What Might the FDIC Have Planned for Brokered Deposits?
Looking back at now-Chairman Gruenberg's 2020 dissent
Next Tuesday the FDIC’s Board of Directors will hold a public meeting. The agenda is packed full of potentially interesting items, including among other things new proposed rules for parent companies of industrial banks, final 165(d) living will guidance for certain filers, and another set of proposals regarding the Change in Bank Control Act.1
In addition to all that, the FDIC also intends to discuss what the agenda terms a Notice of Proposed Rulemaking on Brokered Deposit Restrictions. The agenda does not offer any hints as to what this proposal will or will not include, and it is possible that the changes wind up being inconsequential.2
There were hints last week, though, that the FDIC may in fact have something significant in mind. In a speech on Wednesday, FDIC Vice Chair Hill discussed brokered deposits at length. Vice Chair Hill pointed out a “number of flaws” in the statutory brokered deposits regime, which he believes is “no longer fit for purpose.” But, stuck with a statute that doesn’t necessarily make much sense, Vice Chair Hill also believes that the current FDIC rules on brokered deposits, as amended in 2020, generally do a decent job of bringing “structure, process, and order to a disorderly regime.” Vice Chair Hill closed this section of his speech by saying:
I also think it would be a mistake for the FDIC to substantively reopen the brokered deposits rule. Doubling down on the pre-2020 brokered deposits regime in 2024 is like doubling down on stone castles after the invention of cannons.
Vice Chair Hill and his colleague Director McKernan are generally in the minority on the FDIC’s Board of Directors, so assuming the FDIC this week does intend to revisit some of the substantive changes made in 2020, what might the agency have in mind?
2020 Director Gruenberg Dissent
When the FDIC finalized the 2020 brokered deposits changes, then-Director Gruenberg dissented. Looking at the provisions of the 2020 rule that then-Director Gruenberg disliked may provide a reasonable hint at what the current FDIC under now-Chairman Gruenberg may now be looking to change.3
Then-Director Gruenberg’s dissent, a little dramatically, argued that under the 2020 rule, other than brokered CDs, “it is not clear what activities would continue to be treated as brokered deposits.”4 The dissent took issue with three changes in particular.
Exclusive Deposit Placement Arrangements
In the preamble to the 2020 final rule, the FDIC explained that a person that has a deposit placement arrangement with a single insured depository institution, and is not placing or facilitating the placement of deposits at any other IDI, would not be regarded as being in the business of placing or facilitating the placement of deposits, and so would not be a deposit broker.5
Then-Director Gruenberg argued that this interpretation is “a complete departure from the FDIC’s historical interpretation of the statute”6 and “may be the most extreme change yet made to the brokered deposit rule.” He warned:
This regulatory change opens up great risk to the banking system. Under this change, a bank could rely for one hundred percent of its deposits on a sophisticated, unaffiliated third party without any of those deposits considered brokered. The bank could fall below well capitalized and still rely on those third party placed deposits for one hundred percent of its funding without any of those deposits considered brokered, effectively an end-run around the statutory prohibition on less than well capitalized banks receiving brokered deposits. A bank could form multiple “exclusive” third party relationships to fund itself without any of those deposits considered brokered.
Primary Purpose Exception
Under the 2020 rule, a person is not a deposit broker if their primary purpose is not the placement of funds with depository institutions. The rule then goes on to define various business relationships that do not have as their primary purpose the placement of funds with depository institutions, and thus do not involve brokered deposits.
Two notable business relationships in this category are, with respect to a particular business line: (1) a situation in which less than 25 percent of the total assets that the agent or nominee has under administration for its customers is placed at depository institutions (25 Percent Test) and (2) a situation in which 100 percent of depositors' funds that the agent or nominee places, or assists in placing, at depository institutions are placed into transactional accounts that do not pay any fees, interest, or other remuneration to the depositor (Enabling Transactions Test).
A person seeking to rely on either of the exceptions described above is required to provide a written notice to the FDIC.7 (This was a change from the proposed rule, which would have required an application.8)
Then-Director Gruenberg’s 2020 dissent included multiple criticisms of these provisions.
Director Gruenberg argued that the 25 Percent Test departed from previous FDIC guidance which, as he characterized it, “established 10 percent as representative of an incidental activity of the brokerage business in the context of sweep arrangements between a broker-dealer and affiliated depository institutions.”
Thus, in then-Director Gruenberg’s view, the 25 Percent Test, as compared to the previous FDIC stance, reflects both (i) an increase in the overall threshold from 10 percent to 25 percent with “no analysis provided to explain the basis for this change” and (ii) an expansion of the FDIC’s previous guidance to also now apply to third parties, rather than only bank affiliates.
Director Gruenberg appeared to imply that the Enabling Transactions Test was too categorical in providing an exemption for placement of deposits into transaction accounts, criticizing the final rule for failing to provide an explanation “as to why the placement of deposits into transactional accounts without a fee should, per se, qualify for the exception.”
Director Gruenberg also criticized the FDIC’s move to allow notice-only filings for the 25 Percent Test and the Enabling Transactions Test, and to allow banks to rely on certain other primary purpose exceptions without needing to provide any notice at all, saying that these provisions in the final rule “significantly reduc[e] FDIC oversight of the process.”
