Unsafe and Unsound Banking Practices: Brokered Deposits and Interest Rate Restrictions, 2366-2400 [2018-28273]
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
898–6847, vkhare@fdic.gov; Division of
Risk Management Supervision—Thomas
F. Lyons, Chief, Policy and Program
Development, (202) 898–6850, tlyons@
fdic.gov; Judy Gross, Senior Policy
Analyst, (202) 898–7047, jugross@
fdic.gov; Division of Insurance and
Research—Ashley Mihalik, Chief,
Banking and Regulatory Policy, (202)
898–3793, amihalik@fdic.gov.
SUPPLEMENTARY INFORMATION:
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 337
RIN 3064–AE94
Unsafe and Unsound Banking
Practices: Brokered Deposits and
Interest Rate Restrictions
Federal Deposit Insurance
Corporation.
ACTION: Advance notice of proposed
rulemaking and request for comment.
AGENCY:
The Federal Deposit
Insurance Corporation (FDIC) is
undertaking a comprehensive review of
the regulatory approach to brokered
deposits and the interest rate caps
applicable to banks that are less than
well capitalized. Since the statutory
brokered deposit restrictions were put
in place in 1989, and amended in 1991,
the financial services industry has seen
significant changes in technology,
business models, and products. In
addition, changes to the economic
environment have raised a number of
issues relating to the interest rate
restrictions. A key part of the FDIC’s
review is to seek public comment
through this Advance Notice of
Proposed Rulemaking (ANPR) on the
impact of these changes. The FDIC will
carefully consider comments received in
response to this ANPR in determining
what actions may be warranted.
DATES: Comments must be received by
the FDIC no later than May 7, 2019.
ADDRESSES: You may submit comments
on the notice of proposed rulemaking
using any of the following methods:
• Agency Website: https://
www.fdic.gov/regulations/laws/federal/.
Follow the instructions for submitting
comments on the agency website.
• Email: comments@fdic.gov. Include
RIN 3064–AE94 on the subject line of
the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
• Hand Delivery: Comments may be
hand delivered to the guard station at
the rear of the 550 17th Street NW
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
• Public Inspection: All comments
received, including any personal
information provided, will be posted
generally without change to https://
www.fdic.gov/regulations/laws/federal.
FOR FURTHER INFORMATION CONTACT:
Legal Division—Thomas Hearn,
Counsel, (202) 898–6967; thohearn@
fdic.gov; Vivek V. Khare, Counsel, (202)
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SUMMARY:
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I. Policy Objectives
The policy objective of this ANPR is
to obtain input from the public as the
FDIC comprehensively reviews its
brokered deposit and interest rate
regulations in light of significant
changes in technology, business models,
the economic environment, and
products since the regulations were
adopted. The FDIC is inviting comment
on all aspects of the brokered deposit
and interest rate regulations.
To facilitate comment, the remainder
of this ANPR has been structured in the
following manner: (II) Brokered
Deposits and Interest Rate Restrictions,
addressing (A) Current Law and
Regulations, (B) History and Research,
(C) Brokered Deposit Issues, (D) Interest
Rate Issues; (III) Requests for Comment;
and Appendices with additional
background and descriptive statistics.
II. Brokered Deposits and Interest Rate
Restrictions
Brokered and high-rate deposits
became a concern among bank
regulators and Congress before any
statutory restrictions were put in place.
This concern arose because: (1) Such
deposits could facilitate a bank’s rapid
growth in risky assets without adequate
controls; (2) once problems arose, a
problem bank could use such deposits
to fund additional risky assets to
attempt to ‘‘grow out’’ of its problems,
a strategy that ultimately increased the
losses to the deposit insurance fund
when the institution failed; and (3)
brokered and high-rate deposits were
sometimes volatile because deposit
brokers (on behalf of customers), or the
customers themselves, were often drawn
to high rates and were prone to leave the
bank when they found a better rate or
they became aware of problems at the
bank.
Before proceeding further, it should
be noted that, historically, most
institutions that use brokered and
higher-rate deposits have done so in a
prudent manner and appropriately
measure, monitor, and control risks
associated with brokered deposits.
Moreover, well-capitalized institutions
are not subject to restrictions on
accepting brokered deposits or setting
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interest rates. Nonetheless, the FDIC
also recognizes that institutions
sometimes are concerned that the use of
brokered deposits can have other
regulatory consequences, such as
implications for deposit insurance
pricing in certain circumstances, or may
be viewed negatively by investors or
other stakeholders.
A. Current Law and Regulations
Section 29 of the Federal Deposit
Insurance Act (FDI Act), titled
‘‘Brokered Deposits,’’ was originally
added to the FDI Act by the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA). The
law originally restricted troubled
institutions (not meeting their minimum
capital requirements at the time) from
(1) accepting deposits from a deposit
broker without a waiver and (2)
soliciting deposits by offering rates of
interest on deposits that were
significantly higher than the prevailing
rates of interest on deposits offered by
other insured depository institutions (or
‘‘IDIs’’) having the same type of charter
in such depository institution’s normal
market area.1
Two years later, Congress enacted the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA),
which added the Prompt Corrective
Action (PCA) capital regime to the FDI
Act and also amended the threshold for
the brokered deposit and interest rate
restrictions from a troubled institution
to a bank falling below the ‘‘well
capitalized’’ PCA level. At the same
time, the FDIC was authorized to waive
the brokered deposit restrictions for a
bank that is adequately capitalized upon
a finding that the acceptance of such
deposits does not constitute an unsafe
or unsound practice with respect to the
institution.2 FDICIA did not authorize
the FDIC to waive the brokered deposit
restrictions for less than adequately
capitalized institutions. Most recently,
earlier this year, Section 29 of the FDI
Act was amended as part of the
Economic Growth, Regulatory Relief,
and Consumer Protection Act, to except
a capped amount of certain reciprocal
deposits from treatment as brokered
deposits.3
1 See Public Law 101–73, August 9, 1989, 103
Stat. 183.
2 See Public Law 102–242, December 19, 1991,
105 Stat. 2236.
3 The statute was amended 1994 as part of the
Riegle Community Development and Regulatory
Improvement Act of 1994. The changes were
generally technical to ensure that the interest rate
restrictions under Section 29(g)(3) were consistent
with the PCA framework, among other things. See
Public Law 103–325, September 23, 1994, 108 Stat.
2160.
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Section 337.6 of the FDIC’s Rules and
Regulations implements and closely
tracks the statutory text of Section 29,
particularly with respect to the
definition of ‘‘deposit broker’’ and its
exceptions.4 Section 29 of the FDI Act
does not directly define a ‘‘brokered
deposit,’’ rather, it defines a ‘‘deposit
broker’’ for purposes of the restrictions.5
Thus, the meaning of the term
‘‘brokered deposit’’ turns upon the
definition of ‘‘deposit broker.’’
Section 29 and the FDIC’s
implementing regulation define the term
‘‘deposit broker’’ to include:
(1) Any person engaged in the
business of placing deposits, or
facilitating the placement of deposits, of
third parties with insured depository
institutions or the business of placing
deposits with insured depository
institutions for the purpose of selling
interests in those deposits to third
parties; and
(2) An agent or trustee who
establishes a deposit account to
facilitate a business arrangement with
an insured depository institution to use
the proceeds of the account to fund a
prearranged loan.
This definition is subject to the
following nine statutory exceptions:
(1) An insured depository institution,
with respect to funds placed with that
depository institution;
(2) An employee of an insured
depository institution, with respect to
funds placed with the employing
depository institution; 6
(3) A trust department of an insured
depository institution, if the trust in
question has not been established for
the primary purpose of placing funds
with insured depository institutions;
(4) The trustee of a pension or other
employee benefit plan, with respect to
funds of the plan;
(5) A person acting as a plan
administrator or an investment adviser
in connection with a pension plan or
other employee benefit plan provided
that that person is performing
managerial functions with respect to the
plan;
(6) The trustee of a testamentary
account;
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4 See
12 CFR 337.6. The FDIC issued two
rulemakings related to the interest rate restrictions
under this section. A discussion of those
rulemakings, and the interest rate restrictions, is
provided in Section (II)(B) of this ANPR.
5 See 12 U.S.C. 1831f.
6 The term ‘‘employee’’ is defined as ‘‘any
employee (A) who is employed exclusively by the
insured depository institution; (B) whose
compensation is primarily in the form of salary; (C)
who does not share such employee’s compensation
with a deposit broker; and (D) whose office space
or place of business is used exclusively for the
benefit of the insured depository institution which
employs such individual.’’
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(7) The trustee of an irrevocable trust
(other than one described in paragraph
(1)(B)), as long as the trust in question
has not been established for the primary
purpose of placing funds with insured
depository institutions;
(8) A trustee or custodian of a pension
or profit sharing plan qualified under
section 401(d) or 430(a) of the Internal
Revenue Code of 1986; or
(9) An agent or nominee whose
primary purpose is not the placement of
funds with depository institutions.
As listed above, the statute includes
nine exceptions to the definition of
‘‘deposit broker.’’ The FDIC’s
regulations include the following tenth
exception: ‘‘An insured depository
institution acting as an intermediary or
agent of a U.S. government department
or agency for a government sponsored
minority or women-owned depository
institution program (‘‘MWODI’’).7
In addition to restricting the
acceptance of brokered deposits by less
than well-capitalized IDIs, Section 29 of
the FDI Act also prohibits such IDIs
from paying rates that significantly
exceed their normal market area or the
national rate as established by the FDIC
by regulation. This provision was
intended to prohibit ‘‘the solicitation of
deposits by in-house salaried employees
through so-called money-desk
operations.’’ 8 More specifically, the
provision addressed a concern that
emerged during various legislative
hearings that brokered deposit
restrictions could easily be
circumvented by in-house solicitation of
high-rates.9 In implementing this
legislative restriction, from 1989 to
2009, the FDIC pegged the national rate
to comparable Treasury rates in its
regulation. However, the national rate
calculation was changed in 2009,
pursuant to a notice-and-comment
rulemaking, when yields on Treasuries
fell dramatically during the crisis,
compressing the rate caps. The FDIC
moved to a simple average of rates paid
by all banks and branches that offer a
specific product. This national rate data
is provided to the FDIC by a data7 See 12 CFR 337.6(a)(5)(J). The exception was
adopted by the FDIC shortly after FDICIA was
enacted in 1991, and the FDIC indicated in the
preamble for the final rule that implemented the
FDICIA revisions to section 29 that those revisions
were not intended to apply to deposits placed by
insured depository institutions assisting
government departments and agencies in
administration of MWODI deposit programs. See 57
FR 23933, 23040 (1992).
8 See H.R. Conf. Rep. No. 101–222, 101st Cong.,
1st Sess. 402 (1989).
9 See ‘‘Problems of the Federal Savings and Loan
Insurance Corporation: Hearings Before the
Committee on Banking, Housing, and Urban Affairs
of the United States Senate,’’ (part II) 101st Cong.,
1st Sess. 230–231 (1989).
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gathering company and is published
weekly on the FDIC’s website. The
history of the interest rate restrictions
and its associated issues are discussed
more fully in Section D.
B. History and Research
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.10 Even as early as the
1970s, the FDIC noted concerns about
brokered deposits, as stated in the
FDIC’s Division of Bank Supervision
Manual—‘‘The use of brokered deposits
has been responsible for abuses in
banking and has contributed to some
bank failures, with consequent losses to
the larger depositors, other creditors,
and shareholders.’’ 11
However, the potential abuses
associated with brokered deposits
received relatively little attention until
the failure of Penn Square Bank in 1982.
This failure resulted in the largest bank
payout of insured deposits in the history
of the FDIC up until that time.12
Brokered deposits allowed the bank to
grow rapidly from $30 million in assets
in 1977 to $436 million in assets when
it failed in 1982, with much of the
growth in high risk loans to small oil
and gas producers.13 In response to the
rising use of brokered deposits and data
suggesting negative consequences, in
April 1984 the FDIC and the Federal
Home Loan Bank Board (FHLBB)
adopted a joint final rule restricting pass
through deposit insurance for deposits
obtained through a deposit broker.14
The agencies indicated that data showed
that institutions used brokered deposits
to pursue rapid growth in risky real
estate-related lending without adequate
controls and to increase risky lending
after problems arose. In January 1985,
the Court of Appeals for the District of
Columbia Circuit ruled that the FDI Act
did not permit the FDIC to eliminate
pass-through deposit insurance for
deposit brokers.15
10 History of the Eighties—Lessons for the Future,
p. 119, Federal Deposit Insurance Corporation
December 1997 https://www.fdic.gov/bank/
historical/history/.
11 FDIC, ‘‘Division of Bank Supervision Manual,’’
Section L, page 3, November 1, 1973.
12 History of the Eighties—Lessons for the Future,
p. 119, Federal Deposit Insurance Corporation
December 1997 https://www.fdic.gov/bank/
historical/history/.
13 See id; see also, Belly Up: The Collapse of the
Penn Square Bank (1985), Chapter 9, Phillip L.
Zweig.
14 See 49 FR 13003 (April 2, 1984).
15 FAIC Securities, Inc. v. United States, 768 F.2d
352 (D.C. Cir. 1985).
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While the case was pending, and after
the decision, Congressional hearings
regarding brokered deposits were held
between 1984 and 1988 and, in 1989, as
noted earlier, as part of FIRREA.
Pursuant to these hearings, Congress
imposed restrictions on brokered
deposits for institutions that did not
meet their minimum capital
requirements and later tied the
restrictions to the PCA framework in
1991 through FDICIA. Congress also
imposed rate restrictions on institutions
that were less than well capitalized out
of concern that institutions would be
able to circumvent brokered deposit
restrictions by merely advertising or
otherwise offering very high rates. Since
enactment of Section 29, the FDIC has
continued to study the role of brokered
deposits in the performance of banks,
their impact on safety and soundness,
and the loss they impose on the Deposit
Insurance Fund (DIF) when a bank fails.
Brokered Deposit Usage and Relevant
Data
From the 1960s up until 2000,
brokered retail CDs and wholesale CDs
were the main type of brokered deposits
used in the banking system. Starting in
the 1980s deposit listing services began
generating deposits for IDIs by
advertising CD rates on behalf of
institutions. Beginning in 1999, brokerdealers first started to offer brokerage
customers an automatic sweep of their
customers’ idle funds to IDIs.
Beginning in 2003, a network was
established through which banks could
place customer funds in time deposits at
other banks and receive time deposits in
an equal amount of funds in return,
such deposits being referred to as
‘‘reciprocal deposits.’’ Similar services
evolved for money market deposit
accounts (MMDAs).
As of September 30, 2018, insured
depository institutions held $986 billion
in brokered deposits, which amounted
to 8.0 percent of the $12.3 trillion in
industry domestic deposits. These
brokered deposits were held by 2,221
insured depository institutions,
representing 40.6 percent of the 5,477
total number of insured depository
institutions.
Although 2,221 institutions held
brokered deposits as of September 30,
2018, a significant portion of these
deposits are concentrated in a small
number of institutions. One hundred
institutions held 89.4 percent, or $881
billion, of the $986 billion brokered
deposits in the banking system, with
five institutions accounting for 39.4
percent, or $389 billion, of all brokered
deposits. The remaining 2,121
institutions using brokered deposits
account for the remaining $104 billion
in brokered deposits.
Consistent with this concentration,
among the 2,221 institutions holding
brokered deposits as of September 30,
2018, the median holding was 4.7
percent of total domestic deposits, but 6
institutions held brokered deposits in
excess of 90 percent of total domestic
deposits; 25 institutions held brokered
deposits between 50 percent and 90
percent of total domestic deposits; and
79 institutions held brokered deposits
between 25 percent and 50 percent of
total domestic deposits.
BROKERED DEPOSITS HELD BY INSURED DEPOSITORY INSTITUTIONS AS OF SEPTEMBER 30, 2018 16
Total number
of banks
Asset size group
Share of
total
brokered
deposits
(%)
Total
brokered
deposits
(billions)
Total
domestic
deposits
Share of
total
domestic
deposits
(%)
Under $1 Billion .......................................
$1–10 Billion ............................................
$10–50 Billion ..........................................
Over $50 Billion .......................................
4,704
635
97
41
1,656
439
89
37
$31.92
90.16
171.87
691.78
3.2
9.1
17.4
70.2
$988.05
1,349.56
1,605.40
8,378.84
8.0
11.0
13.0
68.0
All Banks ...........................................
5,477
2,221
985.73
........................
12,321.84
........................
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.
Master Certificate of Deposits
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Number of
banks with
brokered
deposits
Information about brokered deposits
that the FDIC collects from banks
through the Call Report does not reflect
certain elements of the structure of the
brokered deposit market. However,
industry participants have informed the
FDIC that a sizable portion of reported
brokered deposits are wholesale Master
Certificate of Deposits. These
instruments are held on the books of the
16 Descriptive statistics detailing the historical
holdings of brokered deposits by bank size and PCA
capital classification status can be found in
Appendix 1.
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issuing bank in the name of a subsidiary
of Depository Trust Corporation (DTC)
as custodian for deposit brokers who are
often broker dealers. These broker
dealers, in turn, issue retail CDs,
typically in denominations of $1,000,
under the Master Certificate of Deposit
to their retail clients.
