The Federal Deposit Insurance Corporation issued a press release entitled, "FDIC Issues Proposed Rule on Interest Rate Restrictions Applicable to Less Than Well Capitalized Institutions," we learned from an article in The National Law Review, "FDIC Published Notice of Proposed Rulemaking on Interest Rate Restrictions." The latest proposed rules are related to an earlier FDIC regulatory proposal, "Unsafe and Unsound Banking Practices: Brokered Deposits and Interest Rate Restrictions," which contains some comments on brokerage sweep accounts. We excerpt some of the parts related to money market deposit account rates, brokered deposits and sweep assets below.
The FDIC's latest release tells us, "The Federal Deposit Insurance Corporation (FDIC) ... issued a notice of proposed rulemaking (NPR) related to interest rate restrictions that apply to less than well capitalized insured depository institutions. Under the proposed rule, the FDIC would amend the methodology for calculating the national rate and national rate cap for specific deposit products to provide a more balanced, reflective, and dynamic national rate cap. The national rate would be the weighted average of rates offered on a given deposit product by all reporting institutions weighted by domestic deposit share. The national rate cap for particular products would be set at the higher of (1) the 95th percentile of rates paid by insured depository institutions weighted by each institution's share of total domestic deposits, or (2) the proposed national rate (i.e., the weighted average) plus 75 basis points."
It continues, "The proposed rule would also greatly simplify the current local rate cap calculation and process by allowing less than well capitalized institutions to offer up to 90 percent of the highest rate paid on a particular deposit product in the institution's local market area. Additionally, the proposed rule would seek comment on alternative approaches to setting the national rate caps, including setting the national rate cap at the higher of the current rate cap or the previous rate cap."
The FDIC explains, "The statutory interest rate restrictions generally limit a less than well capitalized institution from offering rates on deposits that significantly exceed the prevailing rates in its normal market area. The proposed approach would provide more balance, compared to the current methodology, in that it provides less than well capitalized institutions additional flexibility to compete for funds in different interest rate environments, and yet continues to satisfy the statutory restrictions." (See the full proposal, "Interest Rate Restrictions on Institutions That Are Less Than Well Capitalized," here.)
Finally, the release adds, "In February 2019, the FDIC published an advance notice of proposed rulemaking in the Federal Register seeking comment on its regulations for the interest rate restrictions and brokered deposits. The FDIC received nearly 60 comments from individuals, banking organizations, and trade groups. Comments are now requested on the proposed approach, as well as alternative approaches. Comments will be accepted for 60 days after the NPR is published in the Federal Register. (See the FDIC's "Weekly National Rates and Rate Caps" here.)
The National Law Review's article explains, "On Tuesday, the FDIC released a Notice of Proposed Rulemaking (NPR) that outlines anticipated revisions to its regulations regarding interest rate restrictions that apply to less than well capitalized insured depository institutions. The proposed rule modifies the methodology by which the national rate and national rate cap are calculated on deposit products and proposes a new methodology for calculation of a local rate."
They add, "This follows a December 2018 Advanced Notice of Proposed Rulemaking(ANPR) in which the FDIC sought comments on its brokered deposit regulations and on proposed changes to the methodology used to calculate the national rate. Of the 130 comments on the ANPR, 59 addressed the interest rate restrictions; most of which responded that the current interest rate and rate cap methodology, which is calculated from a formula based on weighted deposits where the weights are the institutions’ number of branches, results in interest rates that are too low."
The FDIC's earlier proposal on "Brokered Deposits and Interest Rate Restrictions" says, "As described in the FDIC's 1997 study of the banking and thrift crises of the 1980s and early 1990s, brokered CDs became increasingly used as funding sources, first by money center banks and then by regional and smaller institutions. Even as early as the 1970s, the FDIC noted concerns about brokered deposits.... The largest concentrations of brokered deposits can be characterized as 3 types of deposits: (1) Master Certificates of Deposits; (2) sweep deposits that are viewed as brokered; and (3) reciprocal deposits. Listing service deposits are also discussed below, but typically, are not reported as brokered."
On "Sweep Deposits," the proposal comments, "Third parties (including investment companies acting on behalf their clients) that sweep client funds into deposit accounts at IDIs are deposit brokers. As a result, the sweep deposits placed by these third parties are brokered deposits unless the third party meets one of the exceptions to the definition of 'deposit broker'. In 2005, FDIC staff issued an advisory opinion that took the view that a brokerage firm placing idle client funds into deposit accounts at its affiliate IDI, under certain circumstances, meets the 'primary purpose' exception. Thus, the deposits placed on behalf of their clients would not be brokered deposits."
It tells us, "As of September 30, 2018, 28 insured depository institutions have indicated to the FDIC that they receive funds swept from an affiliated broker dealer under conditions that FDIC staff have indicated would support the affiliate being viewed as meeting the 'primary purpose' exception to the 'deposit broker' definition. Each of these insured depository institutions provides monthly reports to the FDIC of the monthly average of the swept funds as of month end. As of September 30, 2018, these 28 insured depository institutions reported $724 billion as the average amount of funds swept from the institutions' affiliated broker dealers for September 2018."
The proposal continues, "Thus, as of September 30, 2018, the reported brokered deposits of $986 billion, which includes brokered CDs and broker dealer sweeps to unaffiliated insured depository institutions, when combined with the average monthly balance of funds that broker dealers sweep to affiliated institutions for September of $724 billion result in a combined amount of $1.710 trillion, which represents 14 percent of the $12.3 trillion in industry domestic deposits for that date."
Finally, it adds, "Reciprocal deposit arrangements are based upon a network of IDIs that place funds at other participating banks in order for depositors to receive insurance coverage for the entire amount of their deposits. Because reciprocal arrangements can be complex, and involve numerous banks, they are often managed by a third-party sponsor. As a result, all deposits placed through this arrangement have historically been viewed as brokered deposits."
