- Key insight: The new law's reciprocal and custodial deposit provisions recognize what the evidence has shown for two decades. They should spur, not substitute for, the broader work of protecting America's depositors.
- Supporting data: In March 2023, when deposits fled smaller institutions for the perceived safety of the very largest, roughly $108 billion left small banks in a single week while the 25 largest gained $120 billion.
- Forward look: Community bankers should put the new tools to work for the customers and communities they serve. And Washington should bring that same bipartisan resolve to the work of depositor protection that remains.
Late last month, Congress passed the 21st Century
The first provision replaces the cap that has governed reciprocal deposits since 2018, under which a bank could treat them as non-brokered core funding only up to the lesser of $5 billion or 20% of its liabilities. The new law substantially expands that capacity for well-capitalized banks through a tiered framework tied to bank size. The second provision allows well-capitalized banks under $10 billion in assets to treat custodial deposits — funds placed by agents, trustees or custodians on behalf of third parties — as core funding for the first time, up to 20% of liabilities. The act also directs the FDIC to study the reciprocal market, which I welcome.
The mechanics of that market are straightforward. A network of banks exchanges deposits dollar for dollar, so that a large local customer's funds are placed in insured-size increments across many institutions. The customer keeps one banking relationship and gains full insurance coverage; the bank keeps the funding and puts it to work at home.
For years, however, these deposits were swept into the "brokered" category, a label built in 1989 for rate-chasing money of an entirely different character. But reciprocal deposits have never behaved that way. Fifteen years ago, my colleagues and I urged the FDIC to judge them by their substance rather than their label. The evidence was already plain: they were overwhelmingly local deposits, priced at local market rates, and remarkably stable, even through the financial crisis. Analysis we submitted at the time found that banks making greater use of reciprocal deposits were less, not more, likely to fail. Congress was asking the right question even then, directing the FDIC in the Dodd-Frank Act to study, among other things, "the competitive parity between large institutions and community banks that could result from redefining core deposits."
It took time, but the answers came. In 2018, Congress created the first statutory recognition that a well-run bank's reciprocal deposits are not brokered deposits. And in March 2023, when deposits fled smaller institutions for the perceived safety of the very largest — roughly $108 billion left small banks in a single week while the 25 largest gained $120 billion — reciprocal deposits proved their worth at scale. Federal Reserve researchers found that reciprocal balances roughly doubled that year, as community bankers used them to reassure worried customers and keep funding close to home. That is precisely what reciprocal deposits were designed to do.
The Independent Community Bankers of America is lobbying Congress to require federal credit unions to disclose CEO pay, as most other nonprofit organizations must do. The calls follow the discovery of a massive embezzlement scheme led by the CEO of a Mississippi credit union.
What Congress affirmed last month, by margins rarely seen in banking legislation, is that the evidence has carried the argument. Reciprocal deposits are core community bank funding — in substance and now in statute. The playing field on which community banks compete for large deposits is meaningfully more level than it was a month ago.
Some will read the act as Congress choosing a market mechanism instead of modernizing deposit insurance itself. I would resist that reading. Protecting depositors is not merely a business proposition; it is a civic obligation and that work is unfinished. The basic coverage limit has been essentially unchanged since 2008, while the operating balances of businesses, municipalities and nonprofits have grown well past it. The FDIC's own 2023 study made a careful case for targeted reform, and Congress should return to it. Reciprocal networks extend the reach of the insurance system we have today — every dollar placed through them is insured within existing limits, backed as always by industry-funded assessments. That is a reason to keep improving the system, not an excuse to stop. Both approaches serve the same end: No American should have to choose between banking locally and keeping their money safe.
There is work ahead to make the new law deliver. The FDIC should write conforming rules promptly and bring to its mandated study the same evidentiary rigor Congress brought to the legislation. Community banks, for their part, should treat the new headroom as what it is: capacity in service of customer relationships and local lending, not an invitation to buy growth. Boards should ask management a simple question: How does this expanded capacity serve our depositors, our lending and our community?
The deposit rules tilted against community banks for the better part of four decades. Congress has now leveled a meaningful part of the field, and it did so with a unity that should encourage everyone who believes that a diverse banking system is one of America's great economic strengths. Community bankers should put the new tools to work for the customers and communities they serve. And Washington should bring that same bipartisan resolve to the work of depositor protection that remains.
