By Debra CopeOne key provision of S. 2155 that has received little publicity so far is Section 202. Under Section 202, which became effective when the president signed S. 2155, most reciprocal deposits are no longer considered brokered. ABA officially supported the legislation that became Section 202.
The American Bankers Association endorses two reciprocal deposit services—CDARS and Insured Cash Sweep, or ICS—offered by Promontory Interfinancial Network. The new law permits a well-capitalized bank with a CAMELS rating of 1 or 2 to hold reciprocal deposits up to the lesser of 20 percent of its total liabilities or $5 billion without those deposits being treated as brokered. (Reciprocal deposits at a bank above these amounts are also permitted, but remain brokered.)
In addition, a bank that drops below well-capitalized is no longer required to obtain a waiver from the FDIC to continue accepting reciprocal deposits, as long as it does not accept an amount that would cause its total reciprocal deposits to exceed a previous four-quarter average.
For banks that hesitated to offer or to take full advantage of reciprocal deposits through services such as CDARS and ICS because regulators treated all such deposits as brokered, a big concern is now removed. Banks—especially community banks—should welcome this legislative change, which comes at a critical time.
Two factors have changed the deposit landscape and are continuing to change it, shaping it into something different from anything seen before. First, an unintended consequence of recent Basel Committee liquidity rules has been to place far more value on retail deposits for the large banks covered by the rules. Consequently, the largest banks have focused on—and invested in—retail deposit-gathering, creating ferocious competition.
Second, the much-increased competition is heightened by technology that enables any financial institution anywhere to solicit a bank’s local retail deposits, which are the deposits that smaller banks have traditionally used to fund their lending. Community banks are therefore finding it important to expand their efforts in non-retail deposits, where there is less competition. They are also recognizing that they need to change their deposit mix to give more emphasis to corporate and public-unit deposits.
Reciprocal deposits can help banks succeed in these efforts and keep their local money working locally. And the change in law that makes most reciprocal deposits non-brokered makes their use by banks even more attractive.
Questions for bank directors to ask at the next board meeting are:
- Does our bank have the best tools to target non-retail deposits, and is it using them as well as it could be?
- Is there more that our bank can do with reciprocal deposits, now that most reciprocal deposits are considered non-brokered?
In addition to pursuing these questions, directors should ensure that the bank carefully reviews its liability policies to ensure that they enable management—and especially the management level ALCO committee—to give reciprocal deposits the consideration they deserve.