Legal Analysis Finds FDIC Has Broad Authority on Brokered Deposits

The FDIC has “ample existing authority” to address the regulation of brokered deposits, according to a legal analysis by law firm Jones Day commissioned by the American Bankers Association. ABA shared the analysis with the agency in a letter to FDIC Chairman Jelena McWilliams. The FDIC recently issued an advance notice of proposed rulemaking on brokered deposits and is currently soliciting public comments. This memorandum, while not in direct response to that ANPR, presents a legal foundation for reform recommendations to the FDIC.

Jones Day’s analysis focuses on the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which placed limits on the use of brokered deposits by troubled banks and thrifts in the wake of the savings and loan crisis. “Contrary to congressional intent, many of the FDIC’s FAQs and staff advisory opinions transform Section 29 [of FIRREA]from part of a narrowly drawn provision of law that specifically targets the most flagrant abusers of brokered deposits to a significantly more expansive prohibition covering arrangements that do not appear to present risks of flagrant abuses,” the analysis found.

Today, however, new business models and bank strategies, including those used for risk mitigation, are coming into conflict with the FDIC’s regulatory architecture for brokered deposits, ABA President and CEO Rob Nichols said in his letter to McWilliams. However, he added, “It is clear from the memorandum that what the FDIC has wrought it can remedy. Legislative amendment or repeal is not a necessary precondition to conform its policies to address the unnecessary problems that today inhibit innovation and stable and diversified funding by banks.” For more information, or to join ABA’s comment letter working group, contact ABA’s Alison Touhey.

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