Here's How the Regulation Works

The Federal Deposit Insurance Corp. will publish the final version of its controversial brokered-deposit rule Thursday in the Federal Register. It includes several major changes from the regulation that was initially proposed by the agency's staff. Based on the document, which was obtained by American Banker, here are answers compiled by reporter Barbara A. Rehm to questions commonly asked about the rule, which takes effect June 16.

Q.: What is the definition of a brokered deposit?

A.: A brokered deposit is money obtained directly or indirectly by or through any deposit broker for deposit in one or more accounts.

The definition excludes insured depository institutions acting as intermediaries or agents for government agencies and departments placing money in banks owned by women or minorities.

Q.: How does the new rule restrict brokered deposits?

A.: Only well-capitalized banks and savings and loans will be allowed to use brokered deposits without restriction. About 8,000 banks and 1,200 thrifts fit the description.

In what may constitute the biggest break from the past, adequately capitalized banks and thrifts will require a waiver from the FDIC to accept brokered deposits or to roll over existing accounts.

They also must limit the amount of interest they pay on brokered funds. About 3,000 banks and 600 thrifts are in this category.

The rule bars undercapitalized institutions from accepting brokered deposits, but waivers may be granted to such institutions being operated in government conservatorship. About 400 banks and 325 thrifts will be undercapitalized when the rule takes effect.

Q.: What's the difference between being well-capitalized and just adequately capitalized?

A.: A well-capitalized institution, according to the most current data available, has:

* A ratio of total capital to risk-weighted assets of at least 10%.

* A ratio of Tier 1 capital to risk-weighted assets of at least 6%.

* A Tier 1 capital-to-total-assets ratio of 5%. (This is known as the leverage ratio and consists of common equity and noncumulative perpetual preferred stock.)

* Has not been branded as "troubled" by its primary supervisor.

The leverage ratio will be phased out once interest rate risk is incorporated into the risk-based capital standards.

An adequately capitalized bank or thrift must have a:

* 7.25% risk-based capital ratio now and 8% by yearend.

* Leverage ratio of 4% equity to total assets.

Q.: What is an undercapitalized institution?

A.: Any bank or savings and loan failing to meet the minimum capital requirements.

Q.: What standards are applied to the branches of foreign banks?

A.: To be considered well capitalized, an insured branch of a foreign bank must pledge 5% of its assets for safekeeping at any depository, and it must maintain eligible assets at 108% of the preceding quarter's average book liability value.

Ineligible assets are those that are impaired or not entirely in the branches' control. Foreign bank branches, too, must not have been told by their regulators that they are "troubled."

Q.: What interest rate caps must be observed by adequately capitalized institutions when they pay for brokered deposits?

A.: The new rule bars them from paying more than 75 basis points over local or national rates for brokered funds. This is up from 50 basis points in the rule originally proposed by the FDIC staff.

Q.: How do I compute the national market rate?

A.: It's 120% of the yield on Tresury securities of a similar maturity for insured deposits. If the brokered funds are wholesale, meaning that some of the money is not insured, then the national market rate is 130% of comparable Treasury rates.

Q.: How do I compute the rate for my own market?

A.: An adequately capitalized bank or S&L may not pay more than 75 basis points over rates being paid by its competitors on deposits of a similar maturity.

Q.: How do I know what my market area is?

A.: It is "any readily defined geographical area in which rates offered by any one insured depository institution operating in the area may affect the rates offered by other institutions operating in that same area."

Q.: What do I do about existing deposits if my institution is adequately capitalized?

A.: The FDIC is allowing adequately capitalized banks and thrifts to continue using brokered deposits until mid-August so long as the institution asks permission by July 16.

Q.: What must be included on an application?

A.: All banks and S&Ls applying for permission to accept brokered deposits must tell the FDIC the dollar amount of deposits to be taken, the rates that will be paid, and the deposits' maturities. The institution also must explain how long it plans to use brokered funds.

Approvals to take brokered deposits will never remain in effect longer than two years.

Q.: Doesn't the rule contradict itself, considering that even if adequately capitalized institutions get FDIC approval to accept brokered deposits, they still can't pay the high rates needed to attract them?

A.: The FDIC admits the "circularity" of the final rule. But it notes in the rule that it is merely carrying out Congress' will as set out in the banking law enacted last December.

"The consequence is that a merely adequately capitalized institution can never solicit deposits by offering rates of interest which are significantly more than the relevant local or national rate," the FDIC admitted.

Q.: Whom do I contract for more information?

A.: Phone the FDIC officials who wrote this rule: William G. Hrindac, an examination specialist in the supervision division, at (202) 898-6892, or Valerie Jean Best, a lawyer, at (202) 898-3812.

The agency said it wants to know whether the new rule poses difficulties for any institution and welcomes suggestions on improving its enforcement.

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