FDIC It’s Time to Update the Definition of Brokered Deposits
The NAIB is urging the FDIC review the exclusion of all fully-insured brokered deposits from the definition of the term “core deposit” used in the Uniform Bank Performance Report (“UBPR”).
The exclusion of brokered deposits from the definition of core deposits lacks foundation and can be easily remedied by the FDIC. As the definition of a “core” deposit is not in a regulation, but rather a financial report, such a change would not require publication and solicitation of comments.
The FDIC’s over-broad and outdated definition of the term “brokered deposit” does not reflect the underlying characteristics of the deposit accounts, and has resulted in undue and unnecessary burdens on insured depository institutions.
By excluding brokered deposits from the definition of “core” deposits intuitions holding brokered deposits face significantly higher deposit insurance premiums.
A bias in support of “core” deposits has morphed into a misguided belief that brokered deposits are the cause of widespread bank failures. However, brokered deposits have developed into an abundant, reliable and cost-effective source of stable funding for insured depository institutions. The stability of brokered deposits has made them a reliable source of funding in all economic conditions, even during a “run on a bank”. Once deposited, brokered CDs tend to stay in an institution until they mature and, as depositors don’t usually know which bank holds their money, there is no “headline risk” that results in a run on a bank
Brokered deposits have also been proven to be very stable in bad economic times, with the supply of brokered deposits increasing dramatically during the Great Recession as consumers shifted assets to the safety of FDIC insured deposit accounts. As such, increasing premiums for holding brokered deposits can only be justified if brokered deposits are inherently risky, which is simply not the case. Some banks use brokered deposits as their primary funding source and yet have the highest capital levels, best profit margins, best efficiency ratios, and lowest delinquency and charge offs in the banking industry.
Nothing in the legislative history or purpose of the definition of “deposit broker” would support the use of the definition to implement policies beyond the narrow statutory limitations on weak institutions accepting brokered deposits
The failure of Barnes Bank in Utah presents an illustrative example of this reliability and stability of brokered deposits. Despite a strong and loyal customer base, Barnes Bank failed in 2010, when rumors of its failing condition were reported in local newspapers. At the start of the run, about 30% of the bank’s deposits were brokered. During the run, the bank lost about 15% of its total deposits over 10 days and eventually exhausted its liquidity. All of the deposits withdrawn were core deposits, while brokered deposits at the bank remained untouched.