I. INTRODUCTION
The FDIC has amended its regulations that implement brokered deposits and interest rate restrictions to conform with changes to section 29 of the Federal Deposit Insurance Act made by section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act related to reciprocal deposits, which took effect on May 24, 2018. The main effect of the legislation and the final rule is to permit FDIC-insured financial institutions, under certain circumstances, to except certain amounts of reciprocal deposits from treatment as brokered deposits.
II. BACKGROUND
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) was enacted on May 24, 2018. Section 202 of the Act amends section 29 of the Federal Deposit Insurance Act (FDI Act) to except a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions. In addition, section 202 ensures that the interest rate restrictions in section 29 remain applicable to any deposit, including reciprocal deposits, whether or not they meet the limited exception.
Well-capitalized institutions are not restricted from accepting or soliciting brokered deposits and have no restrictions on the rates they pay on deposits. However, under section 29, less than well-capitalized institutions may generally not accept, renew, or roll-over brokered deposits and may not offer rates on any deposits that are significantly higher than the prevailing rates in the institution's normal market area. Section 29 defines the term “deposit broker” and provides a list of exclusions to that term. Funds obtained through a deposit broker are considered brokered deposits. Section 202 amends section 29 to provide that a capped amount of reciprocal deposits will not be considered funds obtained through a deposit broker for certain insured depository institutions, and thus such deposits will be non-brokered.
A. Section 29 of the FDI Act
Under section 29 of the FDI Act, an insured depository institution that is less than well capitalized is restricted from accepting deposits by or through a deposit broker. The FDIC may, however, waive this restriction if the insured depository institution is adequately capitalized; the restriction cannot be waived if the institution is less than adequately capitalized. Section 29 also imposes restrictions on the deposit interest rates that an insured depository institution may offer if the institution is not well capitalized.
A “deposit broker,” as defined by section 29 of the FDI Act, includes “any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties. . . . ” Under the FDIC's regulations, a “brokered deposit” is thus defined as a deposit accepted through a “deposit broker.”
B. Reciprocal Deposits
The reciprocal deposit arrangement is based upon a network of banks that place funds at other participating banks in order for depositors to receive insurance coverage for the entire amount of their deposits. In these arrangements, institutions within the network are both sending and receiving identical amounts of deposits simultaneously. Because reciprocal arrangements can be complex, and involve numerous banks, they are often managed by a third-party network sponsor. As a result of this arrangement, the institutions themselves (along with the third-party network sponsors) are “in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions.” The involvement of deposit brokers within the reciprocal network means the deposits are brokered deposits.
Prior to enactment of the Act, all reciprocal deposits were classified as brokered deposits. Section 202 of the Act amends section 29 of the FDI Act to except a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions. Section 202's amendments took effect upon enactment on May 24, 2018.
Section 202 defines “reciprocal deposits” as “deposits received by an agent institution through a deposit placement network with the same maturity (if any) and in the same aggregate amount as covered deposits placed by the agent institution in other network member banks.” Network member banks may receive other deposits through a network such as (1) deposits received without the institution placing into the network a deposit of the same maturity and same aggregate amount (sometimes referred to as “one-way network deposits”) and (2) deposits placed by the institution into the network where the deposits were obtained, directly or indirectly, by or through a deposit broker. Such other network deposits meet the definition of brokered deposits but would not meet the definition of reciprocal deposits. Thus, these deposits would not be eligible to be excepted from an institution's brokered deposits under section 202.
III. Discussion of Treatment of Reciprocal Deposits Under the Act and Final Rule
A. Deposit Placement Network, Covered Deposits, and Network Member Bank
The term “deposit placement network” is defined in section 202 as a network in which an insured depository institution participates, together with other insured depository institutions, for the processing and receipt of reciprocal deposits. Institutions that are members of the deposit placement network are “network member banks.”
The deposits that an “agent institution” places at other banks in return for reciprocal deposits are termed “covered deposits” under section 202. The term covered deposit is defined as a deposit that (1) is submitted for placement through a deposit placement network and (2) does not consist of funds that were obtained for the agent institution, directly or indirectly, by or through a deposit broker before submission for placement through the deposit placement network.
B. Agent Institution
An “agent institution” is an insured depository institution that places a covered deposit through a deposit placement network at other insured depository institutions in amounts that are less than or equal to the standard maximum deposit insurance amount, and specifies the interest rate to be paid for such amounts, if the insured depository institution:
C. Caps Applicable to Agent Institutions
Consistent with section 202, under the regulation, an “agent institution” can except reciprocal deposits from being classified as brokered deposits up to its applicable statutory caps, as explained below.
1. General Cap
An agent institution may except reciprocal deposits up to the lesser of the following amounts (referred to as the general cap) from being classified as brokered deposits:
2. Special Cap
A special cap applies if the institution is either not well rated or not well capitalized. In this case, the institution may meet the definition of “agent institution” if it does not receive reciprocal deposits in excess of the special cap, which is the average amount of reciprocal deposits held at quarter-end during the last four quarters preceding the quarter that the institution fell below well capitalized or well rated. Thus, the special cap is applicable to agent institutions that were previously well capitalized and well rated.
3. Application of Statutory Caps
Below are descriptions of how the two statutory caps will apply to an agent institution based upon its capital and composite ratings.
a. Well capitalized and well rated. Institutions that are both well capitalized and well rated can have non-brokered reciprocal deposits up to the general cap. Any amount of reciprocal deposits over the general cap will not meet the limited exception and therefore that amount will be considered to be “brokered deposits.” Well capitalized institutions may accept brokered deposits, including reciprocal deposits that are brokered deposits, without restrictions.
b. Not well capitalized or not well rated. Institutions that are either not well capitalized or not well rated are subject to the lesser of either the special cap or the general cap. The amount of reciprocal deposits within the institution's applicable cap will not be considered brokered deposits. In no event, however, can an institution's non-brokered reciprocal deposits exceed the general cap. With respect to an institution that is well capitalized but not well rated, if it received reciprocal deposits above the special cap, it will no longer meet the definition of “agent institution.”
Institutions that are less than well capitalized, however, are subject to restrictions on the acceptance of brokered deposits, including reciprocal deposits that are brokered deposits. Because only reciprocal deposits of an agent institution that are below the applicable cap are considered non-brokered, a less than well-capitalized agent institution may not accept reciprocal deposits in excess of the special cap. (An adequately capitalized institution's non-brokered reciprocal deposits may be above the special cap with a waiver from the FDIC, but can also never exceed the general cap.)
4. Interest Rates
Section 202 applies the statutory interest rate restrictions under section 29 to all reciprocal deposits. More specifically, section 202 amends section 29(e) of the FDI Act by ensuring that the interest rate restrictions apply to less than well capitalized banks that accept reciprocal deposits. As a result, section 202 confirms that the current statutory and regulatory rate restrictions for less than well capitalized institutions continue to apply to any deposit, including a reciprocal deposit that is a covered deposit.