- Source: fdic.gov
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On December 15, 2020, the Federal Deposit Insurance Corporation (FDIC) finalized revisions to regulations governing unsafe and unsound banking practices associated with brokered deposits and interest that may be paid by insured depository institutions (IDIs) that are less than “well-capitalized.”
Key components of the brokered deposits rule include:
- Narrowed or clarified definitions, including “deposit broker” and the “placing deposits” and “facilitation” components of the “deposit broker” definition;
- Increased the “incidental activity” threshold per business line between an agent or nominee and its customers from 10 percent to 25 percent;
- Adds a new exception for a person with an exclusive deposit placement arrangement with a single insured depository institution;
- Includes relationships in which an agent or nominee facilitates placement of depositors’ funds into transactional accounts for the purpose of enabling payments, in the “primary purpose” exception as long as no fees, interest, or other remuneration is provided to the depositor;
- Incorporates several designated “primary purpose” exceptions that were previously the subject of prior staff interpretations;
- Expands the interpretation of the “primary purpose” exception and designates a list of business relationships that meet the primary purpose exception;
- Eliminated applications and notices for business relationships included in the list of primary purpose exceptions;
- Permits entities that do not meet a designated primary purpose exception to apply for such an exception;
- Clarifies that third parties that either place or assist in placing deposits for the primary purpose of encouraging savings are not deposit brokers; and
- Affirms that brokered certificates of deposit will continue to classified as brokered deposits.
The changes in the rule, particularly the primary purpose exception for persons with an exclusive deposit placement arrangement with a single IDI, provide significant regulatory relief for banks and their fintech partners. The inclusion of the exclusive deposit placement relationship within the scope of the “primary purpose” exception was identified by FDIC Board Member Martin Gruenberg as an extreme change ignoring the history of bank risk related to brokered deposits, and was part of his rationale for opposing the rule.
With respect to interest rate restrictions on IDIs that are less than well-capitalized, the rule revises the method for calculating the “National Rate,” “National Rate Cap,” and “Local Market Rate Cap.”
- Defines the “National Rate” as the weighted average rate paid by all IDIs and insured credit unions (rates are to be weighted by domestic deposit market share);
- Provides definitions of “National Rate Cap” for maturity and nonmaturity deposits; and
- Defines “Local Market Rate Cap” at a deposit product level.
In addition, the final rule specifies when nonmaturity deposits are considered solicited or accepted for the purposes of the brokered deposits and interest rate restrictions.
FDIC Chair Jelena McWilliams pointed out that the framework of the new rule increases transparency by establishing bright lines tests for the “facilitation” prong of the deposit broker definition and encourages innovation by reducing barriers to certain types of deposit-gathering partnerships. Despite these improvements, Chair McWilliams cited the complexity and challenges in developing the rule, stating “Creating a broadly applicable rule for every type of deposit arrangement involving a third party is an enormous challenge, and new products will continue to arise that challenge any framework attempting to do so.” She called on Congress to replace the section of the Federal Deposit Insurance Act requiring restrictions on brokered deposits with a simpler restriction on asset growth.