By Alison Touhey
ABA Viewpoint
Alison Touhey is SVP for bank liquidity policy at the American Bankers Association. Previously, she served as a senior financial economist and senior capital markets specialist at the FDIC.
Today’s depositors have more choices, greater rate transparency and faster ways to move their money than ever before. That’s good news for bank customers.
For banks, these changes are reshaping how deposits are gathered, priced and retained, requiring a modern approach to funding and liquidity management. Equally important is a regulatory framework aligned with how banks do business today.
Congress took a welcome step toward modernizing bank funding through Section 902 of the 21st Century ROAD to Housing Act. By allowing banks greater use of reciprocal deposits without triggering brokered deposit restrictions, the provision gives institutions more flexibility to serve customers and support lending in their communities. Congress deserves credit for recognizing the value of this funding source and easing the restrictions that unnecessarily limited its use.
Implementing Section 902’s improved treatment of reciprocal deposits is a good first step, but the underlying brokered deposit framework still needs modernization. Section 29 of the Federal Deposit Insurance Act, enacted in 1989, continues to rely on outdated concepts, such as treating brokered CDs as unstable and definitions related to who is a deposit broker, that constrain banks’ funding choices and too often treat third-party involvement as a proxy for risk.
The consequences of maintaining a 1980s view of funding and liquidity are significant. Once deposits are labeled “brokered,” even healthy banks can face higher regulatory costs and deposit insurance assessments, heightened supervisory scrutiny, stricter liquidity treatment and adverse market perceptions — regardless of whether the funding is stable and well managed. This framework unnecessarily constrains banks and does not reflect today’s deposit-gathering practices, and the tension will only grow. Congress should replace this outdated framework with a risk-based approach that more squarely targets excessive growth at weak institutions.
A label in search of a risk
Section 29 establishes broad parameters and leaves the FDIC to determine who qualifies as a “deposit broker” and, therefore, which deposits are deemed “brokered.” Over time, the FDIC’s interpretation expanded well beyond the deposits and troubled banks that Congress intended to restrict. From 1989 until the adoption of a narrower regulatory framework in 2020, the FDIC consistently interpreted the definition of “deposit broker” broadly and the statutory exemptions narrowly, severely limiting banks’ funding options. By 2015, the interpretation was so expansive that it encompassed virtually any third party involved in gathering deposits. Entities inappropriately classified as deposit brokers included:
- Social media platforms.
- Fintech partners, including those that connect via APIs.
- Bank affiliates and subsidiaries.
- Employees of bank affiliates and subsidiaries.
- Homeowners’ associations.
- Advertising and marketing partners.
- Personal financial management and advice apps and websites.
- Alumni associations and other member-based organizations.
- Universities.
- Small businesses.
This expansive interpretation created a sharp disconnect among congressional intent, regulatory scope and the actual risks posed by different funding sources. It also stigmatized funding that can be stable and well managed. The resulting costs and restrictions can discourage healthy, well-capitalized banks from using these deposits and penalize those that do. Even traditional brokered deposits, including certificates of deposit purchased through third parties, can be among the most stable, cost-effective tools available for managing interest-rate risk.
Meaningful progress toward aligning regulation with modern banking began under former FDIC Chairman Jelena McWilliams. In 2020, the FDIC significantly narrowed its interpretation of who qualifies as a “deposit broker” and adopted a framework that was as transparent and practical as the statute allowed. McWilliams also recommended that Congress repeal Section 29 and replace it with targeted asset-growth restrictions for troubled institutions. That approach would allow banks and supervisors to focus on actual funding and liquidity risks rather than risks inferred from regulatory labels.
Without statutory reform, the definition of a brokered deposit could fall further out of step with bank funding practices as markets evolve. It would also remain subject to swings based on shifts in FDIC leadership under different FDIC chairs, creating persistent uncertainty and obscuring actual funding risks.
A better approach: Follow the risk
Restricting how quickly and how much weak institutions can grow would more directly address the concerns that led Congress to enact Section 29 after the savings and loan crisis. Replacing Section 29 with targeted asset-growth restrictions would also encourage a more holistic assessment of risk based on balance-sheet composition, business strategy and other relevant factors, rather than an unhelpful and sometimes arbitrary distinction between “good” and “bad” deposits.
Decades of innovation since Section 29’s enactment have made clear distinctions among deposit types increasingly difficult to draw. Banks also operate under liquidity and capital requirements — including prompt corrective action — that did not exist in 1989. Replacing Section 29 would remove barriers that no longer reflect today’s dynamic funding market while preserving strong prudential oversight. A framework centered on actual risk would better support safe innovation, sound liquidity management, and competition while meeting the evolving needs of customers and financial institutions. Section 902 demonstrates that Congress recognizes the need to modernize the rules governing bank funding. It should now build on that progress by replacing Section 29’s outdated brokered deposit framework with targeted asset-growth restrictions for weak institutions and a regulatory approach grounded in actual funding risk.