The retail customers’ ownership
interests in the brokered retail CDs are
reflected on the books of the deposit
broker that issued them. These Master
Certificates of Deposits are reported by
banks on Call Report Schedule RC–E,
Memoranda Item 1.c as deposits of
$250,000 or less even though issued in
the name of DTC for more than $250,000
to reflect the substance of the retail CDs
issued under them. The FDIC, however,
has no Call Report information about
what portion of reported brokered
deposits of $250,000 or less are Master
Certificates of Deposits as described
above. In the event of a failure, the
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deposit broker maintains records of the
retail CDs held by its customers, and
these records would be submitted to the
FDIC in order to make payments on
deposit insurance to the retail CD
holders.
Sweep Deposits
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
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purpose’’ exception.17 Thus, the
deposits placed on behalf of their clients
would not be brokered deposits.
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.
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.
Reciprocal Deposits
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.
On May 24, 2018, the Economic
Growth, Regulatory Reform, and
Consumer Protection Act took effect,
allowing certain banks to except a
limited amount of reciprocal deposits
(as defined by the Act) from brokered
deposits. Under the reciprocal deposit
exception, well-capitalized and wellrated institutions are not required to
treat such reciprocal deposits as
brokered deposits up to the lesser of 20
percent of its total liabilities, or $5
billion. Institutions that are not both
well capitalized and well rated may also
exclude reciprocal deposits from their
brokered deposits under certain
circumstances.
The immediate result of this Act has
significantly reduced the percentage of
17 See
FDIC Advisory Opinion No. 05–02 (2005).
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reciprocal deposits that are classified as
brokered deposits. As of March 30,
2018, the last reporting quarter before
the Act took effect, reciprocal deposits
of $48.5 billion were reported. As of
June 30, 2018, the first quarter end after
the Act took effect, brokered reciprocal
deposits had fallen to $17.1 billion. As
of September 30, 2018, brokered
reciprocal deposits had fallen to $13.7
billion. For banks with assets less than
$1 billion, their percentage of reciprocal
deposits as a percent of brokered
deposits declined from 33.7 percent on
March 31, 2018, to 15.4 percent on June
30, 2018 and, 11.5 percent on
September 30, 2018.
Listing Service Deposits
Deposits whose placement at insured
depository institutions are facilitated, in
a passive manner, by deposit listing
services have not been reported as
brokered deposits. However, since 2011,
such deposits have been reported on
banks’ Call Reports. As of September 30,
2018, insured depository institutions
reported holding $69.6 billion in listing
service deposits that are not reported as
brokered deposits, which amounted to
0.6 percent of industry domestic
deposits. One quarter of insured
depository institutions held nonbrokered listing service deposits as of
September 30, 2018.
As of September 30, 2018, 22
institutions were not well capitalized
for PCA purposes. Of these institutions,
13 institutions held non-brokered listing
service deposits, for which the ratio of
non-brokered listing service deposits to
domestic deposits was 3.6 percent,
while the ratio for the 1,356 well-rated
institutions holding such deposits was
2.9 percent. Among insured depository
institutions with non-brokered listing
service deposits, the share of nonbrokered listing service deposits to
domestic deposits has declined from a
median of 4.6 percent on September 30,
2011 to 2.9 percent as of September 30,
2018.
FDIC Studies That Discuss Brokered
Deposits
In the wake of the recent financial
crisis, the Dodd-Frank Act directed the
FDIC to conduct a study of core and
brokered deposits, which the FDIC
completed in July 2011. Recently the
FDIC updated its analysis with data
through the end of 2017. The results of
that analysis confirm the previous
findings of the 2011 study and can be
found in Appendix 2.
The research provided in the study
shows that higher brokered deposit use
is associated with higher probability of
bank failure and higher insurance fund
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2369
loss rates. Banks with higher levels of
brokered deposits are also, in general,
more costly to the DIF when they fail.
The study also found that, on average,
brokered deposits are correlated with
higher levels of asset growth, higher
levels of nonperforming loans, and a
lower proportion of core deposit
funding. FDIC’s study also describes the
three characteristics of brokered
deposits that have posed risk to the DIF:
1. Rapid growth—the extent to which
deposits can be gathered quickly and
used imprudently to expand risky assets
or investments.
2. Volatility—the extent to which
deposits might flee if the institution
becomes troubled or the customer finds
a more appealing interest rate or terms
elsewhere. Volatility tends to be also be
mitigated somewhat by deposit
insurance, as insured depositors have
less incentive to flee a problem
situation.
3. Franchise Value—the extent to
which deposits will be attractive to the
purchasers of failed banks, and therefore
not contribute to losses to the DIF.
In December 2017, the FDIC
published Crisis and Response: An FDIC
History, 2008–2013.18 The history
shows that failures and downgrades
were highly correlated with reliance on
brokered deposits and other wholesale
funding sources.19 Generally speaking,
failures were more concentrated among
banks that made relatively greater use of
brokered deposits and other wholesale
funding sources.
The history noted that, although the
use of brokered deposits and other
wholesale funding sources within a
sound liquidity management program is
not in itself a risky practice, significant
reliance on wholesale funds may reflect
a decision that an institution has made
to grow its business more aggressively.
On the liability side, the history
indicated that if the institution comes
under stress, wholesale counterparties
may be more apt to withdraw funding
or demand additional collateral.
In addition to these publications, the
following reports prepared by the
Inspectors General of the federal
banking agencies have detailed how
brokered deposits were sometimes used
by failed banks in the most recent crisis.
These reports include the following:
• Safety and Soundness: Analysis of
Bank Failures Reviewed by the
18 Federal Deposit Insurance Corp., Crisis and
Response: An FDIC History, 2008–2013 (2017),
available at: https://www.fdic.gov/bank/historical/
crisis/crisis-complete.pdf.
19 In addition to brokered deposits, wholesale
funding includes federal funds purchased,
securities sold under repurchase agreements, and
other borrowed money.
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Department of the Treasury Office of
Inspector General, OIG–16–052,
August 15, 2016
• Summary Analysis of Failed Bank
Reviews, Board of Governors of the
Federal Reserve System, Office of
Inspector General, September 2011
• Follow Up Audit of FDIC Supervision
Program Enhancements, FDIC Office
of Inspector General, Report No.
MLR–11–010, December 2011
In these reports, brokered deposits
were most commonly cited as a
contributor to problems at troubled and
failed institutions, largely by allowing
institutions with concentrations in
poorly underwritten and administered
commercial real estate loans, including
acquisition, construction, and
development loans (ADC) or other risky
assets, to grow rapidly. Institutions that
failed were typically subject to the
brokered deposit restrictions and
interest rate restrictions before failure
because their capital levels deteriorated
to below well capitalized. However, for
those institutions that failed and still
had brokered deposits at the time of
failure, either the acquirer did not want
the brokered deposits or did not pay a
premium for them, either of which
increases the cost to the DIF.
Brokered Deposits in Bank Failures
2007–2017
The FDIC and the DIF were
significantly affected by the previous
financial crisis between 2007 and 2017.
During this time, excluding Washington
Mutual, 530 banks failed and were
placed in FDIC receivership and, as of
December 31, 2017, the estimated loss to
the DIF for these institutions is $74.4
billion.
Based upon regulatory reporting data,
47 institutions that failed relied heavily
on brokered deposits and caused losses
to the DIF that triggered material loss
reviews. These 47 institutions held total
assets representing 13 percent of the
$703.9 billion in aggregate total assets of
the 530 failed institutions, but
accounted for $28.4 billion in estimated
losses to the DIF, representing 38
percent of the $74.4 billion in all DIF
estimated losses for that same period.20
For example, the largest of these 47
institutions was IndyMac Bank, F.S.B.,
which failed on July 11, 2008. As of
December 31, 2017, the estimated loss to
the DIF for IndyMac, is $12.3 billion,
representing 40 percent of IndyMac’s
$30.7 billion in total assets at failure
and approximately 16.5 percent of the
total $74.4 billion in estimated losses to
20 The estimated loss data is as of November 26,
2018, available at: https://www5.fdic.gov/hsob/
hsobRpt.asp.
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the DIF from bank failures between 2007
and 2017. In its last Thrift Financial
Report (‘‘TFR’’) filed prior to failure, as
of March 30, 2008, IndyMac reported
brokered deposits of $5.5 billion, which
represented 28.98 percent of the
institution’s $18.9 billion in total
deposits.21 In its TFR filed for the 4th
quarter of 2005, approximately 12
quarters before the institution failed,
IndyMac reported $1.4 billion in
brokered deposits, representing 18.4
percent of its then $7.4 billion in total
deposits. This data suggests that
IndyMac accelerated its use of brokered
deposits as its problems mounted.22
Another, more pronounced, example
is ANB Financial National Association
(ANB Financial), which failed on May 9,
2008. As of November 26, 2018, the
estimated loss to the DIF for ANB
Financial is $1.029 billion, representing
54 percent of the institution’s $1.89
billion in total assets at failure. In its
Call Report filed prior to failure, i.e., as
of March 30, 2008, ANB Financial
reported brokered deposits of $1.578
billion, which represented 86.96 percent
of the institution’s $1.815 billion in total
deposits. In the Call Report filed for the
4th quarter of 2005, approximately 12
quarters before the institution failed,
ANB Financial reported $256.8 million
in brokered deposits, representing 50.46
percent of its then $508 million in total
deposits.23 The brokered deposits
remaining at failure for both IndyMac
and ANB’s brokered deposits were
master CDs issued in the name of DTC
as sub-custodian for deposit brokers,
which were the primary source for the
remaining brokered deposits at failure
for most of the other 34 institutions
referenced above.
Brokered Deposits and Assessments
The FDIC has amended its assessment
regulations to address the risks to the
DIF associated with brokered deposits.
For small banks (generally, IDIs with
less than $10 billion in total assets),
brokered deposits can increase a bank’s
21 Of the $5.4 billion in brokered deposits that
IndyMac reported on it Call Report for March 31,
2008, 98.42 percent were in brokered certificates of
deposits documented as master certificates of
deposits issued in the name of CEDE & Co, a
subsidiary of DTC, as sub-custodian for deposit
brokers.
22 See Safety and Soundness: Material Loss
Review of IndyMac Bank, FSB, United States
Department of Treasury, Office of Inspector
General, February 26, 2009 https://
www.treasury.gov/about/organizational-structure/
ig/Documents/oig09032.pdf.
23 See Safety and Soundness: Material Loss
Review of ANB Financial National Association,
United States Department of Treasury, Office of
Inspector General, November 28, 2008 https://
www.treasury.gov/about/organizational-structure/
ig/Documents/oig09013.pdf
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assessment rate if the bank’s ratio of
brokered deposits to total assets exceeds
10 percent.24 The brokered deposit ratio
is one of several financial measures
used to determine assessment rates for
small banks. For new small banks in
Risk Categories II, III and IV, and large
and highly complex institutions that are
not well capitalized, or that are not
CAMELS composite 1- or 2-rated,
brokered deposits can increase a bank’s
assessment rate through the brokered
deposit adjustment.25 Under the
adjustment, a bank’s assessment will
increase if its ratio of brokered deposits
to domestic deposits is greater than 10
percent.
C. Brokered Deposit Issues
As noted above, Section 29 does not
explicitly define the term ‘‘brokered
deposit.’’ Restrictions on brokered
deposits are tied to the statutory
definition of ‘‘deposit broker’’ that
Congress adopted in 1989 as part of the
legislative response to the bank and
thrift crisis. That definition includes
dealers in the brokered CD market, and
broker dealers that sweep customer
funds to unaffiliated insured depository
institutions which, when combined,
represent over 90% of reported brokered
deposits according to industry sources
as discussed more fully above.
Therefore, based on those same sources,
the interpretive issues tend to relate to
a small segment of reported brokered
deposits.
Determining what constitutes a
deposit broker, and thus a brokered
deposit, is very fact-specific and
requires a close review of the
arrangement, the documents governing
the arrangement, and the third party’s
remuneration, among other things.
Given the wide, and evolving, variety of
third-party arrangements, FDIC staff
review them on a case-by-case basis,
applying the statutory provisions to the
facts and circumstances presented. Staff
interpretations are typically
documented in Advisory Opinions.26 In
addition, on June 30, 2016, the FDIC
issued, after soliciting comment, an
updated set of Frequently Asked
Questions,27 that compiles information
24 For banks that are well capitalized and well
rated, reciprocal deposits that are treated as
brokered deposits are deducted from brokered
deposits for purposes of the brokered deposit ratio.
See 12 CFR 327.16(a).
25 See 12 CFR 327.16(e)(3).
26 FDIC Staff Advisory Opinions are available at:
https://www.fdic.gov/regulations/laws/rules/
index.html.
27 See Identifying, Accepting, and Reporting
Brokered Deposits: Frequently Asked Questions
(rev. Jul 14, 2016). An initial set of Frequently
Asked Questions was issued in January 2015, but
without notice and comment at that time.
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about the law, regulation, and FDIC staff
interpretations in a single online
location.
The FDIC continues to receive
inquiries, and in recent years, FDIC staff
has been asked about the application of
the ‘‘deposit broker’’ definition, and its
statutory and regulatory exceptions, to
new types of third parties that are
involved in placing or facilitating the
placement of third-party funds at IDIs.
Many of these questions relate to
advancements in technology, and new
business practices and products that
IDIs might utilize to offer services to
customers and also to gather deposits.
The inherent challenge often is to
distinguish between third party service
providers to the IDI and third parties
that are engaged in the business of
placing or facilitating the placement of
deposits, albeit using updated
technology.
Generally, in determining whether
deposits placed through these new
deposit placement arrangements are
brokered, staff has looked to precedents
involving the definition of ‘‘deposit
broker’’ and has attempted to
consistently apply that analysis to these
new products. If a third party is placing
funds on behalf of itself, the funds are
not brokered. If a third party is in the
business of either (1) placing funds, or
(2) facilitating the placement of funds—
of another third-party (such as its
customers)—then it meets the definition
of ‘‘deposit broker’’ and the deposits are
brokered, unless an exception applies.
Below is a discussion of a few of the
most typical issues for which questions
have arisen, organized in the context of
the definitions and exceptions.
The FDI Act defines ‘‘deposit broker’’
to mean:
(A) any person engaged in the
business of placing deposits, or
facilitating the placement of deposits, of
third parties with insured depository
institutions or the business of placing
deposits with insured depository
institutions for the purpose of selling
interests in those deposits to third
parties; 28 and
28 The second phrase in FDI Act section
29(g)(1)(A) provides that a ‘‘deposit broker’’
includes, ‘‘any person engaged in . . . the business
of placing deposits with insured depository
institutions for the purpose of selling interests in
those deposits to third parties.’’ This clause appears
to reference the practice involving master
certificates of deposits issued to deposit brokers
who, in turn, issue retail CDs in denominations of
$1,000 to their retail customers. Industry
participants have previously informed the FDIC that
the practice of issuing master certificates of deposit
from which smaller retail CDs are issued dates back
to the early 1980s. 12 U.S.C. 1831f(g)(1)(A).
In a 1983 advanced notice of proposed
rulemaking that preceded the 1984 final rule, the
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(B) an agent or trustee who establishes
a deposit account to facilitate a business
arrangement with an insured depository
institution to use the proceeds of the
account to fund a prearranged loan.’’ 29
1. Engaged in the Business of Placing
Deposits or Facilitating the Placement of
Deposits
The first phrase of FDI Act section
29(g)(1)(A), defines a deposit broker as,
‘‘any person engaged in the business of
placing deposits, or facilitating the
placement of deposits, of third parties
with insured depository institutions.’’ 30
In evaluating whether certain third
parties comport with the statutory
definition of ‘‘deposit broker,’’ and
being ‘‘engaged in the business of
placing deposits, or facilitating the
placement of deposits,’’ staff at the FDIC
reviews every arrangement on a case-bycase basis considering the following
factors:
Æ Whether the third party receives
fees from the insured depository
institution that are based (in whole or in
part) on the amount of deposits or the
number of deposit accounts.
Æ Whether the fees can be justified as
compensation for administrative
FDIC and FHLBB described the underlying market
practice:
CD Participations. Some brokers engage in the
practice of ‘‘participating certificates of deposit to
their customers. Under this arrangement a brokerdealer purchases a certificate of deposit issued by
an insured institution and sells interests in it to
customers. Upon sale of the participations in the
deposit to its customer, the broker so informs the
issuing institution and requests that the deposits be
registered in its own name as nominee for others.
The broker’s records, in turn, reflect the ownership
interest of each customer in the deposit. A CD
participation program results in a ‘‘flow-through’’ of
insurance coverage to each owner of the deposit.
The ownership interest of each participant in the
deposit is added to the individually owned deposits
held by the participant at the same institution and
the total is insured to a maximum of $100,000,
provided the proper recordkeeping requirements
are maintained.
48 FR 50339 (November 1, 1983).
29 12 U.S.C. 1831f(g)(1); 12 CFR 337.6(a)(5(i). As
stated above, section 29(g)(1)(B) provides that
‘‘deposit broker’’ includes: ‘‘An agent or trustee
who establishes a deposit account to facilitate a
business arrangement with an insured depository
institution to use the proceeds of the account to
fund a prearranged loan.’’ The preamble to the 1984
FDIC/FHLBB final rule, provided background as to
what this language was intended to address:
Certificates of deposit held in trust for
bondholders under ‘‘loans-to-lenders’’ or industrial
development bond (‘‘IDB’’) programs are covered by
the final rule. These programs entail a transaction
where the proceeds of an IDB issuance are placed
with an insured institution, in exchange for a
certificate of deposit, to fund a designated project.
