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From Banking and Finance Law Daily, August 14, 2015

Industry groups fear broadened definition of ‘brokered deposits’

By J. Preston Carter, J.D., LL.M.

Industry groups are contesting what they fear is a broadened definition of "brokered deposits" published in Federal Deposit Insurance Corporation guidance last January. At that time, the FDIC said its set of frequently asked questions and answers would help insured depository institutions identify and report brokered deposits (see Banking and Finance Law Daily, Jan. 6, 2015).

In a letter to the FDIC, The Clearing House Association, American Bankers Association, and Institute of International Bankers state that the proper characterization of deposits as brokered is of "vital importance" to all insured depository institutions (IDIs) and their customers given the regulatory and prudential restrictions relating to an IDI’s acceptance of brokered deposits. The associations expressed concern that the FAQs may significantly broaden the scope of the types of activities and deposits that are deemed to be "brokered" by characterizing, for the first time, certain deposits resulting from modern banking affiliations and certain customer relationships as brokered, volatile, "hot money" deposits.

Client activities. In particular, the letter states, the guidance "appears to upset long-settled expectations" of IDIs of all sizes by characterizing the client-servicing activities of certain dual, "dual-hatted," contractual, and other employees intended to meet customer demand for a "holistic, cost-effective banking experience" as being "tantamount" to the activities of "deposit brokers." Such characterization, the associations contend, would result in deposits arising from these employee-customer interactions as being classified as brokered "hot money," despite the fact that deposits placed by customers with a holistic relationship with the banking organization tend to be exceedingly stable.

Affiliate activities. In addition, the letter says, the guidance appears to unduly capture similarly stable deposits resulting from certain bank-affiliate relationships, as well as all deposits obtained by contract employees, such as those typically used by banking organizations to staff customer service call centers. In light of modern banking organizations’ widespread use of dual and contract employees and affiliations with non-banking entities, the associations believe that the FAQs could require deposits resulting from a large amount of deposit-taking activities, including those that occur at the vast majority of branch locations and call centers, to be classified as brokered.

Employee relationships. Absent clarification, the associations contend that the guidance could require that deposits resulting from the following typical customer interactions with dual, affiliate, or contract employees be classified as brokered, even where the employee’s compensation is not directly or explicitly tied in any material respect to the volume of deposits placed:

  • customer interactions with IDI employees, including bank tellers, who share office space with affiliate or third-party employees, despite the fact that the proceeds related to the IDI’s business and activities inure exclusively to the benefit of the IDI, as required by applicable regulation; customer interactions with customer service call center employees who function as IDI employees but who are employed by an affiliate or by a service contractor;

  • deposit referrals to an IDI on behalf of customers by an affiliate employee as part of providing a holistic banking experience, such as a referral by a financial advisor employed by an affiliated broker dealer; and

  • customer interactions with IDI employees who also have licenses through affiliated entities, such as a broker-dealer or insurance agency.

If further clarification is not provided, the letter says, the guidance likely will ultimately lead IDIs to alter their employee and affiliate relationships in a manner that "will cause customers significant harm."

The associations affirmed their support of "appropriately designed measures" to encourage institutions to rely on and seek stable sources of funding. However, they emphasized that "the FAQs could be interpreted as characterizing a very substantial volume of stable deposits resulting from certain dual, contract, and affiliate employee customer interactions as brokered."

Recommendations. "At a minimum," the letter states, "we urge the FDIC to suspend application of the broad conclusions set forth in the Guidance" regarding dual, contract, and affiliate employees until the FDIC, or the industry, has conducted a "public and transparent study" of:

  • the volume of deposits that would be redefined as "brokered deposits" if the guidance were not clarified as requested by their letter;

  • the level of stability and the rates of interest that apply to these deposits; and

  • whether banks could afford to accept such deposits if they were classified as brokered, and the resulting impact on credit availability.

With this information, the association state, "the FDIC could make an informed, reasoned judgment as to the impact of the guidance as it could presently be interpreted and revise or enhance the guidance accordingly."

Companies: American Bankers Association; Institute of International Bankers; The Clearing House Association

MainStory: TopStory BankingOperations DepositInsurance FinancialStability

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