Many undercapitalized banks that are barred from soliciting brokered deposits under new federal regulations are scrambling to boost capital to meet the requirement.
Others are planning to let the deposits run off and replace them with other expensive sources of funds, such as subordinated debt. Still others will just let the deposits run off and shrink the size of their companies.
"What the brokered deposit rule means for banks is an additional layer of costs," an industry lawyer said.
Separating Sheep from Goats
Under the rules, adopted last week by the Federal Deposit Insurance Corp., banks with total risk-adjusted capital of less than 8% of assets or leverage ratios under 4% will not be allowed to accept brokered deposits. These deposits are high-yielding certificates.
Well-capitalized banks, with more than 10% total risk-adjusted capital and 5% leverage ratios, can continue to attract these deposits without FDIC intervention. Banks that fall in between need explicit FDIC permission to solicit such funds.
At yearend, as many as 10 banks that have more than $2 billion in assets were undercapitalized and had significant amounts of brokered deposits. The list includes units of Bank of New York Co., Bank of Boston Corp., MNC Financial Inc., and Midlantic Corp.
These banks said their regulators have given them no directive on whether they can continue to solicit brokered deposits.
Some May Improve
By the time the regulations take effect June 16, some of these banks may be adequately capitalized. Some may already be there.
Moreover, banks that are only adequately capitalized may choose to raise capital to move into the well-capitalized group.
Bankers at adequately capitalized institutions said they are unsure whether they will be able to obtain FDIC waivers. Also, they are unsure whether they will be able to comply with interest rate restrictions set by the FDIC.
For brokered deposits gathered nationally, adequately capitalized banks can pay 120% to 130% of the comparable-maturity Treasury security plus a half percentage point.
Few big banks have 10% capital ratios. To get there, they would likely have to issue subordinated debt, which is more expensive than deposits. In some cases, the difference can be as much as 400 basis points.
Well-capitalized banks can continue to attract these deposits.
Bank of New York (Delaware), a credit card subsidiary of Bank of New York Co., has 97% of its deposits in the form of brokered CDs. A spokesman for the banking company said capital at the subsidiary will be boosted, either by funneling debt from the parent company or through issuing debt.
Baltimore Bancorp plans to shrink assets and issue equity. Its Bank of Baltimore unit has $692 million in brokered deposits, or 23.2% of its total deposits.
Those CDs, which carry an average interest rate of 8.8%, funded the bank's ill-fated push into commercial real estate lending in the late 1980s.
Two units of MNC Financial Inc. had among the biggest proportions of brokered deposits. At yearend, Maryland National Bank and American Security Bank were undercapitalized. MNC said these units are now at least adequately capitalized.
Still, MNC plans to let brokered deposits run off and replace them with other sources of funds. The banking company would not say whether it would issue debt or use another method.
"We will replace the deposits as needed with other funding sources," said a spokesman.
But some banks will let the high-rate funds roll off without replacement.
"We are happy to have those CDs mature," said Donald Ebbert, senior vice president at Midlantic Corp. "Those are 9% liabilities, and CD interest rates are sharply below that today."