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Community bankers tell regulators they want more access to brokered deposits

Competition for deposits is mounting, and bankers want more access to brokered deposits — especially for lenders serving rural or underbanked clients.

The Federal Deposit Insurance Corp. is undertaking a "comprehensive review" of brokered deposits, currently defined as any deposit obtained from a deposit broker. The regulator had received 105 letters when the comment period closed May 7.

With funding costs getting more expensive, banks are using brokered deposits as a way to fund loans. The cost of deposits rose 8 basis points quarter over quarter in the first quarter of 2019, to 0.85%.

Regulators currently place restrictions on brokered deposits based on banks' capital levels. Banks that are considered well-capitalized are not restricted from accepting brokered deposits, but those considered adequately capitalized must receive permission from the FDIC in order to accept, renew or roll over brokered deposits. Banks that are undercapitalized are not allowed to accept, renew or roll over brokered deposits.

Regulators did recently change the classification of some deposits previously considered brokered. In May 2018, Congress reclassified reciprocal deposits from "brokered" to "nonbrokered" if they totaled less than $5 billion or less than 20% of total liabilities. Advisers have said that the change would allow smaller community banks to compete with their bigger counterparts for commercial deposits since they tend to be larger.

An FDIC study in 2011 commissioned after the passage of the Dodd-Frank Act once again found that institutions with higher brokered deposit concentrations were more likely to fail.

Banks in the past have misused brokered deposits to fund growth in risky assets and then taken on further brokered deposits to try to "grow out" of problems, ultimately increasing losses to the insurance fund if the institution fails, wrote the Independent Bankers Association of Texas in its letter. This is why the restrictions on brokered deposits were put into place in the first place.

Despite this risk, many commenters said that there are several legitimate reasons to employ brokered deposits, and the FDIC should reconsider the rules limiting their use.

"Brokered or 'institutional' deposits are best viewed as an additional source of funding and liquidity available to balance sheet managers," wrote Robert Koncerak, COO and CFO of Bremen, Ga.-based American Commerce Bank NA, a bank with presence in Georgia and Florida and $310.5 million in assets.

Brokered deposits are not significantly more risky than core deposits when used correctly, said Jayendrakumar Shah, CEO of Touchmark National Bank, an Alpharetta, Ga.-based bank with $422.7 million in total assets.

"Core is not synonymous with loyalty," wrote Shah in his letter.

Some rural banks and those that serve underbanked clients said the disconnect between loan demand and deposit availability leads them to rely more heavily on brokered deposits as a source of funding.

"Every year, as loan demand remains strong and deposits leave Iowa, our level of brokered deposits is always increasing," wrote David Woodcock, CEO of Spencer, Iowa-based Farmers Trust and Savings Bank. The bank reported $446.7 million in total assets for the first quarter of 2019. "Brokered deposits [are] a very efficient means of re-allocating deposits from where they are located to where they are needed," he wrote.

Underbanked clients benefit from brokered deposits, as their loan demand often exceeds their deposit availability, according to several comment letters. "A bank whose niche is low/middle income and is trying to serve the needs of the low/middle income population by making loans, will not be able to maintain the funding needed to serve their niche," wrote Mary Fowler, CEO of Magnolia, Ark.-based Peoples Bank, a $214.7 million bank. "[B]ecause in order to serve that niche it's necessary to go outside of their deposit base for funding."