Because of the trust arrangement involved, under
the Agencies’ current insurance coverage rules each
bondholder owns an insured interest in the deposit
up to $100,000 and the deposit, therefore, may be
fully insured by either the FDIC or the FSLIC.
49 FR 13003, 13010 (April 2, 1984).
30 12 U.S.C. 1831f(g)(1)(A).
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2371
services (such as recordkeeping) or
other work performed by the third party
for the insured depository institution (as
opposed to compensation for bringing
deposits to the insured depository
institution).
Æ Whether the third party’s deposit
placement activities, if any, is directed
at the general public as opposed to
being directed at members (or ‘‘affinity
groups’’) or clients.
Æ Whether there is a formal or
contractual agreement between the
insured depository institution and the
third party (e.g., referring or marketing
entity) to place or steer deposits to
certain insured depository institutions.
Æ Whether the third party is given
access to the depositor’s account, or will
continue to be involved in the
relationship between the depositor and
the insured depository institution.
2. Exclusions From the ‘‘Deposit
Broker’’ Definition
The statutory ‘‘deposit broker’’
definition excludes the following:
(A) An insured depository institution,
with respect to funds placed with that
depository institution;
(B) An employee of an insured
depository institution, with respect to
funds placed with the employing
depository institution;
(C) A trust department of an insured
depository institution, if the trust in
question has not been established for
the primary purpose of placing funds
with insured depository institutions;
(D) The trustee of a pension or other
employee benefit plan, with respect to
funds of the plan;
(E) A person acting as a plan
administrator or an investment adviser
in connection with a pension plan or
other employee benefit plan provided
that that person is performing
managerial functions with respect to the
plan;
(F) The trustee of a testamentary
account;
(G) The trustee of an irrevocable trust
(other than one described in paragraph
(1)(B)), as long as the trust in question
has not been established for the primary
purpose of placing funds with insured
depository institutions;
(H) A trustee or custodian of a
pension or profit-sharing plan qualified
under section 401(d) or 403(a) of Title
26; or
(I) An agent or nominee whose
primary purpose is not the placement of
funds with depository institutions.31
In 1992, the FDIC incorporated in its
regulations the list of statutory
exceptions to the ‘‘deposit broker’’
31 12
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definition and added as an additional
exception, ‘‘an insured depository
institution acting as an intermediary or
agent of a U.S. government department
or agency for a government sponsored
minority or women-owned depository
institution.’’ 32
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(a) IDI Exception
The statute provides an exception for
an IDI with respect to funds placed with
that IDI. Staff notes that based on the
plain language of the statute, staff has
consistently applied this exception
strictly to the IDI itself and not to
separately incorporated legal entities
such as subsidiaries or other affiliates.
One challenging issue relates to whollyowned subsidiaries that place deposits
under an exclusive relationship with the
parent IDI. With regard to whollyowned subsidiaries, for some purposes
the subsidiary is treated as part of the
parent IDI (e.g., certain financial
reporting); whereas for other purposes—
such as under the Bank Merger Act and
for receivership purposes—they are
treated separately.
(b) Employee Exception
Section 29(g)(2)(B) of the FDI Act
provides that ‘‘deposit broker’’ does not
include ‘‘an employee of an insured
depository institution, with respect to
funds placed with the employing
depository institution’’ (employee
exception). The employee exception
recognizes that banks are corporate
entities that operate through the natural
persons they employ.
To address concerns that the
employee exception could be used to
evade the deposit broker definition, the
term ‘‘employee’’ is defined for
purposes of section 29, as any
employee:
1. Who is employed exclusively by
the insured depository institution;
2. Whose compensation is primarily
in the form of a salary;
3. Who does not share such
employee’s compensation with a
deposit broker;
4. Whose office space or place of
business is used exclusively for the
benefit of the insured depository
institution which employs such
individual.33
Particularly after the passage of the
Gramm-Leach-Bliley Act and the
permissibility of additional
relationships among affiliated entities,
FDIC staff has dealt with an increase in
questions about IDI employees who also
32 12 CFR 337.6(a)(5)(ii)(J). As provided earlier,
the FDIC added this exception in response to
comments submitted in response to a 1992 notice
of proposed regulation.
33 12 U.S.C. 1831f(g)(4).
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have some form of contractual
relationship with a third party, usually
an affiliate of the IDI. In addition, FDIC
staff has informally addressed questions
related to the use of premises that are
shared by the IDI and an affiliate.
(c) Pension or Other Employee Benefit
Plans
Section 29(g)(2)(D) and (E) exclude
from the deposit broker definition,
trustees of pension and other employee
benefit plans with respect to funds in
the plan, and administrators or
investment advisors provided that the
person is performing managerial
functions with respect to the plan.34
Section 29(g)(2)(H) excludes a trustee or
custodian of a pension or profit-sharing
plan under sections 401(d) or 403(a) of
the Internal Revenue Code.35
Individual retirement accounts (IRAs)
are retirement accounts set up outside of
a pension plan or employee benefit plan
and thus are not expressly covered by
these exceptions. Certain non-retirement
savings plans are also granted taxfavored status under the Internal
Revenue Code, such as 529 savings
plans for higher education tuition and
health savings accounts but are not
expressly covered by the exception. If a
bank’s trust department serves as the
trustee or custodian of such plans, and
the trust has not been established for the
primary purpose of placing funds with
IDIs, the plans’ deposits would not be
treated as brokered deposits because of
the exception for trust departments.
FDIC staff has received a number of
questions about this exception.
(d) Primary Purpose Exception
The primary purpose exception
applies to ‘‘an agent or nominee whose
primary purpose is not the placement of
funds with depository institutions.’’ 36
In particular, the primary purpose
exception applies to a third party when
that third party is acting as agent/
nominee for the depositor. Staff’s
evaluation of a third party’s primary
purpose in placing deposits has been in
the context of that particular agent/
principal relationship.
In interpreting what it means for a
third-party agent to act pursuant to a
‘‘primary purpose,’’ staff has generally
analyzed whether placing—or
facilitating the placement—of deposits
of its customers/clients when acting as
agent for those customers/clients, is for
a substantial purpose other than to
provide (1) deposit insurance, or (2) a
deposit-placement service. In analyzing
34 12
U.S.C. 1831f(g)(2)(D) and (E).
U.S.C. 1831f(g)(2)(H).
36 12 U.S.C. 1831f(g)(2)(I).
35 12
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this principle, staff has considered
whether the deposit-placement activity
is incidental to some other purpose.
In determining whether a depositplacement activity is incidental to some
other purpose, staff reviews the reason
or intent of the third party when acting
as agent or nominee in placing the
deposits, as well as other factors which
might indicate whether the third party
agent is incentivized to place deposits at
the IDI. Factors that staff has considered
include the existence and structure of
fee arrangements and of any
programmatic relationship between the
third party and the insured depository
institution.
• Fees:
Æ Whether the entity placing deposits
receives fees from the insured
depository institution that are based
(directly or indirectly) on the amount of
deposits or the number of deposit
accounts opened.
Æ Whether the fees can be justified as
compensation for recordkeeping or
other work performed by the third party
for the IDI (as opposed to compensation
for bringing deposits to the IDI).
• Programmatic relationship:
Æ Whether there is a formal or
contractual agreement between IDIs and
the placing/referring entity to place or
steer deposits to certain IDIs.
Importantly, when interpreting the
applicability of the primary purpose
exception, staff analyzes the deposit
placement arrangement, including the
underlying agreements, between the
third party agent, the depositor, and the
IDI to determine the primary purpose of
the agent. The exception applies to
agents or nominees, which by
definition, act on behalf of principals.
When acting in that capacity, the third
party agent/nominee is limited to the
principal’s goals and objectives. Staff
does not solely rely upon the business
purpose of the third party involved.
Staff has not considered the size of the
third party or the amount or percentage
of revenue that the deposit-placement
activity generates.
Primary Purpose Exception for
Affiliated Sweeps
Beginning in 1999, the FDIC became
aware of broker dealers offering their
brokerage customers an automatic
sweep program by which customers’
idle funds were swept to affiliated
insured depository institutions.
In 2005, the FDIC’s General Counsel
issued a staff opinion indicating FDIC
staff view that, when certain conditions
are observed, the primary purpose of a
broker dealer in sweeping customer
funds into deposit accounts at its
affiliated IDI is to facilitate the
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customers’ purchase and sale of
securities. Among the conditions are
that funds are not swept to a time
deposit account and do not exceed 10
percent of the total assets handled by
the affiliated broker dealer. The insured
depository institution is permitted to
pay fees to the affiliated broker dealer
but the fees must be flat fees (i.e., per
account or per customer fees)
representing payment for recordkeeping
or administrative services and not for
the placement of deposits. The fee
arrangements must satisfy Section 23B
of the Federal Reserve Act.37
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(e) Other Issues
Deposit Listing Services. Deposit
listing services come in different forms,
but all connect those seeking to place a
deposit with those seeking a deposit by
listing the deposit rates of IDIs.
Depositors use listing services to find
the best rate available for a given
deposit type and, in the case of a CD,
a term. Since the statute was first
enacted, staff has distinguished between
a company that compiles information
about interest rates in passive manner
versus a deposit broker that is in the
business of placing or facilitating the
placement of deposits. A particular
company can advertise itself as a listing
service as well as meet the definition of
a ‘‘deposit broker.’’ In recognition of this
possibility, staff at the FDIC developed
criteria for analyzing whether a ‘‘listing
service’’ acts as a ‘‘deposit broker.’’ 38
In 2004 FDIC staff provided criteria to
assist the industry in analyzing whether
a deposit listing services would be
viewed as a deposit broker. In
particular, staff advisory opinions
indicate that a listing service is not
viewed as a deposit broker if it meets
the following criteria:
(1) The person or entity providing the
listing service is compensated solely by
means of subscription fees (i.e., the fees
paid by subscribers as payment for their
opportunity to see the rates gathered by
the listing service) and/or listing fees
(i.e., the fees paid by depository
institutions as payment for their
opportunity to list or ‘‘post’’ their rates).
The listing service does not require a
depository institution to pay for other
services offered by the listing service or
its affiliates as a condition precedent to
being listed;
(2) The fees paid by depository
institutions are flat fees: They are not
calculated on the basis of the number or
dollar amount of deposits accepted by
37 See
12 U.S.C. 371c–1.
generally, FDIC Staff Adv. Op. Nos. 90–24
(June 12, 1990); 92–50 (July 24, 1992); 02–04
(November 13, 2002).
38 See
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the depository institution as a result of
the listing or ‘‘posting’’ of the depository
institution’s rates;
(3) In exchange for these fees, the
listing service performs no services
except: (A) The gathering and
transmission of information concerning
the availability of deposits; and/or (B)
the transmission of messages between
depositors and depository institutions
(including purchase orders and trade
confirmations). In publishing or
displaying information about depository
institutions, the listing service must not
attempt to steer funds toward particular
institutions (except that the listing
service may rank institutions according
to interest rates and also may exclude
institutions that do not pay the listing
fee). Similarly, in any communications
with depositors or potential depositors,
the listing service must not attempt to
steer funds toward particular
institutions; and
(4) The listing service is not involved
in placing deposits. Any funds to be
invested in deposit accounts are
remitted directly by the depositor to the
insured depository institution and not,
directly or indirectly, by or through the
listing service.39
In 2004, when staff last provided its
views on listing services, listing services
had already evolved into internet
exchange platforms with automated
order entry and confirmation services.
At the time, however, listing service
sites did not provide any advice to
prospective depositors, and there was
only a flat subscription fee paid by both
the banks and those seeking to view the
posted rates. Today, the FDIC has
observed that certain listing service
websites provide additional services.
For example, based upon information
gathered from bankers interested in
participating in listing services, the
FDIC notes that some listing services
appear to:
Æ Offer advice to banks on liability
and funds management and regulatory
compliance screening for subscribing
banks.
Æ Send customer information (on
behalf of the prospective depositors)
directly to the banks that are listing
rates.
Æ Charge a fee to banks based upon
the asset size of the bank, rather than a
flat subscription fee.
Æ Post rates of ‘‘featured’’ or
‘‘preferred’’ vendors at the very top of
its rate board.
The FDIC notes the ambiguity over
how these new listing service features
could be applied in light of the 2004
criteria. The features above seem to
39 See
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indicate that some listing services are no
longer acting in a passive capacity but
are instead steering deposits to
particular institutions or are otherwise
providing services that meet the
definition of ‘‘deposit broker.’’
Accounting or related software
products that contemplate the bank
using the same software. Some
companies provide accounting and
other administrative support via
software services to clients. These
companies, on behalf of their clients,
place deposits at either one or a group
of preferred banks. Because the
companies place deposits at IDIs, the
software companies meet the definition
of ‘‘deposit broker’’ (unless they meet
one of the exceptions). The primary
purpose exception applies to an agent or
nominee whose primary purpose is not
the placement of funds with depository
institutions. Banks who receive deposits
from software companies argue that the
primary purpose of the software
companies is to provide accounting
services (e.g., bankruptcy management)
and the placement of deposits is
incidental to this purpose. In analyzing
whether a particular arrangement meets
the primary purpose arrangement, as
noted above, staff currently reviews
whether the placement (of third party
funds) is for a substantial purpose other
than to provide (1) deposit insurance, or
(2) a deposit-placement service. In
previous cases that staff reviewed
relating to accounting software
products, staff has not distinguished
between providing integrated
accounting software and providing
access to a deposit account that offers
core banking functions (such as daily
cash management). Moreover, in the
previous arrangements that staff has
reviewed, there is typically a
contractual volume based fee being paid
by the bank to the software company
based upon the volume of deposits
being placed. As a result, staff has
viewed that the software companies are
incentivized to place funds of
prospective depositors at preferred
banks because of the fees that the
placement generates.
Prepaid cards. Some companies
operate general purpose prepaid card
programs, in which prepaid cards are
sold to members of the public through
the assistance of a prepaid card
company or a program manager. After
collecting funds from the cardholders,
sometimes at retail stores or directly
from the card company, funds are
placed into a custodial deposit account
at an insured depository institution
(sometimes with ‘‘pass-through’’ deposit
insurance coverage). The funds may be
accessed by the cardholders through the
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use of their cards. In regard to this
scenario, staff at the FDIC has taken the
position that the prepaid card company
or the program manager likely qualifies
as a ‘‘deposit broker’’ because it is a
third party that is in the business of
facilitating the placement of customer
deposits at an insured depository
institution. Some have argued that a
particular prepaid card arrangement is
covered by the ‘‘primary purpose
exception’’—specifically, that the
‘‘primary purpose’’ of a prepaid card
company (in establishing deposit
accounts at an insured depository
institution) is not to provide the
cardholders with a deposit-placement
service, but to enable the cardholders to
make purchases through the interbank
payment system. Staff at the FDIC has
not distinguished between (1) acting
with the purpose of placing deposits for
other parties, and (2) acting with the
purpose of enabling other parties to use
deposits to make purchases. When
funds are placed into demand deposit
accounts (as in the case of custodial
accounts used by prepaid card
companies), the deposits will be
available for withdrawals or transfers or
spending. Thus, prepaid card
companies have not been viewed as
meeting the ‘‘primary purpose’’
exception.
Software applications for personal use
that involve funds being placed at an
insured depository institution. Some
applications provide customers the
opportunity to link their existing bank
accounts (and other accounts, such as
credit cards, and 401k)—with software
applications—in an effort to provide
efficiencies in budgeting, bill-paying,
and opening up a new deposit account.
In some cases, the application
aggregates customer information based
upon available account balances and
spending patterns and provides that
information to depository institutions to
assist in targeting certain customers
with financial products. Once the
customer is targeted with a financial
product, the customer may be
transferred to the bank to open up the
deposit account or the application may
assist in transferring customer
information to the bank for purposes of
establishing the deposit account. The
software provider may receive
compensation from the financial
institution based upon the referral. FDIC
staff has received inquiries about
whether various arrangements between
software applications and IDIs should
be viewed as brokered.
D. Interest Rate Restrictions
As noted earlier, the purpose of
Section 29 generally is to limit the
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acceptance or solicitation of certain
deposits by insured depository
institutions that are not well capitalized.
This purpose is promoted through two
means: (1) The prohibition against the
acceptance of brokered deposits by
depository institutions that are less than
well capitalized (as described above);
and (2) certain restrictions on the
interest rates that may be paid by such
institutions. In enacting section 29,
Congress added the interest rate
restrictions to prevent institutions from
avoiding the prohibition against the
acceptance of brokered deposits by
soliciting deposits internally through
‘‘money desk operations.’’ Congress
viewed the gathering of deposits by
weaker institutions through either thirdparty brokers or ‘‘money desk
operations’’ as potentially an unsafe or
unsound practice.40 The FDIC has
simplified the application of these
restrictions through two rulemakings.
Under Section 29, well-capitalized
institutions can pay any rate of interest
on any deposit. However, the statute
imposes different interest rate
restrictions on different categories of
insured depository institutions that are
less than well capitalized. These
categories are (1) adequately-capitalized
institutions with waivers to accept
brokered deposits (including reciprocal
deposits excluded from being
considered brokered deposits); 41 (2)
adequately-capitalized institutions
without waivers to accept brokered
deposits; 42 and (3) undercapitalized
institutions.43 The statutory restrictions
for each category are described in detail
below.
