There is no need for the FDIC to tinker with its brokered deposits rule

Al Drago/Bloomberg

The failures of Silicon Valley Bank and Signature Bank last March raised fears of a banking crisis and caused regulators to start thinking about solutions. The payments community recognizes that once problems have been identified, regulators need to develop effective solutions to address the root causes and minimize the chances that such failures occur again. Successfully mitigating risks means focusing on the right root causes. What should we do, however, when policymakers, in the context of correcting root causes, begin to propose changes to our system that have nothing to do with the most recent crisis?   

In 2020, the Federal Deposit Insurance Corp. proposed and finalized new rules regulating brokered deposits. The Innovative Payments Association applauded the framework because it was a positive, rules-based step toward creating a brokered deposits regime, which recognized recent innovations in the payments industry over the three decades since the brokered deposits rules were first established. During that interval, the FDIC issued guidance on brokered deposits through frequently asked questions that often created more questions than answers for IPA members, so we appreciated a formal rulemaking that eliminated uncertainty for market participants. Yet support for the new rules was not universal, and then-FDIC board member Martin Gruenberg vocally opposed the new rule. 

The FDIC, under the leadership of now-Chair Gruenberg, and the Federal Reserve Board each released reports related to the failures of Silicon Valley and Signature banks. The FDIC also issued a report focused on deposit insurance. All the reports acknowledged the primary reasons these banks failed were poor management decisions, failure to address concerns by regulators, and a deposit run inspired on social media. None of the above reports implicated brokered deposits as a cause of these failures.  

In late July, Graham Steele, assistant secretary for financial institutions at the Treasury Department, delivered a speech in which he provided his opinions on what led to the bank failures, as well as observations about what the FDIC could do to mitigate similar problems in the future.

Steele said: "Reciprocal and brokered deposits may warrant greater attention now that they are playing an increasingly important role in bank funding structures in light of the recent events." To support this recommendation, Steele cited Gruenberg's December 2020 statements in opposition to the new brokered deposit rules, which were delivered more than two and a half years before the collapse of Silicon Valley and Signature banks.   

So, it is troubling to see calls for the FDIC to contemplate changes to their own regulations less than three years after they took effect — especially, when, according to the FDIC's own reports, neither brokered deposits nor the payments community had anything to do with the failures which took place earlier this year. Any changes to the current brokered deposit rules based on events that occurred this year are unwarranted. 

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Fintech debit deposits are stable bank accounts regulated by the Consumer Financial Protection Bureau and hold Regulation E protections as provided for in the Prepaid Account Final Rule. Further, in 2008, the FDIC's General Counsel Opinion No. 8 stated that a prepaid card (i.e. fintech) program which places funds at a financial institution should be viewed as a "bank product." It clarified that any funds underlying such bank products qualify as deposits, referring to prepaid cards as "nontraditional access mechanisms." 

The payments community plays a big role in bringing more people into the financial services system. According to the 2022 Federal Reserve Payments Study, electronic payments increased during COVID-19 by almost 10%. This rate of increase was more than twice the rate of increase in the previous three-year period, and more than three times the rate of increase from 2000 to 2018. Moreover, the United States is at its lowest national unbanked rate since the FDIC survey began in 2009. The payments community played a major role in making this happen. 

If the FDIC were to take us back to a time before the 2020 brokered deposit rules, it would have implications beyond fintech products. The deposits in many payment products used by millions of Americans could potentially be considered "brokered." Such a broad classification would increase costs, stifle innovation and limit consumer access. This, in turn, could reduce consumer choice at a time when consumer and commercial confidence in our national economy is uncertain.

Regulatory solutions should be based on facts and data, not on fear of new technology. When the solution does not match the problem, or when regulators develop solutions in search of a problem, it leads to instability which, in turn, undermines public trust.