Cheat sheet: FDIC pitches brokered deposit update, other reg reforms

Perhaps the biggest FDIC release was a request for comment on the agency's brokered deposit regulations.

The "advance notice of proposed rulemaking" is the first step toward what the industry hopes is a policy update. Many say those rules are long overdue for reforms, especially as online and mobile banking plays an increasingly dominant role in deposit taking. Banks that do not attain "well-capitalized" status face restrictions on accepting brokered deposits, and an interest rate cap on deposits that they do accept.

The FDIC is weighing certain changes to the definition of brokered deposits, as well as its methodology for setting the deposit rate cap.

“Brokered deposit regulations affect every bank in this country and it’s our duty to our members and our members’ customers to try find a better approach to the rules,” said Rob Nichols, president and CEO of the American Bankers Association, in a statement. “We think they can be updated to reflect the realities of today’s marketplace and better fit how banks serve their customers.”

The FDIC is specifically asking whether there are deposits that should, or should not, be considered brokered and how to update its policy to reflect technology advancements in online banking. The ANPR also has a separate section asking whether the agency should change the interest rate cap it sets based on a national average.

The industry has 90 days to comment in response to the ANPR.

In September, FDIC Chairman Jelena McWilliams released a statement suggesting that the current brokered deposit rules may be outdated.

“Since the rules were put in place, the industry has seen significant changes in technology, business models, and product types, and later this year we will ask for public comment on how best to update the rules to reflect such changes,” she said.

Bankers argue the rate cap is largely based on what the biggest banks pay depositors whereas the rate limit should more closely consider the prevailing rates in a community bank's direct market, which can be higher. The FDIC is asking how to define a “normal market area” as part of its ANPR.

It is unclear how much the FDIC would ultimately change its rules to provide relief to banks, since FDIC staff have long defended the existing restrictions to prevent banks from using brokered deposits to fuel rapid growth. Several banks that failed in the 2008-2010 crisis had relied on brokered funds but then could not weather the losses from their overheated portfolio. Yet bankers argue those failures were because of bad loans, not because an institution accepted brokered funds.

FDIC staff have recently appeared more open to changes, but are adamant that brokered deposits carry risks.

“Throughout time, there is a linkage between institutions that have used brokered deposits and used high-rate deposits for excessive risk-taking and excessive growth,” said Rae-Ann Miller, associate director for the FDIC’s division of risk management supervision, during a meeting with community bankers in October.

Failed institutions with a lot of brokered deposits "have cost us a lot of money on the back end,” she added.

The FDIC released a final rule, written with the other regulators, that maintains the agencies' proposed three-year phase-in period for implementing the Current Expected Credit Loss model.

Bankers have lobbied aggressively for changes to the accounting standard, developed by the Financial Accounting Standards Board, which requires a much more forward-looking projection of credit losses. While the industry has lauded regulators' attempt to delay implementation, industry trade groups preferred a longer phase-in period of at least five years.

The CECL model is slated to take effect in January 2020, but under the final rule its initial impact on capital levels will be spread out over three years, beginning January 2020.

“ABA appreciates today’s acknowledgment by the FDIC that the Current Expected Credit Loss model presents a substantial change to bank accounting and ultimately, the business of lending. Unfortunately, the implementation phase-in approved today does not go far enough to ensure CECL will function as intended," Nichols said Tuesday. “Banks have long been concerned about CECL’s cost and impact on our ability to serve our customers and communities, particularly in times of economic stress. That’s why ABA believes CECL must be delayed until a quantitative impact study can be conducted and the economic consequences of the accounting standard are fully understood.

Yet there are signs that federal policymakers are considering further changes to CECL implementation, since the new credit loss model is on the agenda for a Wednesday meeting of the Financial Stability Oversight Council.

FSOC's inclusion of the accounting standard at its meeting "is an important step in a process that we believe will result in either a delay or meaningful changes to CECL, or both," said Ian Katz, an analyst at Capital Alpha Partners, in a note on Friday.

The FDIC also provided an update on efforts to build up the Deposit Insurance Fund.

For the first time since the 2010 Dodd-Frank Act required the fund's level of reserves to be equal to 1.35% of insured deposits, the agency met that threshold this past September. For the current quarter, banks will only be charged regular risk-based assessments, as the agency will no longer impose a special surcharge on large banks that was meant to reach the required ratio.

Small banks will also begin receiving assessment credits for premiums they had paid that helped the agency close the gap from 1.15% to 1.35%.

“Credits are estimated to amount to approximately $750 million ... in aggregate,” the agency said in its staff update on the DIF. “Provided the reserve ratio is at least 1.38%, the FDIC will automatically apply credits to reduce each small bank’s regular assessment up to the entire amount of its assessment.”

Meanwhile, the FDIC board issued a proposal incorporating a statutory change in small-bank capital requirements in the FDIC’s deposit insurance pricing.

The reg relief law that passed in May allowed banks with under $10 billion of assets to opt for a simpler measure of their capital strength — known as the “community bank leverage ratio” — in lieu of more complicated Basel risk-based capital standards. Last month, the bank regulators proposed setting the CBLR at 9% of tangible equity to total assets.

On Tuesday, the FDIC proposed letting CBLR banks use either that ratio or their tier 1 capital ratio to calculate their assessment base. To calculate a small bank’s assessment rate, an institution could similarly use the CBLR or the tier 1 leverage ratio.