Adequately-capitalized institutions
with waivers to accept brokered
deposits. Institutions in this category
may not pay a rate of interest on
deposits that ‘‘significantly exceeds’’ the
following: ‘‘(1) The rate paid on deposits
of similar maturity in such institution’s
normal market area for deposits
accepted in the institution’s normal
market area; or (2) the national rate paid
on deposits of comparable maturity, as
established by the [FDIC], for deposits
accepted outside the institution’s
normal market area.’’ 44
Adequately capitalized institutions
without waivers to accept brokered
deposits. In this category, institutions
may not offer rates that ‘‘are
significantly higher than the prevailing
rates of interest on deposits offered by
40 See H.R. Conf. Rep. No. 101–222 at 402–403
(1989), reprinted in 1989 U.S.C.C.A.N. 432, 441–42.
41 12 U.S.C. 1831f(e).
42 12 U.S.C. 1831f(g)(3).
43 12 U.S.C. 1831f(h).
44 12 U.S.C. 1831f(e).
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other insured depository institutions in
such depository institution’s normal
market area.’’ 45 For institutions in this
category, the statute restricts interest
rates in an indirect manner. Rather than
simply setting forth an interest rate
restriction for adequately capitalized
institutions without waivers, as noted
previously, the statute defines the term
‘‘deposit broker’’ to include ‘‘any
insured depository institution that is not
well capitalized . . . which engages,
directly or indirectly, in the solicitation
of deposits by offering rates of interest
which are significantly higher than the
prevailing rates of interest on deposits
offered by other insured depository
institutions in such depository
institution’s normal market area.’’ 46 In
other words, the depository institution
itself is a ‘‘deposit broker’’ if it offers
rates significantly higher than the
prevailing rates in its own ‘‘normal
market area.’’ Without a waiver, the
institution cannot accept deposits from
a ‘‘deposit broker.’’ Thus, the institution
cannot accept these deposits from itself.
In this indirect manner, the statute
prohibits institutions in this category
from offering rates significantly higher
than the prevailing rates in the
institution’s ‘‘normal market area.’’
Undercapitalized institutions. In this
category, institutions may not offer rates
‘‘that are significantly higher than the
prevailing rates of interest on insured
deposits (1) in such institution’s normal
market areas; or (2) in the market area
in which such deposits would otherwise
be accepted.’’ 47
Rulemakings Related to Section 29’s
Interest Rate Restrictions
The FDIC has implemented the
interest rate restrictions under section
29 of the FDI Act through two
rulemakings.48 Although the statute, as
noted above, sets forth a basic
framework, it does not provide certain
key details, such as definitions for the
terms—‘‘national rate,’’ ‘‘significantly
exceeds,’’ ‘‘significantly higher,’’ and
‘‘market area.’’ As a result, in 1992, the
FDIC defined these key terms before
updating the ‘‘national rate’’ and
clarifying the rate restrictions again in
2009.
‘‘Significantly Exceeds.’’ Through
Section 337.6, the FDIC has provided
that a rate of interest ‘‘significantly
exceeds’’ another rate, or is
‘‘significantly higher’’ than another rate,
if the first rate exceeds the second rate
45 12
U.S.C. 1831f(g)(3).
46 Id.
47 12
U.S.C. 1831f(h).
57 FR 23933 (1992); 74 FR 26516 (2009).
48 See
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following explanation: ‘‘The FDIC
believes this approach would not be
timely because data on market rates
must be available on a substantially
current basis to achieve the intended
purpose of this provision and permit
institutions to avoid violations. At this
time, the FDIC has determined not to tie
the national rate to a private
publication. The FDIC has not been able
to establish that such published rates
sufficiently cover the markets for
deposits of different sizes and
maturities.’’ 55
by more than 75 basis points.49 In
adopting this standard, the FDIC offered
the following explanation: ‘‘Based upon
the FDIC’s experience with the brokered
deposit prohibitions to date, it is
believed that this number will allow
insured depository institutions subject
to the interest rate ceilings . . . to
compete for funds within markets, and
yet constrain their ability to attract
funds by paying rates significantly
higher than prevailing rates.’’ 50 This
interpretation of the statute has
remained unchanged since the 1992
rulemaking.
‘‘Market Area.’’ In Section 337.6, prior
to the adoption of the 2009 final rule,
the term ‘‘market area’’ was defined as
follows: ‘‘A market area is any readily
defined geographical area in which the
rates offered by an one insured
depository institution soliciting deposits
in that area may affect the rates offered
by other insured depository institutions
in the same area.’’ 51 At the time, the
FDIC reasoned that the market area will
be determined on a case-by-case basis,
based on the evident or likely impact of
a depository institution’s solicitation of
deposits in a particular area, taking into
account the means and media used and
volume and sources of deposits
resulting from such solicitation.52
The ‘‘National Rate.’’ In Section 337.6,
as part of the 1992 rulemaking, the
‘‘national rate’’ was defined as follows:
‘‘(1) 120 percent of the current yield on
similar maturity U.S. Treasury
obligations; or (2) In the case of any
deposit at least half of which is
uninsured, 130 percent of such
applicable yield.’’ 53 In defining the
‘‘national rate’’ in this manner, the FDIC
understood that the spread between
Treasury securities and depository
institution deposits can fluctuate
substantially over time but relied upon
the fact that such a definition is
‘‘objective and simple to administer.’’ 54
By using percentages (120 percent or
130 percent of the yield on U.S.
Treasury obligations) instead of a fixed
number of basis points, the FDIC hoped
to ‘‘allow for greater flexibility should
the spread to Treasury securities widen
in a rising interest rate environment.’’ In
deciding not to rely on published
deposit rates, the FDIC offered the
2009 Rulemaking on the Interest Rate
Restrictions
For many years, the 1992 definition of
‘‘national rate’’ functioned well because
rates on Treasury obligations tracked
closely with rates on deposits. By 2009,
however, the rates on certain Treasury
obligations were low compared to
deposit rates. Consequently, the
‘‘national rate’’ as defined in the FDIC’s
regulations became artificially low. By
setting a low rate, the FDIC’s regulations
required some insured depository
institutions to offer unreasonably low
rates on some deposits, thereby
restricting access even to market-rate
funding.
As part of the 2009 rulemaking, the
FDIC addressed two issues that
developed after the 1992 rulemaking: (1)
The obsolescence of the FDIC’s 1992
definition of the ‘‘national rate’’; and (2)
the difficulty experienced by insured
depository institutions and examiners in
determining prevailing rates in its
‘‘market areas.’’
In response to the first problem, the
FDIC redefined the ‘‘national rate’’ as ‘‘a
simple average of rates paid by all
insured depository institutions and
branches for which data are available.’’
As noted in the 2009 rulemaking, the
updated ‘‘national rate’’ methodology
represented an objective average and the
exclusion of certain branches or offices
was viewed by the FDIC, at the time, as
contrary to providing a meaningful
restriction on insured depository
institutions that are not well
capitalized.56
In response to the second problem,
the FDIC created a presumption that the
prevailing rate in any market would be
the national rate (as defined above). An
49 See 12 CFR 337.6(b)(2)(ii), (b)(3)(ii) and (b)(4).
See also, 55 FR 39135 (1990) (FDIC’s final rule that
took the view that ‘‘significantly exceeds’’ means
more than 50 basis points. At the time, this was
believed to be a reasonable compromise between
the need to permit troubled institutions to compete
on a reasonable basis in their market area and yet
prevent such institutions from bidding excessively
for an increased share of market-area deposits by
paying excessive rates).
50 57 FR at 23939.
51 See 57 FR 23933 (1992) and 74 FR 26516
(2009).
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insured depository institution could
rebut this presumption by presenting
evidence to the FDIC that the prevailing
rate in a particular market is higher than
the national rate. If the FDIC agreed
with this evidence, the institution
would be permitted to pay as much as
75 basis points above the local
prevailing rate. In evaluating this
evidence, the FDIC may use segmented
market rate information (for example,
evidence by State, county or MSA).
Also, the FDIC may consider evidence
as to the rates offered by credit unions
but only if the insured depository
institution competes directly with the
credit unions in the particular market.
Finally, the FDIC may consider
evidence that the rates on certain
deposit products differ from the rates on
other products. For example, in a
particular market, the rates on NOW
accounts might differ from the rates on
MMDAs. NOW accounts might be
distinguished from MMDAs because the
two types of accounts are subject to
different legal requirements.57
Ultimately, the 2009 rulemaking
simplified the approach of applying the
rate restrictions and, importantly, has
provided community banking
institutions, that may not compete in
the national deposit marketplace (e.g.,
listing services), the ability to offer
competitive deposit rates in its local
market area.
Additional Interest Rate Issues
Since the FDIC’s adoption of the 2009
rulemaking, federal funds rates stayed at
historically low levels and only recently
have begun to rise. In addition,
institutions also have created new
products that do not fit into the posted
national rates and rate caps.
Calculation of rates. Since the crisis
that began in 2008, the ‘‘national rate’’
has been relatively low due to the low
interest rate environment. Moreover,
because the national rate is an average
for all banks and branches, the largest
banks with large numbers of branches
have had a disproportional effect on
average interest rates. Even as other
interest rates have begun to rise, the
average has stayed low as the largest
banks have been slow to increase
interest rates on deposits.
52 Id.
53 12
CFR 337.6(b)(2)(ii)(B).
FR 23933, 23938 (June 5, 1992).
55 Id. at 23939.
56 See 74 FR 26516 (2009).
57 12 CFR 337.6(f).
54 57
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New products. The FDIC has recently
seen an increase in promotional deposit
products and products with special
features. These products and
promotions are generally not compatible
with the standard products included in
the FDIC’s published weekly national
rate caps. An example of a product with
a special feature is one that provides a
one-time cash payment for opening up
a deposit account or provides airline
miles or other bonuses with specific
deposit products. Such deposit products
may have common maturities (or be
demand accounts) and as a result they
may be included as part of the ‘‘national
rate’’ calculation without
acknowledgement of the up-front
payment or other bonus received in
place of interest paid on the deposit.
Special features. Some institutions are
also offering deposit products with
special features that may raise questions
about how the rate cap should apply.
Below are examples of three types of
deposit products with special features:
Æ Step up rates. Certain deposit
products have variable rate features that
allow the interest rate to increase before
the deposit matures. With these
products, particularly time deposits
with longer maturities, the institution
could fall to less than well capitalized
during the term of the deposit. As a
result, and as the FDIC has seen in the
past, an institution could pay a rate that
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exceeds the interest rate restrictions
after the downgrade.
Æ Atypical maturities. Unusual
maturity periods (for example, 13 or 15
months instead of 12 or 18 months)
make it difficult to compare with either
national rates or prevailing local rates.
Æ Exceptionally long maturities for
time deposits combined with penaltyfree early withdrawal. In some cases,
institutions have structured deposit
products with exceptionally long
maturities in order to extrapolate
exceptionally high interest rates for the
deposits coupled with withdrawal rights
that are significantly shorter than the
term of the deposit maturity (e.g., 7 day
penalty period on a 5 year certificate of
deposit).
III. Request for Comments
The FDIC seeks comment on all
aspects of its regulatory approach to
brokered deposits and interest rate
restrictions, and in particular the
following:
Æ Are there ways the FDIC can
improve its implementation of Section
29 of the FDI Act while continuing to
protect the safety and soundness of the
banking system? If so, how?
Brokered Deposits
Æ Are there types of deposits that are
currently considered brokered that
should not be considered brokered? If
so, please explain why.
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Æ Are there types of deposits that are
currently not considered brokered that
should be considered brokered? If so,
please explain why.
Æ Are there specific changes that have
occurred in the financial services
industry since the brokered deposits
regulation was adopted that the FDIC
should be cognizant of as it reviews the
regulation? If so, please explain.
Æ Do institutions currently have
sufficient clarity regarding who is or is
not a deposit broker and what is or is
not a brokered deposit? Are there ways
the FDIC can provide additional clarity
through updates to the brokered
deposits regulation, consistent with the
statute and the policy considerations
described above?
Æ Are there areas where changes
might be warranted but could not be
effectuated under the current statute?
Are there any statutory changes that
warrant consideration from Congress?
Æ Should the FDIC make changes to
the Call Report instructions so that the
agency can gather more granular
information about types of brokered
deposits?
Æ In general, the FDIC welcomes any
additional data or market information
related to brokered deposits,
particularly related to those types of
brokered deposits that are not
specifically reported by institutions in
their Call Reports (e.g., Master
Certificates of Deposits held in the name
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Appendix 1
Interest Rate Restrictions
Descriptive Statistics on Core and
Brokered Deposits
Æ Are there alternatives that the FDIC
should consider in addressing Section
29’s interest rate restrictions for less
than well capitalized institutions?
Æ Should the methodology used to
calculate the ‘‘national rate’’ be
changed? If so, how?
Æ Should there remain a presumption
that the prevailing rate in any ‘‘market
area’’ is the national rate? If not, how
should the FDIC define the ‘‘normal
market area’’?
Æ Should the amount of the rate cap,
currently 75 basis points over either the
national rate or the prevailing market
rate, be revised? If so, how?
Æ How should deposits with
promotional or special features be
treated with respect to the national rate
or the prevailing market rate?
Æ How should the rates offered by
internet-based or electronic commercebased institutions be calculated?
Core Deposits
Core deposits are not defined by
statute. Rather, they are defined for
analytical and examination purposes in
the Uniform Bank Performance Report
(UBPR). Through 2010, the Federal
Financial Institutions Examination
Council (FFIEC) defined ‘‘core deposits’’
to include all demand and savings
deposits, including money market
deposit, NOW and ATS accounts, other
savings deposits, and time deposits in
amounts under $100,000.58 Under this
definition, core deposits were
equivalent to total domestic deposits
less time deposits over $100,000 and
included insured brokered deposits. As
of March 31, 2011, the definition was
revised to reflect the permanent increase
to FDIC deposit insurance coverage from
$100,000 to $250,000 and to exclude
insured brokered deposits from core
deposits. This revision defines core
deposits as the sum of demand deposits,
all NOW and ATS accounts, MMDAs,
other savings deposits and time deposits
under $250,000, minus all brokered
deposits under $250,000. For periods
before March 2011, the definition was
revised to the sum of demand deposits,
all NOW and ATS accounts, MMDAs,
other savings deposits and time deposits
under $100,000, minus all brokered
deposits under $100,000.
Historically, reliance on core deposits
has varied by bank size. Banks with less
than $1 billion in total assets generally
have had the heaviest reliance on core
deposits, and banks with $50 billion or
more in total assets have had the least
reliance on core deposits. Since 2010,
the ratio of core deposits to total assets
has changed less for smaller banks than
it has for larger banks. At year-end 2010,
core deposits equaled 75 percent of total
assets at banks with less than $1 billion
in assets, but only 47 percent for banks
with $50 billion or more in total assets.
By the third quarter of 2018, core
deposits equaled 76 percent of total
assets at banks with less than $1 billion
in assets and 58 percent of at banks with
$50 billion or more in total assets (See
Chart 1.)
Through mid-year 2009, almost all
core deposits at community banks were
estimated to be insured, but, at the end
of third quarter 2009, when banks began
reporting insured deposits at the then
temporary insurance limit of $250,000,
estimated insured deposits were greater
than core deposits. Estimated insured
deposits represented a smaller share of
core deposits at the largest banks, as a
result of their holdings of large
uninsured demand deposits. At
58 An automatic transfer service account is a
deposit or account of an individual or sole
proprietorship on which the depository bank has
reserved the right to require at least seven days’
written notice prior to withdrawal or transfer of any
funds in the account and from which, pursuant to
written agreement arranged in advance between the
reporting bank and the depositor, withdrawals may
be made automatically through payment to the
depository bank itself or through transfer of credit
to a demand deposit or other account in order to
cover checks or drafts drawn upon the bank or to
maintain a specified balance in, or to make periodic
transfers to, such other accounts.
59 Through 2010 core deposits include insured
brokered deposits. Beginning in 2011, brokered
deposits are excluded from core deposits.
of DTC and deposits placed through
unaffiliated sweep programs).
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September 30, 2010, for banks with
assets over $50 billion, estimated
insured deposits represented only 69
percent of core deposits, but, at March
31, 2011, after the coverage of all
noninterest bearing transaction accounts
over $250,000 was established
temporarily under the Dodd-Frank Act,
estimated insured deposits rose to 84
percent. (See Chart 2.)
Note: From October 14, 2008 to December
31, 2010, domestic non-interest bearing
transaction accounts were guaranteed in full
under the Transaction Account Guarantee
Program (TAG), part of the FDIC’s Temporary
Liquidity Guarantee Program (TLGP). From
December 31, 2010 to December 31, 2012, the
Dodd-Frank Act provided temporary
unlimited deposit insurance coverage for
non-interest bearing transaction accounts.
These programs account for the observed
shifts up and down in the Estimated Insured
Deposits as a Share of ‘‘Core’’ Deposits
shown in the chart during these periods.
to $250,000 under Dodd-Frank. The new
definition includes time deposits up to
$250,000 but excludes brokered
deposits of any denomination. Using
Call Report and Thrift Financial Report
(TFR) data as of March 31, 2011, the
new definition of core deposits added
$24.9 billion (or 0.3 percent) to core
deposits. However, the increase in core
deposits, as the result of the new
definition, occurred almost exclusively
at smaller banks and thrifts, since the
decrease in core deposits due to
exclusion of brokered deposits tended to
be less than the increase in core
deposits due to inclusion of time
deposits within the new threshold of up
to $250,000. Core deposits at banks and
thrifts with assets under $10 billion
increased by $143.2 billion under the
new definition, but core deposits at
banks with assets of at least $10 billion
declined by $118.3 billion. Large credit
card banks and specialty lenders with
affiliated brokerage firms were among
those banks with the largest decline in
core deposits as a result of the revised
definition.
