Community bankers have thrown their support behind proposed legislation that would change the way a critical deposit program is regulated, saying it would help them compete against large banks.
The same legislation, however, has raised concerns among some deposit brokers that it favors certain deposit-placement firms and will leave the brokers at a competitive disadvantage.
Two bills, filed in the House and Senate, concern the use of reciprocal deposits, a type of product that allows banks to share deposits in order to sidestep the $250,000 limit on federal deposit insurance. Such deposits are sometimes classified as brokered deposits, which are subject to more regulatory restrictions and costs than apply to nonbrokered deposits.
The legislation would ease those strictures by amending the Federal Deposit Insurance Act to "ensure that the reciprocal deposits of an insured depository institution are not considered to be funds obtained by or through a deposit broker." Supporters say that removing the brokered designation will remove the stigma that they say has been unfairly attached to reciprocal deposits. Regulators' classification of reciprocal deposits as brokered has led them to mistakenly believe the deposit type has a high correlation with bank failures, the bill's supporters say.
Community banks have been lagging larger banks when it comes to deposit gathering. Deposits at banks with less than $100 million of assets fell 8.7% over the last year, according to data released last week by the Federal Deposit Insurance Corp. In the same period, deposits at banks with more than $10 billion of assets rose 6.7%.
Reciprocal deposits provide a way for community banks to allow their largest customers — including municipalities and nonprofits — to deposit more than $250,000 with them, but still receive FDIC deposit insurance on the funds above $250,000. The deposit-placement provider takes a bank's deposits and redistributes the funds among multiple banks. Each bank that contributes its deposits to the placement agent receives an equal amount in return.
Brokered deposits, on the other hand, typically come from customers located outside the community, said Ron Paul, the chairman and chief executive of the $6.4 billion-asset Eagle Bancorp in Bethesda, Md. They can help a bank jump-start loan growth, but they are also volatile as they will quickly leave a bank if they can find a better rate elsewhere, he said.
"[Reciprocal] deposits come from the relationships that I have developed in the community," said Paul, who testified in favor of the legislation at a House subcommittee hearing on Sept. 27. "The money is not going to leave EagleBank if someone else around the corner raises rates."
There are several players in the market for reciprocal deposits, including Promontory Interfinancial Network in Arlington, Va., which manages the Certificate of Deposit Account Registry Service, or CDARS. Close to 3,000 community banks use Promontory's service. Other players include Pacific Coast Bankers' Bank in Walnut Creek, Calif., Anova Financial in Edenton, N.C., and Reich & Tang in New York.
The market for deposit-management services also includes traditional deposit brokers. Two of the companies in this space, StoneCastle Cash Management in New York and Charity Deposits in Miami, argue that their products provide the same benefit to community banks—the ability to hold more insured deposits for important local customers. Eric Lansky, the president of StoneCastle, said that the bill would only help firms like Promontory because its wording specifically states that the legislation applies to reciprocal deposits, and brokered deposits do not meet that definition.
Promontory said that reciprocal deposits deserve to be treated differently, since they do not involve a broker seeking the highest rate for the depositor.
With reciprocal deposits, a bank can "pay its own interest rates on deposits, while offering other services to the depositor, which makes the deposits stable," said Promontory spokesman Phil Battey.
Reich & Tang declined to comment on the proposed legislation. Neither Pacific Coast Bankers' Bank nor Anova returned calls seeking comment.
Reciprocal deposits are deemed brokered because they flow through a third party, pursuant to the deposit insurance act's definition. But they act nothing like brokered deposits, said Jeffrey Naimon, an attorney with BuckleySandler who is not involved with the legislation.
"These deposits are very stable, and they're not hot money in any respect," Naimon said.
Under current law, banks that fall from well-capitalized status to adequately capitalized must receive a waiver from the FDIC in order to continue to hold brokered deposits, including reciprocal deposits. The House and Senate bills would slightly amend that law by allowing adequately capitalized banks to continue to hold the reciprocal deposits they have on their books, up to a specified limit, without getting a waiver from the FDIC.
Some industry observers say that bill is so narrowly written that it would hardly have much impact on deposit-gathering.
"The bill we are talking about simply removes one layer of restrictions from well-capitalized banks having no constrictions at all to something that's a little less than well-capitalized," Norbert J. Michel, a research fellow in financial regulation at the Heritage Foundation, said at last week's House hearing. "This is a marginal change at best."
But the legislation has support from a number of banking trade groups, including the Independent Community Bankers of America and the American Bankers Association, as well as lawmakers on both sides of the aisle.
Rep. Gwen Moore, D-Wis., a co-sponsor of the House legislation, said she supports the bill because it will help both rural and urban districts and help small banks.
"It's a targeted way for us to help minority-owned, small and [community development financial institutions] within our districts," she said during the Sept. 27 House subcommittee hearing.
"Reciprocal deposits are safe, practical, core-like deposits that enhance the ability of a community bank to serve loyal customers," Rep. Tom Emmer, R-Minn., another co-sponsor of the legislation, said at the same hearing. "Ultimately, this leads to more capital in our communities to fund economic development."
The FDIC declined to comment on the pending legislation. But it has made previous public statements in support of the concept that reciprocal deposits act more like core deposits than brokered deposits.
"The FDIC is persuaded that reciprocal deposits may be a more stable source of funding for healthy banks than other types of brokered deposits and that they may not be as readily used to fund rapid asset growth," the FDIC said in March 2009 when it revised its deposit insurance assessment rates.
Alan Kline contributed to this story.
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Corrected October 5, 2016 at 6:23PM: An earlier version of this story mistakenly suggested that Promontory Interfinancial was the only firm that might benefit from the legislation discussed; several other firms also offer what they call "reciprocal deposits." The earlier version also included unsupported claims about Promontory's intellectual property.