Recent guidance from the Federal Deposit Insurance Corp. was meant to provide banks with greater clarity to interpret and report their levels of brokered deposits. But regulators fell short of that goal. The FDIC's Frequently Asked Questions on brokered deposits is an example of how poorly crafted guidelines can cause significant harm and impose costs on financial institutions and communities without any true societal or supervisory benefit.

In response to the downturn, the FDIC under Sheila Bair mounted a campaign to discourage bankers from accepting brokered deposits — traditionally thought of as bulk amounts of deposits that banks acquire from brokers in exchange for high interest rates. The justification for limiting brokered deposits was that they had contributed to bank failures by allowing banks to greatly accelerate growth, and that such deposits have less franchise value than "core deposits."

Admittedly, a number of failed banks during the crisis had significant quantities of brokered deposits. They can be used as a tool to fuel growth — but then, so can subscription service deposits, certificates of deposit and large money-market deposits. Yet unlike ordinary CDs, brokered deposits cannot be withdrawn prior to maturity. Congress had it in its authority to prohibit brokered deposits altogether, but limited such restrictions just to banks in a troubled condition.

Upon this dubious foundation, the FDIC has mounted its anti-brokered deposit crusade by limiting wholesale funding, imposing higher FDIC assessments and downgrading liquidity ratings when a bank is considered too dependent on wholesale funding.

But these restrictions come with societal costs. For one thing, they deny banks the ability to use brokered deposits to meet communities' lending needs. Instead, banks must try to fund such loan growth by collecting enough retail deposits to perfectly offset those demands.

Second, the FDIC's limitations on brokered deposits curtail bank earnings. Brokered deposits cost less than retail deposits. But to maintain satisfactory liquidity ratings, bankers must pay up for retail. Basel III furthers this imbalance with the liquidity coverage ratio expectation that brokered deposits be offset by on-balance-sheet liquidity.

Third, the restrictions force banks to overinvest resources in branch facilities and staffing to attract retail deposits.

Contrary to all common sense, the FDIC now believes that insurance agents, lawyers or accountants that merely refer business to a bank could be considered deposit brokers regardless of whether they receive a fee or compensation. Employees who work for a broker/dealer, an investment advisor subsidiary of a bank or its parent holding company may also be considered deposit brokers.

Moreover, the characterization of certain deposits as "brokered" will no longer be terminated if the deposit is renewed, regardless of whether the original deposit broker receives a fee.

The guidelines also further obfuscate the exceptions to the definition of deposit broker. For instance, an insurance agent or nominee who has a "primary purpose" other than placing the deposit may be exempted from the definition. The primary purpose exception is not applicable, however, if the intent of the third party is to earn fees through the deposit placement. Now bankers must judge the subjective intent of those placing the deposit. A quantitative analysis of the revenues generated by the third party is not acceptable.

Moreover, the FDIC says that the primary purpose exception applies only infrequently and typically requires a specific request for confirmation by the FDIC. Bankers would likely need to hire lawyers to request confirmation of the exception. It is more likely that they will simply choose to limit their acceptance of deposits from trust companies and broker/dealers or fiduciary deposits for fear that they will be deemed to be brokered.

The Q&A also throws its expansive net over prepaid cards and general reloadable cards. Companies that issue the cards sometimes deposit the balances in a bank account from which customers can make withdrawals. Now the balances supporting the cards will be considered brokered deposits, even though the bank pays no fees on those accounts and the accounts are very stable.

Bankers are already engaged in a significant effort to reclassify funding as brokered deposits in response to the FDIC's guide. SNL Financial reported that brokered deposits grew 4.83% in the fourth quarter of 2014, as compared to total deposit growth of 1.44% over the same period. The FDIC's change in definition was credited for such reclassification.

Now banks have limited choices. They can absorb the increased costs associated with the brokered deposit label or choose to offset newly-defined brokered deposits with three or four dollars of retail deposits (assuming their capital can support such change). They can also curtail loan growth or shrink earning assets to minimize the effect of the increase in brokered deposit balance.

The costs of the FDIC's guidance are serious and ongoing. Of course, regulators do not perform — or at least, disclose — any cost-benefit analysis of such guidance.

The FDIC's goals of reducing the risk of bank failure and of resolution costs are admirable. But there is no evidence that the FAQ, despite its material costs, will assist in achieving either objective.

Peter Weinstock is a partner at Hunton & Williams. His practice focuses on corporate and regulatory representation of small to large regional and national financial institution franchises.