Effective with the March 31, 2011,
UBPR, the FFIEC revised the definition
of core deposits to take into account the
increase in the deposit insurance limit
Brokered Deposits
FDIC-insured banks report total
brokered deposits and the amount of
brokered deposits under the insurance
limit on their Call Reports and TFRs.
60 Through 2010 core deposits include insured
brokered deposits. Beginning in 2011, brokered
deposits are excluded from core deposits.
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Before 2010, brokered deposits were
reported as insured, as any deposits, up
to the $100,000 threshold. Beginning
March 31, 2010, the threshold for
reporting insured brokered deposits on
Call Reports and TFRs was increased to
$250,000.61 Insured depository
institutions also began reporting total
reciprocal brokered deposits in their
June 30, 2009, Call Reports and TFRs.
The Economic Growth, Regulatory
Reform, and Consumer Protection Act,
enacted on May 24, 2018, allows certain
banks to except a limited amount of
reciprocal deposits from brokered
deposits.
As of September 30, 2018, brokered
deposits totaled $985.7 billion. Fewer
than half of all FDIC-insured banks
(2,221 banks, or 40.6 percent) reported
2379
brokered deposits on their September
30, 2018, Call Reports. As of this date,
brokered deposits made up 8.0 percent
of industry domestic deposits, in
contrast to second quarter 2009 when
banks began reporting total reciprocal
brokered deposits, brokered deposits
accounted for 10.1 percent of industry
domestic deposits.
BROKERED DEPOSITS HELD BY INSURED DEPOSITORY BANKS AS OF SEPTEMBER 30, 2018
Total brokered
deposits
(billions)
Share of total
brokered deposits
(%)
Total domestic
deposits
Share of total
domestic deposits
(%)
Under $1 Billion .......................................
$1–10 Billion ............................................
$10–50 Billion ..........................................
Over $50 Billion .......................................
4,704
635
97
41
1,656
439
89
37
$31.92
90.16
171.87
691.78
3.2
9.1
17.4
70.2
$988.05
1,349.56
1,605.40
8,378.84
8.0
11.0
13.0
68.0
All Banks ...........................................
5,477
2,221
985.73
........................
12,321.84
........................
Brokered deposits typically make up
a lower share of deposit funding for
small banks compared to banks with
$10 billion or more in assets. In
aggregate, banks with assets between
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Number of
banks with
brokered deposits
$10 billion and $50 billion reported
brokered deposits equal to 10.7 percent
of their domestic deposits as of
September 30, 2018, the highest of any
asset cohort group, while banks with
assets under $1 billion reported
brokered deposits equal to just 3.2
percent of domestic deposits. (See Chart
3.)
61 Certain brokered retirement accounts are
included in insured brokered deposits.
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Total number
of banks
Asset size group
Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
Note: The reversal of growth in the use of
brokered deposits occurring between 2009
and 2012 is likely the joint result of the
dramatic decline in interest rates occurring
over that period, coupled with significant
new restrictions on the use of brokered
deposits by banks classified as adequately
and undercapitalized.
At the end of the third quarter of
2018, insured brokered deposits made
up more than 82.5 percent of total
brokered deposits at all banks. Insured
brokered deposits as a percent of all
brokered deposits was highest at banks
with assets of $50 billion or less. In
aggregate, insured brokered deposits
made up 93.7 percent of total brokered
deposits at banks with assets between
$1–10 billion, as compared to 79.5
percent at banks with assets greater than
$50 billion. (See Chart 4.)
Section 29 of the Federal Deposit
Insurance Act (FDI Act) sets forth
restrictions on the acceptance of
brokered deposits that also appear in the
FDIC’s regulations.62 Under Section 29,
banks are restricted from accepting,
renewing, or rolling over brokered
deposits if they are less than well
capitalized. This restriction may be
waived for adequately capitalized
banks. Undercapitalized institutions are
not allowed to receive new brokered
deposits and must follow an FDICapproved plan to remove them from
their books over time. After rising to a
peak in mid-2009, the use of brokered
deposits as a share of domestic deposits
declined for both adequately capitalized
banks and well capitalized banks. As of
September 30, 2018, of the 5,477
insured depository institutions, 99.6
percent were well capitalized, while 0.2
percent were rated as adequately
capitalized. Of those rated as adequately
capitalized, roughly half held brokered
deposits. (See Chart 5.) 63
capitalized if it is subject to a written agreement,
order, capital directive, or prompt corrective action
directive to meet and maintain a specific capital
level for any capital measure; and (2) may be
reclassified as adequately capitalized, if, following
notice and an opportunity for hearing, the bank is
determined to be unsafe or unsound or has failed
to correct a less-than-satisfactory rating for asset
quality, management, earnings, or liquidity. See 12
CFR 6.4(c)(1)(v) and (e), 12 CFR 208.43(b)(1)(v) and
(c), and 12 CFR 324.403(b)(1)(v) and (d).
62 See
12 U.S.C. 1831f; 12 CFR 337.6.
note that the data and chart are based
only on capital ratio thresholds used for PCA.
However, an IDI that otherwise meets the ratio
threshold requirements for the well capitalized PCA
category: (1) Will be classified as an adequately
63 Please
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
Brokered Deposits during the 2007–2017
Financial Crisis
During the financial crisis and the
years that followed, from the beginning
of 2007 through the end of 2017, the
Deposit Insurance Fund (DIF) incurred
$74.4 billion in losses as of December
31, 2016. During this period, excluding
Washington Mutual, 530 banks failed
and were placed in FDIC receivership.
Typically, as institutions get closer to
failure, their capital level declines and
they are no longer able to accept, renew,
or roll over brokered deposits, so levels
of brokered deposits at failure are
2381
usually low. Nevertheless, of the 530
failed banks, twelve, approximately 2.3
percent, held a majority (50% or greater)
as brokered deposits; 280 or
approximately 52.8 percent, held less
than 1% of their total deposits as
brokered deposits.64 (See Chart 6.)
CHART 6
Brokered Deposits at 530 Failed Institutions, 2007–2017
Brokered deposits as % of total deposits
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90–100 .................................................................................
80–89 ...................................................................................
70–79 ...................................................................................
60–69 ...................................................................................
50–59 ...................................................................................
40–49 ...................................................................................
30–39 ...................................................................................
20–29 ...................................................................................
10–19 ...................................................................................
5–9 .......................................................................................
1–4 .......................................................................................
0–1 .......................................................................................
0 ...........................................................................................
64 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.
Master Certificates of Deposits are held on the
books of the issuing bank in the name of a
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% of
Institutions
1
2
3
0
6
8
17
30
53
56
74
8
272
0.19
0.38
0.57
0.00
1.13
1.51
3.21
5.66
10.00
10.57
13.96
1.51
51.32
subsidiary of Depository Trust Corporation (DTC) as
custodian for deposit brokers who are often broker
dealers. These broker dealers, in turn, issue retail
CDs, typically in denominations of $1,000, under
the Master Certificate of Deposit to their retail
clients.
65 Banks that used reciprocal deposits are not
included in Non-DTC CD Brokered Deposits unless
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Number failed
institutions
w/non-DTC
titled
brokered
deposits 65
0
0
0
0
1
1
0
3
20
33
77
184
211
% of
institutions
0.00
0.00
0.00
0.00
0.19
0.19
0.00
0.57
3.77
6.23
14.53
34.72
39.81
Number failed
institutions
w/internet
deposits
1
1
2
8
8
16
31
46
57
47
55
27
231
they also held other non-DTC CD brokered deposits.
While all reciprocal deposits were brokered
deposits between 2007 and 2017, since May 24,
2018, a significant portion of reciprocal deposits are
excepted from brokered deposits.
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Number failed
institutions
w/DTC-titled
brokered CDs
2382
Reciprocal Deposits
A reciprocal deposit is an
arrangement based upon a network of
banks that place funds at other
participating banks in order for
depositors to receive insurance coverage
for the entire amount of their deposits.
In these arrangements, institutions
within the network are both sending
and receiving identical amounts of
deposits simultaneously. As a result of
this arrangement, the institutions
themselves (along with the network
sponsors) are ‘‘in the business of placing
deposits, or facilitating the placement of
deposits, of third parties with insured
depository institutions,’’ and the
amozie on DSK3GDR082PROD with PROPOSALS3
Listing Services
A ‘‘listing service’’ is a company that
compiles information about the interest
rates offered by banks on deposit
products, especially CDs. A particular
company can be a ‘‘listing service’’
(compiling information about deposits)
as well as a ‘‘deposit broker’’
(facilitating the placement of deposits).
In recognition of this possibility, the
FDIC has set forth specific criteria to
66 For the specific criteria to determine when a
listing service qualifies as a deposit broker see
Advisory Opinion No. 90–24 (June 12, 1990).
Advisory Opinion No. 92–50 (July 24, 1992). The
criteria were subsequently updated in Advisory
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involvement of deposit brokers within
the reciprocal network means the
deposits are brokered deposits. Since
banks first reported reciprocal deposits
on the Call Report in June 2009,
reciprocal deposits as a share of total
brokered deposits increased greatly,
primarily among small banks. For banks
with assets less than $1 billion,
reciprocal deposits as a percent of total
brokered deposits rose from 16.4
percent on June 30, 2009, to a peak of
33.7 percent on March 31, 2018.
The Economic Growth, Regulatory
Reform, and Consumer Protection Act,
enacted on May 24, 2018, allows certain
banks to except a limited amount of
reciprocal deposits from brokered
deposits. The immediate result of this
Act has been to dramatically reduce the
percent of reciprocal deposits that are
classified as brokered deposits. For
example, for banks with assets less than
$1 billion, reciprocal deposits as a share
of brokered deposits declined from 33.7
percent on March 31, 2018, to 11.5
percent on September 30, 2018. (See
Chart 7.)
For the largest banks, those with
assets greater than $50 billion,
reciprocal deposits as a share of total
brokered deposits has remained
relatively low, accounting for 0.1
percent of total brokered deposits as of
June 30, 2018.
determine when a listing service
qualifies as a deposit broker.66
The FDIC began collecting data on
non-brokered, or ‘‘passive,’’ listing
service deposits in the first quarter of
2011. As of September 30, 2018, a total
of 1,369 banks reported a positive
balance for non-brokered listing service
deposits. In aggregate, these banks held
approximately $69.6 billion in listing
service deposits, which represented 0.6
percent of total domestic deposits. (See
Chart 8.)
Listing service deposits made up a
higher share of domestic deposits at
smaller banks. On average from 2011 to
the third quarter of 2018, non-brokered
listing service deposits represented 1.3
percent of domestic deposits at banks
with less than $10 billion in total assets,
compared to 0.9 percent of domestic
deposits at banks with $10 billion to $50
billion in total assets. (See Chart 8.)
Opinion No. 02–04 (November 13, 2002) and
Advisory Opinion No. 04–04 (July 28, 2004).
Assuming these criteria are satisfied, the FDIC takes
the position that a company is not ‘‘facilitating the
placement of deposits,’’ and is therefore not a
deposit broker, even if the company provides a
platform for the execution of trades. Consequently,
the deposits themselves are not classified as
brokered deposits.
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
Banks that are less than well
capitalized are subject to restrictions on
accepting, renewing, or rolling over
brokered deposits, and historically some
of these banks have turned to listing
service deposits as an alternate source of
founding. (See Chart 9.)
Listing service deposits, however,
may only provide funding to less than
well capitalized banks to the extent that
such a bank can offer rates high enough
to attract deposits. A low interest rate
environment, such as the one during
and after the financial crisis, enabled
less than well-capitalized banks to list
high rate deposits and attracts funding.
As interest rates have been rising in
recent years, these banks are less likely
to be able to use listing service deposits
as an alternate source of funding to
brokered deposits. From 2010 through
most of 2015, rates were low enough
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
2384
Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
that weekly average rates on 1-year CDs
fell below the FDIC rate cap. Thus, for
most banks during that time, the FDIC
rate cap was not a binding constraint in
attracting funding and banks were more
likely to be able to offer high rates via
listing services to attract deposits. Since
2016, average market rates have
exceeded the FDIC rate cap.
Appendix 2
Statistical Analysis
The analysis summarized in this
appendix uses data from FDIC’s Failure
Transaction Database, Call Reports/
TFRs, and supervisory CAMELS ratings.
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Failure Probability Models
The sample used for analysis includes
banks and thrifts that failed between
1988 and 2017. These banks were
insured by the Bank Insurance Fund
(BIF), Savings Association Insurance
Fund (SAIF), and DIF. The data exclude
thrifts resolved by FSLIC or the
Resolution Trust Corporation (RTC). It is
well documented that FHLBB
supervised thrifts (insured by FSLIC)
received regulatory forbearance and
were allowed to operate with lower net
worth and were closed under
procedures that differ significantly from
the 1991 FDICIA prompt corrective
action rules that apply over much of the
sample period. Moreover, the analysis
excludes any bank or thrift that received
open bank assistance. The sample
includes 1,403 failures which consist of
1,267 bank failures between 1988 and
2017 and 136 thrift failures between
1989 and 2017.67 In the remaining
sections, ‘‘banks’’ is used to refer to both
banks and thrifts.
The failure prediction models have a
three-year failure prediction horizon.
The models use bank data at year-end to
predict the probability of the bank
failing in the next three years. The
models use year-end Call Reports from
1987 to 2014 to predict bank failures
from 1988 to 2017.68 The models are
estimated as a pooled time-series cross
section. The standard errors are
clustered at the bank level.
Bank failures are modeled as a
function of banks’ income statement and
balance sheet information, supervisory
composite CAMELS ratings, and time
fixed effects to capture differences in
67 Thrift institutions refer to those with institution
classes of Stock and Mutual Savings Banks, Savings
Banks and Savings and Loans, and State Stock
Savings and Loans.
68 We use non-overlapping three year intervals.
For example, 1987 Call Report data is used to
predict banks failures that occurring in 1988, 1989,
and 1990; 1990 Call report data is used to predict
bank failures in 1991, 1992, and 1993. This timing
pattern is continued through the end of the sample.
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economy-wide unconditional average
bank default rates. The model uses the
total equity-to-assets ratio rather than
the Tier 1 capital ratio because the Tier
1 capital ratio was not used in the
1980s. Core deposits are defined as:
total domestic deposits net of large time
deposits 69 and fully insured brokered
deposits.
A bank’s nonperforming loans and
other real estate owned are used to
measure a bank’s asset quality.
Nonperforming loans are defined as a
sum of loans past due 90+ days and
non-accruing loans. We also include a
bank’s concentration in CRE, C&D, C&I,
and consumer loans. A bank’s asset
growth rate measures percent change in
bank’s total assets from one year ago.
Bank earnings are measured as a
ratio—income before taxes to assets. A
bank’s interest expense is also included
as an explanatory variable. A bank’s
composite CAMELS ratings are
represented as separate binary (0,1)
variables to allow for non-linear ratings
effects on the probability of default.
‘‘CAMELS 3’’ is a binary variable that
indicates a bank’s composite CAMELS
rating is 3. ‘‘CAMELS 4 or 5’’ is a binary
variable that indicates a bank’s
composite CAMELS rating is 4 or 5. All
financial variables are normalized by
total assets with the exception of
CAMELS 3, CAMELS 4 or 5, and Asset
Growth.
Time fixed effects are included to
capture any difference in the
unconditional probability of bank
failure across years. The unconditional
likelihood of a bank failing differs by
period in part because macroeconomic
conditions and regulation vary. In the
probability of failure models, time fixed
effect coefficients estimate the
unconditional failure probability for 3year periods.70
Loss Rate Models
Failed bank loss rates are computed as
a ratio of the most recent estimate of the
failure expense and the bank’s total
assets as of the quarter before its failure.
For the most part, the loss rates for
recent bank failures are estimates and
not final costs as a receivership process
can take many years to conclude. The
sample used for the analysis includes
69 To reflect a change in insured deposits limit,
large time deposits are time deposits over $100,000
up to December 2009. Starting in March 2010, large
time deposits refer to time deposits over $250,000.
Because the last year-end Call Reports data used is
2017, the core deposit variable reflects the
prevailing definition through 2017.
70 For example, when Call Report and CAMELS
ratings data from December 1987 are used to predict
failures in 1988, 1989, and 1990, the time fixed
effect coefficient measures the unconditional
probability of failure for 1988, 1989, and 1990.
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banks that failed between April 13, 1984
and December 15, 2017.71 The banks in
the sample were insured by the BIF,
SAIF, and DIF. The analysis excludes
any banks that received open bank
assistance.
Failed bank loss rates are modeled as
a function of the income and balance
sheet characteristics of the failed bank.
The model explains loss rates using a
failed bank’s equity, nonperforming
loans, other real estate owned, core
deposits, brokered deposits, income
earned but not collected, and total loans
to executives as explanatory variables.
These variables are scaled by a bank’s
asset size. The model allows loss rates
to differ for small (asset size $500
million or less), medium (asset size
between $500 million to $1 billion), and
large (asset size $1 billion and higher)
banks. Call Report/TFR data are from
the last quarter before the bank failure
date.72
Reciprocal Deposit Data
Banks began reporting their reciprocal
brokered deposit funds separated from
non-reciprocal brokered deposits
beginning in June 2009. In analyzing the
effects of reciprocal deposits, we use
Call Reports/TFRs and CAMELS rating
data from June 2009 through December
2017. The analysis examines reciprocal
deposit data through December 2017.
