening the definition of “deposit brokers” (including a discussion on bank networks), and placing restrictions on which FDIC insured depository institutions can accept them.
Combined with the changes to Basel III, this new guidance on brokered deposits appears to further restrict a bank’s ability to increase its liquidity.