Facilitating the Placement of Deposits
Under the final rule a person is engaged in facilitating the placement of deposits, and thus is a deposit broker, if the person engages in one or more of a specified set of activities. Then-Director Gruenberg criticized this piece of the rule for taking too much of a bright-line view and moving away from what had been more of a case-specific analysis.
Under the current regulation, whether a person is engaged in “facilitating the placement of deposits” has typically been a fact specific case-by-case evaluation of the arrangement based on a number of factors including whether the bank pays a fee and what service the fee compensates.
The proposed definition of “facilitating the placement of deposits” in today’s Final Rule appears to be preemptive, largely precluding consideration of other factors. For example, the definition would eliminate any reference to the fees paid by the bank in exchange for the service provided by the person involved in the placement of a third party’s funds at the bank.
Post-2020 Supervisory Experience
In the alternative, or in addition, to looking to reverse some of the 2020 changes that then-Director Gruenberg criticized, a new FDIC rulemaking on brokered deposits could also address certain developments since 2020 that to this point have been addressed only through guidance. For example, the agency in 2022 stated that certain sweep deposits were incorrectly being reported as non-brokered.
Also worth watching is whether whatever the FDIC proposes on Tuesday will touch explicitly on fintech. The interagency joint statement on BaaS and embedded finance relationships released this past week, as part of a laundry list of governance and risk management considerations, reminded banks that they must “perform[] appropriate analysis to determine whether parties involved in the placement of deposits meet the definition of a deposit broker under 12 U.S.C. 1831f and implementing regulations, 12 CFR 337.6, and appropriately report[] any such deposits as brokered deposits in the Call Report.”
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The FDIC also, of course, could wind up going in an entirely different direction from anything discussed above, meaning in around 72 hours (or fewer) this post could end up looking very silly.
On this last item, FDIC Director McKernan wrote on Twitter that “At next week’s board meeting, Director Chopra and I will pick up where we left off at the April meeting. The FDIC must fix our broken monitoring of the Big Three asset managers’ compliance with the banking laws.”
When the FDIC finalized its 2020 revisions to the brokered deposits rules, it inadvertently omitted two footnotes from the final rule, and so has on its regulatory agenda a corrective rulemaking to re-add the footnotes, which should be no different than what was in the previous rule. (Credit to Alexandra Steinberg Barrage for pointing this out in a post on Twitter.)
The footnotes in question are footnotes and 11 and 12 from the pre-2020 version of the rule, as shown below.
Pre-2020 Rule
Current Rule
Perhaps worth noting: Director Gruenberg’s dissent was referenced in a 2023 speech by then-Assistant Treasury Secretary Graham Steele at an Americans for Financial Reform event. Assistant Secretary Steele’s speech described the FDIC’s 2020 rule as having “effectively excluded some bank-fintech partnerships from the brokered deposits rule.”
Looking at the BankRegData page on brokered deposits, it is true that the 2020 final rule resulted in a notable reduction in deposits reported as brokered on banks’ call reports when it took effect on April 1, 2021. But even so, as of Q1 2024 banks were reporting more than $1.3 trillion in brokered deposits. This number would, presumably, be higher (perhaps significantly higher) absent the 2020 changes, but it is tough to make a serious argument that the 2020 rules left nothing as brokered other than brokered CDs.
Note that the Q2 2024 brokered deposits number shown at the above link may look significantly lower than previous quarters, but be careful: as of the date of this post not all banks (and very few large banks) have reported Q2 2024 data yet.
The brokered deposits statute does not actually include brokered deposit as a defined term in and of itself; rather, a brokered deposit is one obtained through a deposit broker (as defined). Thus, when the FDIC’s rule concludes that someone is not a deposit broker in a given context, the rule is saying that deposits obtained from that person are not brokered deposits in that context.
A question to ponder in light of recent Supreme Court decisions is how much weight ought to be given to this historical interpretation, particularly in light of statutory text that could be read to contradict it. The brokered deposit statute defines a deposit broker as one who is engaged in the business of placing deposits, or facilitating the placement of deposits, at “insured depository institutions” in the plural. Then-Director Gruenberg’s dissent suggested this as a potential reason behind the FDIC taking the approach it did in the 2020 rule (emphasis added):
The preamble offers no evidence to support the assertion of reduced run risk. No specific comment on the NPR was cited requesting this regulatory change. It is a complete departure from the FDIC’s historical interpretation of the statute. It appears some reliance may be placed on the statutory reference to “insured depository institutions” rather than to a single institution.
A list of entities that have filed such notices is available on the FDIC’s website.
The notice process under the final rule requires filers to provide specified information demonstrating their eligibility for the exception, allows the FDIC to request additional information at any time, requires ongoing reporting or certification from filers, and allows the FDIC to revoke an exception at any time (with notice) if the agency determines that the party filing the notice does not qualify or no longer qualifies for the exception in question. So while less burdensome, and quicker, than a formal application process, it is not a pure notice process as an ordinary person might understand the term.