During this time period, all reciprocal
deposits were considered brokered
deposits. The Economic Growth,
Regulatory Reform, and Consumer
Protection Act, which was signed into
law on May 24, 2018, allows certain
banks to except a limited amount of
reciprocal deposits from brokered
deposits.
Listing Service Deposit Data
Banks began reporting deposits
obtained through the use of deposit
listing services that are not brokered
deposits beginning in March 2011. In
analyzing the effects of reciprocal
deposits, we use Call Reports and
CAMELS rating data from March 2011
through December 2017.
Estimation Results
Core Deposits and Bank Failure
Probability
In this section, we examine the
relationship between core deposits and
bank failure probabilities. Core deposits
provide a bank with a stable and
71 The loss rate data for more recent bank failures
is updated through 2017.
72 There are some banks in the sample that have
not filed Call Reports or TFRs on the quarter prior
to its failure. For those banks, we use Call Reports
as of two quarters prior to failure.
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
relatively cost effective source of funds.
Core deposits, moreover, are an
important component of customer-bank
relationships. Many core depositors
have long-term financial relationships
with a bank that involve deposits,
lending, and other financial services
that generate bank profits. A bank’s core
deposit base is a measure of the size of
a bank’s opportunity set for relationship
lending. Academic studies as well as
FDIC resolutions experience suggest that
core deposits are a significant source of
bank franchise value.
Table 1 reports the results of a failure
probability model that includes equity
and the core deposits to assets ratio as
predictive variables. The estimated
coefficient on equity is negative,
statistically significant, and very large in
magnitude, suggesting that adequate
equity buffers are among the most
2385
important factors lowering a bank’s risk
of default. The coefficient estimate on
core deposits is also negative and
statistically significant. Controlling for
bank equity, the core deposits ratio is
negative and statistically significant,
suggesting that banks with higher core
deposits have lower failure
probability.73
TABLE 1—CORE DEPOSITS AND BANK FAILURE PROBABILITIES
Coefficient
estimates
Variable
Intercept ...............................................................................................................................................................................................
Equity ...................................................................................................................................................................................................
Core deposits .......................................................................................................................................................................................
Nonperforming loans ...........................................................................................................................................................................
Other real estate owned ......................................................................................................................................................................
Income before taxes ............................................................................................................................................................................
Interest expense ..................................................................................................................................................................................
CAMELS rating 3 .................................................................................................................................................................................
CAMELS rating 4 or 5 .........................................................................................................................................................................
Asset growth ........................................................................................................................................................................................
CRE loans ............................................................................................................................................................................................
C&D loans ............................................................................................................................................................................................
C&I loans .............................................................................................................................................................................................
Consumer loans ...................................................................................................................................................................................
Pseudo R2 ...........................................................................................................................................................................................
Wald Chi2 ............................................................................................................................................................................................
N ..........................................................................................................................................................................................................
*** ¥2.331
[0.000]
*** ¥0.284
[0.000]
*** ¥0.027
[0.000]
*** 0.132
[0.000]
*** 0.124
[0.000]
*** ¥0.145
[0.000]
*** 0.172
[0.000]
*** 0.867
[0.000]
*** 1.687
[0.000]
*** 0.012
[0.000]
*** 0.019
[0.000]
*** 0.061
[0.000]
*** 0.024
[0.000]
*** 0.013
[0.000]
0.515
*** 3,224
98,237
Notes:
1 Uses December Call Report data from 1987, 1990, 1993, 1996, 1999, 2002, 2005, 2008, 2011, and 2014 to predict failures from 1988–2017.
2 Core deposits are defined as domestic deposits minus time deposits over the insurance limit and fully insured brokered deposits.
3 All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating 4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the institution is CAMELS 3-rated and the institution is CAMELS 4
or 5-rated, respectively. Asset Growth is the institution’s one-year asset growth rate.
4 Year fixed effects are included but not reported.
5 Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5 percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in brackets.
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Brokered Deposits and the Probability of
Bank Failure
In this section, we examine the
relationship between brokered deposits
and bank failure probability and loss
rates to the insurance fund. To
summarize the results in this section,
we find that brokered deposit use is
associated with higher probability of
bank failure and higher insurance fund
loss rates. Brokered deposits may
elevate a bank’s risk profile in part
because brokered deposits are
frequently used as a substitute for bank
core deposits and, less frequently, for
equity, and so from the FDIC’s
perspective, banks that use brokered
deposits operate with a higher risk
liability structure relative to banks that
do not use brokered deposits.
Bank failure probability model
estimates are reported in Table 2.
Column (1) of Table 2 reports that
brokered deposits have a positive,
statistically significant effect on a bank’s
estimated probability of failure over a
three-year horizon. In this logistic
regression specification, the income
73 The regression includes time fixed effects, but
the coefficient estimates are not reported in Table
1.
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
before tax ratio is negatively correlated
with bank failures, implying that banks
with higher earnings ratios are less
likely to fail. Banks with higher
nonperforming loan and other real
estate owned ratios are more likely to
fail. All of these effects are statistically
significant at the 1 percent level. There
is a positive and statistically significant
relationship between lagged asset
growth rate and bank failures. The
estimated coefficient for the growth rate
is positive and statistically significant
suggesting that, other things equal,
banks experiencing rapid growth are
more likely to fail within the next 3
years. Estimates also suggest that CRE,
C&D, C&I, and consumer loan
concentrations increase failure
probability estimates. Banks with a
composite CAMELS rating of 3 and
those with a rating of 4 or 5, are more
likely to fail compared to CAMELS 1 or
2 rated banks. This model specification
shows a statistically significant
relationship between interest expense
and bank failures. The model also
includes time fixed effects, but these
estimates are not reported.74
In the estimates reported in Table 2,
Column (1), brokered deposits are the
only funding variable included in the
regression (equity and core deposits are
excluded from the regression). In this
specification, brokered deposits are
clearly associated with an increase in
bank failure probability, but the reason
for the increase is unclear. When a bank
increases its brokered deposit-to-asset
ratio, there must be an offsetting change
in at least one of the bank’s other
funding sources. That is, the bank must
change its equity-to-asset ratio, its core
deposit-to-asset ratio, or its other noncore deposits and other liabilities to
asset ratio to offset the increase in its
brokered deposit ratio. This implicit
shift in a bank’s liability structure is one
possible source of the increase in bank
fragility that is identified by the positive
coefficient on brokered deposits
reported in Column (1). For example, if
the bank’s equity-to-asset ratio declines
to offset an increase in a bank’s brokered
deposit ratio, then the bank is using
brokered deposits to increase its
leverage which would increase its
probability of failure. We investigate
these potential capital structure effects
on bank failure probability using a
series of regressions reported in
Columns (2) and (3) of Table 2.
To control for bank leverage, we
include a bank’s equity-to-asset ratio in
the failure model. The results are
reported in Table 2, Column (2). By
controlling for the equity ratio, the
estimated coefficient on brokered
deposits measures the effect of
increasing a bank’s reliance on brokered
deposits and decreasing its reliance on
other liabilities (such as core deposits,
federal funds purchased, and FHLB
advances), holding a bank’s equity-toasset ratio unchanged. The negative and
statistically significant coefficient
estimate on the equity ratio implies that
greater equity lowers a bank’s
probability of default. The positive and
statistically significant coefficient on the
brokered deposits ratio (unchanged from
previous) suggests that, holding bank
leverage constant, a higher brokered
deposits ratio (with decreased reliance
on other funding sources)
unambiguously increases the probability
that a bank will fail in the subsequent
three years. These results show that the
use of brokered deposits increases a
bank’s failure probability even when
they are not used as a substitute for
bank equity.
Controlling for a bank’s leverage ratio,
the use of brokered deposits raises the
estimated probability of bank failure.
Why? As we have demonstrated in the
prior section, core deposits are an
important category of bank liabilities.
Core deposits are associated with a
lower probability of bank failure. Other
things held constant, should a bank
with a large core deposit franchise
become distressed, long-standing FDIC
resolution experience suggests that it is
much more likely to be recapitalized
through a purchase or a merger and not
through an FDIC resolution. Thus, one
possible avenue through which failure
probability might be affected by the use
of brokered deposits is if brokered
deposits are used as a substitute for core
deposit funding.
In Table 2, Column (3), we estimate
the effects of brokered deposits on the
probability of bank failure holding
constant a bank’s core deposit ratio. In
this specification, core deposits are
negative and statistically significant
whereas brokered deposits are positive
and statistically significant. The
interpretation is that, holding constant
the asset risk characteristics of a bank,
provided a bank’s share of funding from
core deposits remains unchanged, on
average, the use of brokered deposits
increases a bank’s probability of failure.
In Table 2, Column (4), we include
three bank funding categories as
controls: brokered deposits, equity, and
core deposits. The coefficients of equity
and core deposits are both negative and
statistically significant, indicating that
higher equity and core deposit funding
shares both reduce the probability of
bank failure. In this specification, the
estimated coefficient on the brokered
deposits ratio measures the effect of
increasing brokered deposits, holding
constant equity and core deposits, and
reducing reliance on other bank
liabilities. The estimated coefficient on
brokered deposits is not statistically
significant. These results suggest that
brokered deposits can be substituted for
other bank liabilities without any
statistically measureable effect on a
bank’s failure probability, provided that
a bank’s share of equity and core deposit
funding and its asset risk characteristics
remain unchanged.
TABLE 2—BROKERED DEPOSITS AND FAILURE PROBABILITY OVER A THREE-YEAR HORIZON
Variable
Intercept ...........................................................................................................
amozie on DSK3GDR082PROD with PROPOSALS3
Brokered deposits ............................................................................................
Equity ...............................................................................................................
Core deposits ...................................................................................................
74 The omitted period, the period without an
estimate of time fixed effect, is 1988–1990 and so
time fixed effects estimates the unconditional
probability of a 3 year period relative to the
unconditional probability for 1988–1990. The time
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Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
(1)
(2)
(3)
(4)
*** ¥6.447
[0.000]
*** 0.026
[0.000]
........................
........................
........................
*** ¥4.674
[0.000]
*** 0.022
[0.000]
*** ¥0.273
[0.000]
........................
*** ¥5.119
[0.000]
*** 0.013
[0.014]
........................
........................
*** ¥0.016
fixed effect coefficients estimates are negative and
statistically significant indicating that the
unconditional probability of failure was lower in
the periods 1991–1993, 1994–1996, 1997–1999,
2000–2002, 2003–2005, 2006–2008, 2012–2014 and
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*** ¥2.312
[0.000]
¥0.001
[0.790]
*** ¥0.284
[0.000]
*** ¥0.027
2015–2017 (relative to 1988–1990). The time fixed
effect coefficient for 2009–2011 is negative but
statistically insignificant indicating no average
default rate difference relative to 1988–1990.
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TABLE 2—BROKERED DEPOSITS AND FAILURE PROBABILITY OVER A THREE-YEAR HORIZON—Continued
Variable
Nonperforming loans .......................................................................................
Other real estate owned ..................................................................................
Income before taxes ........................................................................................
Interest expense ..............................................................................................
CAMELS rating 3 .............................................................................................
CAMELS rating 4 or 5 .....................................................................................
Asset growth ....................................................................................................
CRE loans ........................................................................................................
C&D loans ........................................................................................................
C&I loans .........................................................................................................
Consumer loans ...............................................................................................
Pseudo R2 ........................................................................................................
Wald Chi2 ........................................................................................................
No. of observations ..........................................................................................
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
(1)
(2)
(3)
(4)
........................
*** 0.164
[0.000]
*** 0.142
[0.000]
*** ¥0.148
[0.000]
*** 0.114
[0.000]
*** 0.992
[0.000]
*** 2.280
[0.000]
*** 0.009
[0.000]
*** 0.022
[0.000]
*** 0.065
[0.000]
*** 0.031
[0.000]
*** 0.021
[0.000]
0.471
*** 3,678
98,237
........................
*** 0.138
[0.000]
*** 0.117
[0.000]
*** ¥0.149
[0.000]
*** 0.199
[0.000]
*** 0.862
[0.000]
*** 1.596
[0.000]
*** 0.014
[0.000]
*** 0.020
[0.000]
*** 0.066
[0.000]
*** 0.030
[0.000]
*** 0.015
[0.000]
0.509
*** 3,193
98,237
[0.000]
*** 0.164
[0.000]
*** 0.147
[0.000]
*** ¥0.140
[0.000]
*** 0.097
[0.000]
*** 1.002
[0.000]
*** 2.347
[0.000]
*** 0.007
[0.000]
*** 0.021
[0.000]
*** 0.062
[0.000]
*** 0.028
[0.000]
*** 0.018
[0.000]
0.473
*** 3,763
98,237
[0.000]
*** 0.132
[0.000]
*** 0.124
[0.000]
*** ¥0.145
[0.000]
*** 0.172
[0.000]
*** 0.867
[0.000]
*** 1.688
[0.000]
*** 0.012
[0.000]
*** 0.019
[0.000]
*** 0.061
[0.000]
*** 0.024
[0.000]
*** 0.013
[0.000]
0.515
*** 3,228
98,237
Notes:
1 Uses December Call Report data from 1987, 1990, 1993, 1996, 1999, 2002, 2005, 2008, 2011, and 2014 to predict failures from 1988–2017.
2 Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured brokered deposits.
3 All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating 4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the institution is CAMELS 3-rated and the institution is CAMELS 4
or 5-rated, respectively. Asset Growth is the institution’s one-year asset growth rate.
4 Year fixed effects are included but not reported.
5 Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5 percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in brackets.
To summarize, these series of
regression model estimates show that
the use of brokered deposits is
associated with a higher probability of
bank failure. The higher probability
owes to a core deposit or equity effect:
When banks substitute brokered
deposits for core deposits or equity, this
can increase their probability of failure.
It is also possible that the use of
brokered deposits is a general indicator
of a higher risk appetite on the part of
bank management which, may be
reflected in the riskiness of the assets
that a bank purchases. We turn to this
issue in the next section.
amozie on DSK3GDR082PROD with PROPOSALS3
Brokered Deposits and Bank Asset
Growth and Quality
To determine whether the use of
brokered deposits may also be a general
indicator of a higher risk appetite on the
part of bank management, as reflected in
the bank’s asset growth or
nonperforming loans, the FDIC
examined the relationship between
brokered deposits and asset growth, and
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between brokered deposits and
nonperforming loans.
To assess whether the use of brokered
deposits helps to explain the variation
in observed bank growth rates, we
estimate alternative models in which a
bank’s 3-year growth rate is in part
determined by its 3-year average use of
brokered deposits. Overall, the
regression analysis suggests that banks
using brokered deposits often exhibit
higher 3-year growth rates compared to
banks that do not use brokered deposits.
This positive relationship is likely to be
the result of a complex series of choices
made by bank management that drive
both a bank’s growth rate and its use of
brokered deposits. The underlying
structural choice models are
undoubtedly much more complex than
the models estimated in this analysis.
For example, we would expect that
aggregate and local market lending
conditions, interest rates and
employment all to be factors included in
the simultaneous determination of a
bank’s growth rate and brokered deposit
usage.
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To analyze the relationship between
brokered deposits and asset quality, we
estimated various models that explain
the level of non-performing bank loans
at the end of three years using
macroeconomic controls and bankspecific measures of risk, including
variables that measure their use of
brokered deposit funding.
Nonperforming loans are defined as a
sum of loans past due 90+ days, nonaccruing loans, and other real estate
owned. Banks that are willing to
undertake riskier funding structures
may also be willing to invest in higher
risk loan portfolios. If this is true, banks
that fund themselves with brokered
deposits would also tend to be banks
with higher non-performing loans.
The results of the regression analysis
include an estimated coefficient for the
brokered deposits to assets ratio that is
positive and statistically significant,
implying that an increase in the
brokered deposit ratio is associated with
an increase in the nonperforming loans
ratio three years into the future. In
contrast, higher core deposits are
E:\FR\FM\06FEP3.SGM
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associated with more conservative
lending practices. Banks with high
reserves, liquid assets, and consumer
loans tend to have a lower
nonperforming loan-to-asset ratio three
years later. In contrast, banks with high
interest expenses, income before taxes,
C&I loans, C&D loans, and CRE loans are
more likely to have a higher
nonperforming loan ratio three years
later. An increase in bank size, on
average, is associated with a lower
nonperforming loan ratio.
The FDIC also tested an alternative
definition of a nonperforming loans
ratio (the sum of loans past due 90+
days and non-accruing loans), and the
results are qualitatively similar to those
in the initial regression analysis.
Brokered deposits continue to be
positively correlated with
nonperforming loan ratios.
Loss Rate Models
In this section, we investigate whether
banks’ use of brokered deposit funding
is associated with higher DIF loss rates
when a bank fails. Banks with heavy
reliance on brokered deposits may have
a low franchise value because they lack
a large core deposit customer base. In
addition, banks that fund themselves
with brokered deposits tend to have
higher non-performing loans which may
contribute to higher DIF losses.
