The FDIC board today voted 3-2 to move forward with a proposed rule that would expand the definition of “deposit broker” to capture many deposit placement arrangements that currently do not meet the criteria for enhanced scrutiny under current regulation, such as sweep deposits and those related to financial technology and cryptocurrency. The proposal would amend a 2020 rule that FDIC Chairman Martin Gruenberg and the other Democratic board members believe is too narrow in scope and which, in their view, allows banks to enter into arrangements that present enhanced liquidity and other risks.
According to a summary by the FDIC, the proposed rule would simplify the definition of “deposit broker,” eliminate the “exclusive deposit placement arrangement” exception and revise the interpretation of the primary purpose exception, or PPE, to consider the third party’s intent in placing customer funds at a particular insured depository institution.
The proposal also would only allow depository institutions to file notices or applications for PPEs instead of third parties; revise the “25% test” designated business exception for a PPE to be available only to broker-dealers and investment advisers, and only if less than 10% of the total assets that the broker dealer or investment adviser has under management for its customers are placed at one or more institutions; eliminate the enabling transactions designated business exception; and clarify when an institution, which has lost its agent institution status, can regain that status for purposes of the limited exception for reciprocal deposits.
“The concern here is that less-than-well capitalized banks may seek these exclusive deposit placement arrangements as their condition is deteriorating without being subject to the limitations on broker deposits even though the risk is the same,” Gruenberg said.
The two Republican board members voted against the proposed rule. FDIC Vice Chairman Travis Hill said that the term “brokered deposits” encompasses many different types of deposits with different characteristics and risks.
“The deposit landscape has become too complex to continually decide which arrangements are brokered and which are not in a fair and risk-sensitive way,” Hill said. “And I am generally skeptical of sweeping rules that cut banks off from certain types of funding as their condition deteriorates, as is the case with broker deposits.”
