By Alison Touhey
ABA Viewpoint
Alison Touhey is SVP for bank funding policy at ABA.
In 2025, the key to building and maintaining a stable funding base is the use of a variety of business services, platforms, technologies and relationships. But the guardrails Congress put in place to keep weak banks from holding rate-sensitive deposits issued through a broker are from another era and do not differentiate among today’s range of deposit types. This is leading to an outdated legal concept imposing significant costs on banks and giving the false impression that “brokered deposits” are a proxy for risk.
What’s not working
Section 29 establishes broad parameters and leaves it to the FDIC to determine who is a “deposit broker,” and therefore which deposits are deemed “brokered.” Over time, the FDIC’s interpretations have expanded far beyond the deposits and troubled banks Congress intended to restrict. From 1989 until 2020, when a narrower framework was finally adopted by regulatory action, the FDIC consistently gave the broadest possible reading to the definition “deposit broker” and the narrowest possible reading to various statutory exemptions, which severely limited banks’ funding options. By 2015, the FDIC’s interpretation was so expansive that it included virtually any third party involved in gathering deposits. Entities that were inappropriately classified as deposit brokers included:
- Social media platforms.
- Fintech partners, including those who connect via application programming interfaces.
- Bank affiliates and subsidiaries.
- Employees of bank affiliates and subsidiaries
- Homeowners’ associations.
- Advertising and marketing partners.
- Websites and applications for personal finance management and advice.
- Alumni associations and other member-based organizations.
- Universities.
- Small businesses.
Over-interpretation of Section 29 created a major disconnect between congressional intent, regulatory scope and the actual risks different funding sources pose to banks. It has also led to the stigmatization of what is otherwise stable funding. Once classified as “brokered,” deposits carry higher regulatory costs and deposit insurance assessments, draw increased supervisory attention, trigger tougher liquidity requirements and can even have adverse impacts on credit ratings and market perception. These factors make such deposits less attractive for healthy, well-capitalized banks and unfairly penalize institutions that hold them. Ironically, the most traditional brokered deposits, such as certificates of deposit purchased through third parties, are often among the most stable, cost-effective and useful tools for managing interest rate risk.
Meaningful progress toward better alignment of regulation with modern banking began under former FDIC Chairman Jelena McWilliams. In 2020, McWilliams significantly narrowed the FDIC’s interpretation of who was a “deposit broker” and introduced a framework that was as transparent and practical as the statute allowed. She also recommended that Congress repeal Section 29 and replace it with a targeted asset growth restriction for troubled institutions. This approach would allow banks and supervisors to focus on managing actual, rather than perceived, funding and liquidity risks
What would work
Limiting how quickly and how much weak institutions can grow would more directly address the concerns that led Congress to enact Section 29 following the savings and loan crisis. Repeal would also promote a more holistic assessment of risk based on balance sheet composition, strategy, and other factors, removing the unhelpful binary of “good” versus “bad” deposits. In place of Section 29, Congress should authorize targeted asset growth restrictions for weak banks.
Since Section 29 was enacted, decades of innovation have made it nearly impossible to draw clear lines between types of deposits. Banks are now subject to a wide range of liquidity and capital regulations that did not exist when Section 29 was enacted, including prompt corrective action. Repealing or reforming Section 29 would remove regulatory barriers that no longer reflect today’s dynamic funding market, fostering competition and financial stability without sacrificing prudential oversight. By focusing on actual risk rather than outdated definitions, regulators can better support safe innovation, sound liquidity management, and the evolving needs of customers and financial institutions.
Targeted asset growth restrictions are a modern, risk-based approach. It is time for Section 29 to catch up with the world it was meant to protect.