Table 3 reports the results of the loss
rate regression analysis. Column (1) of
Table 3 suggests that higher
nonperforming loans, other real estate
owned, income earned but not
collected, loans to executives to asset
ratios are associated with higher loss
rates. Banks with higher C&D, C&I, and
consumer loans also tend to have higher
loss rates. Medium-sized (asset size
between $500 million to $1 billion) and
large failed banks (asset size $1 billion
and higher) tend to have lower loss rates
compared to small banks (asset size
$500 million or less). The year fixedeffects (not reported) are added to
capture any difference in unconditional
loss rates across years. These fixed
effects capture loss rate differences that
may be driven by year-to-year
differences in the strength of the
economy or supervision and
regulation.75
In the failure loss rate model
specification reported in Table 3,
Column (1), only brokered deposits are
included as a funding variable. The
estimated coefficient for brokered
deposits measures the effect of an
increase in brokered deposits and an
offsetting reduction in other funding
sources on the loss rate. The positive
and statistically significant coefficient
on brokered deposits in Column (1)
suggests that an increase in a bank’s
reliance on brokered deposits (and an
offsetting decrease in other funds either
equity or other liabilities) increases the
DIF loss rate.
In Table 3 Column (2), the failed
bank’s equity ratio is also included as an
explanatory variable. The positive and
statistically significant coefficient on
brokered deposits suggests that
increasing reliance on brokered
deposits, holding bank equity constant
and reducing other liabilities (such as
core deposits, fed funds purchased,
FHLB advances), there is an increase in
the DIF loss rate. The negative and
statistically significant coefficient on the
equity ratio suggests that increasing
equity and decreasing a bank’s reliance
on other liabilities with no change in
brokered deposits reduces the loss rate.
In Table 3, Column (3), the failed
bank’s core deposit ratio and brokered
deposit ratio are included as
explanatory variables. The positive and
statistically significant coefficient on
brokered deposits suggests that,
increasing reliance on brokered
deposits, holding core deposits constant
and reducing other liabilities (such as
federal funds purchased, FHLB
advances) and possibly equity, there is
an increase in the DIF loss rate. The
negative and statistically significant
coefficient on the core deposit ratio
suggests that increasing core deposits
and decreasing a bank’s reliance on
other liabilities while holding brokered
deposits constant reduces the DIF loss
rate.
The model specification reported in
Table 3, Column (4) includes brokered
deposits, equity, and core deposits as
funding measures. In this specification,
the estimated coefficient on brokered
deposits is negative and statistically
insignificant suggesting that, other
control variables held constant, when
equity and core deposits are unchanged,
increasing brokered deposits and
decreasing other bank liabilities has no
statistically measurable effect on loss
rates. In contrast, replacing other
liabilities with equity or core deposits
with no change in brokered deposits
decreases a bank’s failure loss rate.
To summarize these results, we find
that the use of brokered deposits results
in higher loss rates to the DIF. These
higher losses can be linked to two
causes, a leverage effect and a core
deposit effect. The leverage effect arises
because brokered deposits are often
used as a substitute for bank equity and
so when brokered deposits are in use
there is less capital to cushion the DIF’s
loss. The core deposit effect is the
substitution of brokered for core
deposits. This lowers bank franchise
value which also increases the DIF loss
rate.
TABLE 3—BANK FAILURE LOSS RATE MODELS
Variable
Intercept ...........................................................................................................
Brokered deposits ............................................................................................
amozie on DSK3GDR082PROD with PROPOSALS3
Equity ...............................................................................................................
Core deposits ...................................................................................................
Nonperforming loans .......................................................................................
Other real estate owned ..................................................................................
75 For example, legislative changes such as the
cross guarantee provision in FIRREA of 1989 and
the least cost resolution requirement in FDICIA of
1991. Unconditional loss rates of banks that failed
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Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
(1)
(2)
(3)
(4)
*** 6.350
[0.000]
*** 0.104
[0.000]
........................
........................
........................
........................
*** 0.431
[0.000]
*** 0.835
*** 9.324
[0.000]
*** 0.082
[0.003]
*** ¥0.470
[0.000]
........................
........................
*** 0.327
[0.000]
*** 0.738
*** 9.680
[0.000]
* 0.063
[0.061]
........................
........................
** ¥0.044
[0.030]
*** 0.441
[0.000]
*** 0.845
in 1998, 2007, 2008, and 2009 are higher compared
to loss rates in 1984 (the base year) with statistical
significance. Compared to loss rates in 1984, loss
rates are substantially lower in 1985, 1990, 1991,
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*** 17.465
[0.000]
¥0.015
[0.665]
*** ¥0.550
[0.000]
*** ¥0.102
[0.000]
*** 0.333
[0.000]
*** 0.746
1992, 1993, 1994, 2000, and 2004 with statistical
significance.
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2389
TABLE 3—BANK FAILURE LOSS RATE MODELS—Continued
Variable
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
(1)
(2)
(3)
(4)
Income earned but not collected .....................................................................
Loan to executive officers ................................................................................
Bank size between $500 mil–$1 bil .................................................................
Bank size >$1 billion ........................................................................................
CRE loans ........................................................................................................
C&D loans ........................................................................................................
C&I loans .........................................................................................................
Consumer loans ...............................................................................................
Adjusted R2 ......................................................................................................
No. of observations ..........................................................................................
[0.000]
*** 3.620
[0.000]
*** 0.334
[0.008]
*** ¥5.517
[0.000]
*** ¥9.064
[0.000]
¥0.002
[0.940]
*** 0.140
[0.001]
*** 0.243
[0.000]
*** 0.128
[0.000]
0.350
1,943
[0.000]
*** 3.888
[0.000]
** 0.302
[0.015]
*** ¥5.118
[0.000]
*** ¥9.015
[0.000]
¥0.014
[0.650]
*** 0.163
[0.000]
*** 0.216
[0.000]
*** 0.117
[0.000]
0.373
1,943
[0.000]
*** 3.690
[0.000]
** 0.323
[0.010]
*** ¥5.882
[0.000]
*** ¥9.567
[0.000]
¥0.001
[0.974]
*** 0.134
[0.001]
*** 0.237
[0.000]
*** 0.125
[0.000]
0.351
1,943
[0.000]
*** 4.095
[0.000]
** 0.272
[0.027]
*** ¥5.886
[0.000]
*** ¥10.158
[0.000]
¥0.013
[0.674]
*** 0.151
[0.000]
*** 0.199
[0.000]
*** 0.108
[0.000]
0.381
1,943
amozie on DSK3GDR082PROD with PROPOSALS3
Notes:
1 Estimates use data from 1984 to 2017 to predict failure loss rates in 1984 to 2017.
2 Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured brokered deposits.
3 All financial variables are normalized by total assets with the exception of Bank size between $500 mil–$1 bil and Bank size >$1billion. Bank
size between $500 mil–$1 bil is a dummy variable indicating that the institution’s asset size is between $500 million and $1 billion. Bank size
>$1billion is a dummy variable indicating that the institution’s asset size is over $1 billion.
4 The regressions include year fixed effects, but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5 percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in brackets.
Analysis of Reciprocal Deposits
In this section we use the available
data to analyze reciprocal deposit use
patterns and the effects of reciprocal
deposits on the probability of bank
failure and DIF loss rates. Banks began
reporting reciprocal brokered deposit
funds separately from non-reciprocal
brokered deposits beginning June 2009.
This analysis examines reciprocal
deposit data through December 2017.
During this time period, all reciprocal
deposits were considered brokered
deposits. The Economic Growth,
Regulatory Reform, and Consumer
Protection Act, which was signed into
law on May 24, 2018, allows certain
banks to except a limited amount of
reciprocal deposits from brokered
deposits.
The data show that while a minority
of banks use reciprocal deposits, those
that use this source of funding tend to
raise a large percentage of their brokered
deposits using reciprocal deposits. From
June 2009 through December 2010, the
use of reciprocal deposits became more
widespread, but was still uncommon.
Over this period, on average, the use of
brokered deposits declined from
December 2011, then increased starting
in December 2015. The relative
importance of reciprocal deposits as a
component of brokered deposits
increased from December 2011 to
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December 2013 and has since fallen.
Table 4 reports the distribution of
different brokered deposit ratios by Call
Report date.76 The first panel of Table
4 reports the distribution of different
brokered deposit ratios (total brokered,
reciprocal brokered, and non-reciprocal
brokered deposits to assets ratios) for
December 2011. The median values for
each of these ratios are zero; in
December 2011, out of 7,366 banks,
3,015 banks had non-zero brokered
deposits.
In December 2011, an average bank’s
reliance on brokered deposits (2.43%)
was split between reciprocal brokered
deposits (0.58%) and non-reciprocal
brokered deposits (1.85%). Only a very
small share of banks has a heavy
reliance on reciprocal brokered
deposits. The 99th percentile of the
reciprocal brokered deposit ratio is
11.61% and the maximum observed
ratio is 49.55%.
Rows (4) and (5) of Table 4 report the
distributions of the ratios of reciprocal
deposits and non-reciprocal brokered
deposits to total brokered deposits for
76 Banks report a total for brokered deposits and
also report the amount of this total that are
reciprocal deposits. We exclude observations when
a bank reports a positive reciprocal brokered
deposit value but reports a zero value for total
brokered deposits. We also exclude from the sample
banks that report higher values for reciprocal
brokered deposits than for total brokered deposits.
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Sfmt 4702
banks that report positive brokered
deposits. The median reciprocal to total
brokered deposits ratio is 0.77 Among
banks using brokered deposits, on
average 31.44% of brokered deposits are
reciprocal deposits. Fourteen percent of
banks using brokered deposits use only
reciprocal brokered deposits.
Rows (6) and (7) of Table 4 report the
distributions of reciprocal deposits and
non-reciprocal brokered deposits to total
brokered deposits ratios for the sample
of banks that report positive reciprocal
brokered deposits. The data show that
while reciprocal brokered deposits are
not used widely among banks that rely
on brokered deposits for funding, when
they are used, they frequently are a
bank’s primary source of brokered
funding.
Comparing data from December 2011
and December 2017, fewer banks are
using brokered deposits, but among
those banks that do, reliance on
brokered deposits has been increasing.
The mean total brokered deposits to
assets ratio in December 2017 was
2.90% which increased from 2.43% in
December 2011. The trend for banks’
reliance on reciprocal deposits is less
clear. In December 2011, 1,348 banks
reported positive reciprocal deposit
77 Only 1,348 banks reported positive reciprocal
brokered deposits out of 3,015 banks that report
positive brokered deposits.
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balances. This number declined to 1,199
banks in December 2014, and has
remained relatively stable, declining
somewhat to 1,184 by December 2017.
The average usage of reciprocal deposits
has increased; the mean reciprocal
deposits to assets ratio was 0.80% in
December 2017 compared to 0.58% in
December 2011. Generally, the share of
brokered deposits funded by reciprocal
versus non-reciprocal deposits has
remained stable.
TABLE 4—DISTRIBUTION OF DIFFERENT BROKERED DEPOSITS RATIOS BY CALL REPORT DATE
Ratios
N
Max
99th
95th
90th
Med
Mean
December 2011
(1) ............
(2) ............
(3) ............
(4) ............
(5) ............
(6) ............
(7) ............
Total brokered/assets ........
Reciprocal brokered/assets
Non-reciprocal brokered/
assets.
Reciprocal brokered/total
brokered.
Non-reciprocal brokered/
total brokered.
Reciprocal brokered/total
brokered.
Non-reciprocal brokered/
total brokered.
7,366
7,366
7,366
90.83
49.55
90.83
27.28
11.61
25.47
12.15
3.63
9.82
7.30
1.29
5.40
0.00
0.00
0.00
2.43
0.58
1.85
3,015
100.00
100.00
100.00
100.00
0.00
31.44
3,015
100.00
100.00
100.00
100.00
100.00
68.56
1,348
100.00
100.00
100.00
100.00
97.13
70.31
1,348
99.99
99.70
96.67
90.91
2.87
29.69
December 2017
(1) ............
(2) ............
(3) ............
(4) ............
(5) ............
(6) ............
(7) ............
Total brokered/assets ........
Reciprocal brokered/assets
Non-reciprocal brokered/
assets.
Reciprocal brokered/total
brokered.
Non-reciprocal brokered/
total brokered.
Reciprocal brokered/total
brokered.
Non-reciprocal brokered/
total brokered.
Reciprocal Deposit Usage at Failed
Banks
In this section, we examine the extent
to which failed banks relied on
reciprocal brokered deposits. The
analysis includes banks that failed
between July 2009 and December 15,
2017. During this period, 458 banks
failed.
Table 5 reports number (percentage in
parenthesis) of failed banks that
reported positive reciprocal deposits
and non-reciprocal brokered deposits on
their balance sheet prior to their failure.
5,678
5,678
5,678
87.66
41.37
87.66
29.92
13.09
25.32
13.69
5.52
10.27
9.00
2.25
6.62
0.00
0.00
0.00
2.90
0.80
2.10
2,526
100.00
100.00
100.00
100.00
0.00
31.79
2,526
100.00
100.00
100.00
100.00
100.00
68.21
1,184
100.00
100.00
100.00
100.00
86.76
67.81
1,184
99.99
99.65
96.81
91.86
13.24
32.19
In this table, data are analyzed
according to the Call Report data
reported a selected number of quarters
before the bank failure date. Reciprocal
deposits were first reported on Call
Reports in June 2009. Hence, we are
limited to 180 failures, which failed
between April 2011 and December 2017,
to have 8 quarters of Call Report data
with reciprocal deposit information. In
contrast, there are 458 failures, which
failed between July 2009 to December
2017, with 1 quarter of Call Report data
with reciprocal deposit information.
The data suggest a number of
consistent patterns. Column (3) shows
that somewhere between 60 and 70
percent of the failed banks used
brokered deposits for at least six
quarters before they failed. There is also
evidence that suggests that some of
these failed banks stop using brokered
deposits in the quarter prior to their
failure. Of these failed banks, roughly 20
percent used reciprocal deposits for up
to seven quarters prior to their failure,
but like brokered deposits, some also
stopped using reciprocal deposit
funding the quarter before they failed.78
amozie on DSK3GDR082PROD with PROPOSALS3
TABLE 5—BROKERED AND RECIPROCAL DEPOSITS USAGE IN FAILED BANKS
8
7
6
5
Number of quarters before failure
Number of
observations
Number of banks
with positive
brokered deposits
reported
(%)
(1)
(2)
(3)
.....................................................................................................
.....................................................................................................
.....................................................................................................
.....................................................................................................
180
206
236
277
122
140
165
196
Number of banks
with positive
non-reciprocal
brokered deposits
reported
(%)
Number of banks
with positive
reciprocal
brokered deposits
reported
(%)
(4)
(5)
(67.78)
(67.96)
(69.92)
(70.76)
116
134
159
183
78 We have not investigated why these banks
stopped using reciprocal deposits.
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(64.44)
(65.05)
(67.37)
(66.06)
39
44
53
64
(21.67)
(21.36)
(22.46)
(23.10)
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
TABLE 5—BROKERED AND RECIPROCAL DEPOSITS USAGE IN FAILED BANKS—Continued
4
3
2
1
Number of quarters before failure
Number of
observations
Number of banks
with positive
brokered deposits
reported
(%)
(1)
(2)
(3)
.....................................................................................................
.....................................................................................................
.....................................................................................................
.....................................................................................................
322
363
408
458
224
251
277
295
Number of banks
with positive
non-reciprocal
brokered deposits
reported
(%)
Number of banks
with positive
reciprocal
brokered deposits
reported
(%)
(4)
(5)
(69.57)
(69.15)
(67.89)
(64.41)
211
235
260
283
(65.53)
(64.74)
(63.73)
(61.79)
67
64
70
63
(20.81)
(17.63)
(17.16)
(13.76)
Notes:
1 Based on 458 Failures between July 2, 2009 and December 15, 2017. All failures after June 2009 when the reciprocal deposits were first reported on the Call Reports.
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reciprocal deposit usage as banks
approach failure.
Figure 2 graphs the failing banks’
usage of non-reciprocal brokered
deposits (as a percentage of assets) prior
to failure. Figure 2 shows that the
median bank usage of non-reciprocal
brokered deposits also declines as the
banks approach failure. In contrast,
those banks most reliant on brokered
deposits (the 90th percentile of the
distribution), do not show any
significant run off in non-reciprocal
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brokered deposits as the banks approach
failure.
Given the small sample size involved
in this analysis, it is inappropriate to
draw strong overall conclusions
regarding the behavior of reciprocal
deposits balances at failing banks.
Moreover, since not all weak banks fail,
the behavior of reciprocal deposit
funding at weak banks (not analyzed in
this memo) could also inform the
regulatory debate about safety and
soundness issues associated with
reciprocal deposit usage.
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Figure 1 graphs the failing banks’
reciprocal deposits to assets ratio prior
to failure. The median reciprocal
deposits ratio at 5, 4, 3, 2, and 1
quarter(s) before failure is 0%. In other
words, the median failed bank did not
hold any reciprocal deposits up to 5
quarters prior to failure. The reciprocal
deposit ratios at the 90th percentile of
the distribution (the failed banks most
reliant on reciprocal deposits) for the 5
quarters before failure decline from
nearly 1.6% to just over 0.2% of
Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
Failure Prediction and Reciprocal
Deposits
We estimate three-year failure
prediction models using 2009, 2012,
and 2015 data to predict failures from
2010 to 2017. We estimate failure
models as a function of reciprocal and
non-reciprocal brokered deposits. The
results are reported in Table 6. Table 6
reports the estimated coefficients and pvalues of the logistic regressions.
In the failure model specification
reported in Column (1) of Table 6, two
funding ratios, reciprocal deposits and
non-reciprocal brokered deposits are
included. Table 6 reports that the nonreciprocal brokered deposits ratio has a
positive and statistically significant
effect on a bank’s estimated probability
of failure.
Column (1) of Table 6 also shows that
higher nonperforming loans and other
real estate owned are positively and
statistically significant variables in the
bank failure probability model.
Because we measure the banks’
liability components as ratios, as a bank
increases its use of reciprocal deposits
and non-reciprocal deposits, there are
necessarily offsetting changes in the
bank’s other funding sources. By
including other funding measures in the
models, we investigate whether the
implicit shift in a bank’s liability
structure (as a bank increases its
dependence on reciprocal and nonreciprocal brokered deposits) is a
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possible source of the increase in failure
probability.
Column (2) of Table 6 reports the
results of the failure probability model
when we include a bank’s equity to
asset ratio to control for bank leverage.
By including the equity ratio in the
model, the coefficient estimates on
reciprocal and non-reciprocal brokered
deposits measure the effect of increasing
a bank’s reliance on these deposit
sources and decreasing its reliance on
other liabilities, holding the bank’s
equity ratio unchanged. Holding the
bank equity ratio constant, the estimated
coefficient on non-reciprocal brokered
deposits ratio is positive with a p-value
of 0.128. The estimated coefficient on
reciprocal deposits ratio remains
statistically insignificant.
Column (3) of Table 6 reports the
failure model estimates when the model
includes a bank’s reciprocal deposits,
non-reciprocal brokered deposits, and
core deposits to assets ratios. In this
specification, the estimated coefficient
on the reciprocal deposits ratio
measures the effect of increasing
reciprocal deposits, holding constant
non-reciprocal brokered deposits and
core deposits and reducing other bank
liabilities. The coefficient of the
reciprocal deposits ratio remains
statistically insignificant. The
coefficient of non-reciprocal deposits is
statistically significant when core
deposits are held constant. The
coefficient of the core deposits ratio on
bank failure probability is statistically
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insignificant. This result differs from the
results in an earlier section as well as
long standing FDIC experience where,
on average, core deposits reduce the
failure probability.
Column (4) of Table 6 reports the
failure model estimates when the model
includes a bank’s reciprocal deposits,
non-reciprocal brokered deposits,
equity, and core deposits to assets
ratios. In this specification, the
estimated coefficient on the reciprocal
deposits ratio measures the effect of
increasing reciprocal deposits, holding
constant non-reciprocal brokered
deposits, equity, and core deposits and
reducing other bank liabilities. The
coefficient of reciprocal deposits
remains statistically insignificant. The
coefficient of non-reciprocal deposits is
not statistically significant when the
equity and core deposits ratios are both
held constant.
The results suggest that, on average,
failed banks that used reciprocal
brokered deposits did not use them as
a substitute for equity or core deposit
funding. The regression results show
that equity and core deposits both
decrease a bank’s probability of failure.
If banks that used reciprocal deposits
used them as a substitute for equity or
core deposit funding, the reciprocal
deposit coefficient in Column (1) would
be positive and significant and mirror
the coefficient for non-reciprocal
deposits. The fact that the reciprocal
deposit coefficient in Column (1) is
insignificant is consistent with the
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
interpretation that banks that used
reciprocal brokered deposits in this
sample period did not use them to
substitute for equity or core deposit
funding. At the same time, this analysis
is based on a small sample limited to
failures between 2010 and 2017. We
believe it is inappropriate to place a
2393
high degree of confidence in the results
of the analysis based on this limited
sample.
TABLE 6—THREE YEAR FAILURE PREDICTION MODELS FOR RECIPROCAL DEPOSITS
Variables
Intercept ...........................................................................................................
Non-reciprocal brokered deposits ....................................................................
Reciprocal deposits .........................................................................................
Equity ...............................................................................................................
Core deposits ...................................................................................................
Nonperforming loans .......................................................................................
Other real estate owned ..................................................................................
Income before taxes ........................................................................................
Interest expense ..............................................................................................
Asset growth ....................................................................................................
CRE loans ........................................................................................................
C&D loans ........................................................................................................
C&I loans .........................................................................................................
Consumer loans ...............................................................................................
CAMELS 3 .......................................................................................................
CAMELS 4 or 5 ...............................................................................................
Pseudo R2 .......................................................................................................
Wald Chi2 ........................................................................................................
No. of observations ..........................................................................................
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
(1)
(2)
(3)
(4)
*** ¥7.053
[0.000]
*** 0.023
[0.001]
¥0.015
[0.544]
........................
........................
........................
........................
*** 0.190
[0.000]
*** 0.086
[0.001]
*** ¥0.090
[0.000]
¥0.018
[0.499]
** 0.009
[0.037]
0.0002
[0.979]
*** 0.035
[0.004]
0.007
[0.534]
¥0.014
[0.484]
*** 1.772
[0.000]
*** 3.730
[0.000]
0.543
867
21225
*** ¥2.995
[0.000]
0.014
[0.128]
¥0.028
[0.349]
*** ¥0.508
[0.000]
........................
........................
*** 0.142
[0.000]
0.040
[0.210]
** ¥0.097
[0.026]
*** 0.419
[0.000]
*** 0.021
[0.000]
0.0007
[0.929]
*** 0.047
[0.001]
0.022
[0.111]
¥0.030
[0.599]
*** 1.498
[0.000]
*** 2.101
[0.000]
0.633
733
21225
* ¥9.289
[0.069]
*** 0.033
[0.001]
0.001
[0.978]
........................
........................
0.019
[0.515]
*** 0.184
[0.000]
** 0.075
[0.030]
*** ¥0.092
[0.000]
0.561
[0.746]
0.014
[0.388]
¥0.0007
[0.923]
*** 0.034
[0.007]
0.012
[0.589]
¥0.026
[0.506]
*** 1.772
[0.000]
*** 3.576
[0.000]
0.545
838
21225
¥1.602
[0.137]
¥0.003
[0.836]
¥0.040
[0.181]
*** ¥0.520
[0.000]
** ¥0.019
[0.033]
*** 0.142
[0.000]
0.042
[0.182]
** ¥0.101
[0.028]
* 0.359
[0.078]
*** 0.020
[0.000]
0.001
[0.890]
*** 0.046
[0.001]
0.021
[0.121]
¥0.025
[0.632]
*** 1.501
[0.000]
*** 2.087
[0.000]
0.634
744
21225
amozie on DSK3GDR082PROD with PROPOSALS3
Notes:
1 Using year-end Call Reports from 2009, 2012, and 2015 to predict 363 failures from 2010 to 2017.
2 Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured brokered deposits.
3 All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating 4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the institution is CAMELS 3-rated and the institution is CAMELS 4
or 5-rated, respectively. Asset Growth is the institution’s one-year asset growth rate.
4 The regressions include time fixed effects, but the coefficient estimates are not reported.
5 Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5 percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in brackets.
Failure Loss Rate Models Including
Reciprocal Deposits
In this section, we examine whether
banks’ reliance on reciprocal brokered
deposits are associated with differential
failure loss rates. Again, data on
reciprocal brokered deposits limits the
sample to banks that failed between July
2009 and December 2017.79
Failed bank loss rates are modeled as
a function of the income and balance
sheet characteristics of the failed bank.
The explanatory variables included in
the model are reciprocal deposits, nonreciprocal brokered deposits, equity,
core deposits, nonperforming loans,
other real estate owned, income earned
but not collected, and loans to executive
officers. In addition, we include a
bank’s concentration in CRE
(commercial real estate), C&D
(construction and development), C&I
(commercial and industrial), and
consumer loans. The model allows loss
rates to differ for small (asset size $500
million or less), medium (asset size
between $500 million to $1 billion), and
large (asset size $1 billion and higher)
banks. The year fixed-effects are added
to capture any difference in
unconditional loss rates across years.
Call Report/TFR data are from the last
quarter before the bank failure date.80
79 The Loss rate model is based on 457 failures
instead of 458 as reported in Table 5. One
institution was excluded from loss rate model
estimation because of abnormality in its last Call
Report data. Namely, its core deposits to assets ratio
was higher than 100%.
80 There are some banks in the sample that have
not filed Call Reports/TFRs on the quarter prior to
its failure. For those banks, we use Call Reports/
TFRs as of two quarters prior to failure.
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2394
Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
TABLE 7—LOSS RATE MODELS INCLUDING RECIPROCAL BROKERED DEPOSITS
Variable
Intercept ...........................................................................................................
Non-reciprocal brokered deposits ....................................................................
Reciprocal deposits .........................................................................................
Equity ...............................................................................................................
Core deposits ...................................................................................................
Nonperforming loans .......................................................................................
Other real estate owned ..................................................................................
Income earned but not collected .....................................................................
Loan to executive officers ................................................................................
Bank size between $500 mil–$1 bil .................................................................
Bank size > $1 billion ......................................................................................
CRE loans ........................................................................................................
C&D loans ........................................................................................................
C&I loans .........................................................................................................
Consumer loans ...............................................................................................
Adjusted R2 ......................................................................................................
No. of observations ..........................................................................................
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
(1)
(2)
(3)
(4)
*** 11.754
[0.000]
* 0.092
[0.090]
¥0.253
[0.448]
........................
........................
........................
........................
*** 0.502
[0.000]
*** 0.827
[0.000]
*** 6.453
[0.000]
0.041
[0.915]
*** ¥6.063
[0.000]
*** ¥8.686
[0.000]
0.018
[0.695]
0.123
[0.103]
** 0.162
[0.043]
** 0.705
[0.013]
0.315
457
*** 13.479
[0.000]
* 0.095
[0.073]
¥0.230
[0.483]
*** ¥0.738
[0.000]
........................
........................
*** 0.415
[0.000]
*** 0.783
[0.000]
*** 6.361
[0.000]
¥0.074
[0.844]
*** ¥5.905
[0.000]
*** ¥8.305
[0.000]
0.027
[0.549]
* 0.137
[0.065]
* 0.138
[0.079]
*** 0.758
[0.007]
0.341
457
0.551
[0.890]
*** 0.262
[0.000]
¥0.131
[0.694]
........................
........................
*** 0.168
[0.001]
*** 0.467
[0.000]
*** 0.801
[0.000]
*** 6.276
[0.000]
0.020
[0.958]
*** ¥5.526
[0.001]
*** ¥7.151
[0.000]
0.013
[0.780]
* 0.134
[0.073]
* 0.151
[0.056]
** 0.702
[0.012]
0.332
457
5.101
[0.220]
*** 0.218
[0.003]
¥0.145
[0.658]
*** ¥0.623
[0.001]
** 0.121
[0.016]
*** 0.404
[0.000]
*** 0.771
[0.000]
*** 6.247
[0.000]
¥0.071
[0.848]
*** ¥5.540
[0.001]
*** ¥7.253
[0.000]
0.022
[0.628]
* 0.143
[0.053]
* 0.134
[0.087]
*** 0.747
[0.007]
0.348
457
amozie on DSK3GDR082PROD with PROPOSALS3
Notes:
1 Estimates use data from 2009 to 2017 to predict 457 failure loss rates from July 2, 2009 to December 15, 2017.
2 Core deposits are defined as domestic deposits minus time deposits over the insurance limit and fully insured brokered deposits.
3 All financial variables are normalized by total assets with the exception of Bank size between $500 mil–$1 bil and Bank size > $1billion. Bank
size between $500 mil–$1 bil is a dummy variable indicating that the institution’s asset size is between $500 million and $1 billion. Bank size >
$1billion is a dummy variable indicating that the institution’s asset size is over $1 billion.
4 The regressions include year fixed effects, but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5 percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in brackets.
Table 7 reports the results of the
failure loss rate model. Column (1) of
Table 7 shows that higher
nonperforming loans and other real
estate owned are associated with higher
loss rates. Banks with higher C&I and
consumer loans (to assets ratios also
tend to have higher loss rates. Mediumsized and large failed banks tend to have
lower loss rates compared to small
banks.
In the specification reported in
Column (1), reciprocal deposits and
non-reciprocal brokered deposits ratios
are included. The estimated coefficients
for reciprocal deposits and nonreciprocal brokered deposits ratios
measure the effect of increases in these
ratios and an offsetting reduction in
other funding sources on the loss rate.
The positive and statistically significant
coefficient on non-reciprocal brokered
deposits suggests that an increase in
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non-reciprocal brokered deposits (and
an offsetting decrease in other funds
either equity or other liabilities)
increases the DIF loss rate. The
coefficient on reciprocal deposits ratio
is not statistically significant.
Column (2) of Table 7 reports results
when the failed bank’s equity ratio is
also included as an explanatory
variable. The positive and statistically
significant coefficient on non-reciprocal
brokered deposits ratio suggests that
increasing reliance on non-reciprocal
brokered deposits, holding bank equity
constant and reducing liabilities other
than reciprocal deposits, increases the
DIF loss rate. The estimated coefficient
on reciprocal deposits ratio remains
statistically insignificant. The negative
and statistically significant coefficient
on the equity ratio suggests that
increasing equity and decreasing a
bank’s reliance on other liabilities with
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no change in non-reciprocal brokered
and reciprocal deposits reduces the loss
rate.
Column (3) of Table 7 reports results
when the reciprocal deposits, nonreciprocal brokered deposits, and core
deposits ratios are included as funding
measures. The estimated coefficient on
non-reciprocal brokered deposits ratio is
positive and statistically significant
suggesting that, holding the reciprocal
deposits and core deposits ratios
constant, increasing non-reciprocal
deposits and decreasing other bank
liabilities and possibly equity, increases
the failure loss rate. Reciprocal deposits
are statistically insignificant.
Column (4) of Table 7 reports results
when the reciprocal deposits, nonreciprocal brokered deposits, equity,
and core deposits ratios are included as
funding measures. The estimated
coefficient on the non-reciprocal
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2395
brokered deposits ratio is positive and
statistically significant, suggesting that,
holding reciprocal deposits, equity, and
core deposits ratios constant, increasing
non-reciprocal deposits and decreasing
other bank liabilities increases the
failure loss rate.
The results reported in Table 7 do not
suggest that the use of reciprocal
deposits have been associated with
higher loss rates on average while nonreciprocal brokered deposits clearly
have a strong relationship with FDIC
losses. At the same time, the sample size
is small and specialized to the crisis.
Unlike the full brokered deposit sample
results (reported in an early section) and
FDIC practical resolution experience,
core deposits do not clearly reduce FDIC
losses. While the reasons for this
difference in findings are beyond the
scope of this analysis, it is likely that
they owe in part to the intensive FDIC
resolution activity in this sample period
with heavy reliance on loss sharing
agreements. There were an unusually
large number of bank franchises
available through the FDIC resolution
process at a time when franchise values
may also have been depressed due to
unusually weak opportunities for
profitable lending growth. These issues
raise concerns that the limited data in
reciprocal deposit sample may not be
representative of the characteristics of
the true failure population. On balance,
we believe it is inappropriate to place a
high degree of confidence in the results
of the analysis of this limited and
potentially unrepresentative sample
period.
In this section, we investigate what
type of banks use reciprocal deposits. In
particular, we analyze the financial
health of these banks by looking at their
CAMELS ratings. We identify banks
with positive reciprocal deposits on
their balance sheet. We investigate the
relationship between CAMELS ratings
and the use of reciprocal brokered
deposits. During the crisis, in 2009 and
2010, banks with reciprocal deposits
made up higher percentages of banks
with a 3, 4, or 5 composite CAMELS
rating. Banks with reciprocal deposits
made up a smaller share of banks with
a 1 CAMELS rating. By 2011, banks with
reciprocal deposits made up higher
percentages of banks with a 2 or 3
CAMELS rating, although the share
banks with reciprocal deposits and a 4
or 5 CAMELS rating was still higher
than the share with a 1 CAMELS rating.
In 2017, banks with reciprocal deposits
made up higher percentages of banks
with a 1 or 2 CAMELS rating.
Figure 3 charts the percentages of
banks with positive reciprocal deposits
for each rating category as of December
2017. For instance, 19.35% of all banks
with CAMELS rating of 1 had reciprocal
deposits in December 2017. A
substantially lower share, 6.56% of 4
rated banks and 9.68% of 5 rated banks
had reciprocal deposits.
Analysis of Listing Services Deposits
brokered listing service deposit funds
beginning March 2011.
Table 8 reports the distribution of
different listing service deposit ratios by
Call Report date. The first panel of Table
8 reports the distribution of different
listing service deposit ratios (total
listing service deposits relative to total
assets, total domestic deposits, and total
brokered deposits) for December 2011.
Row (3) reports the distribution of the
ratios of listing service deposits to total
brokered deposits, among banks that
reported non-zero brokered deposits.
Across the available Call Report filing
dates, the average bank’s reliance on
In this section we use the available
data to analyze non-brokered listing
service deposit use patterns and the
effects of listing service deposits on the
probability of bank failure and DIF loss
rates. Banks began reporting non-
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CAMELS Ratings of Banks Using
Reciprocal Deposits
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listing service deposits shows a stable
trend. The mean total listing service to
assets ratio in December 2017 was
1.18% which was similar to 1.36% in
December 2011. In December 2017, the
average listing service deposit to total
brokered deposit ratio was much higher
at 1197.21.
TABLE 8—DISTRIBUTION OF LISTING DEPOSITS AS A RATIO OF ASSETS AND DOMESTIC DEPOSITS BY CALL REPORT DATE
N
Max
99th
95th
90th
Med
Mean
December 2011
(1) ................
(2) ................
(3) ................
Listing services deposits/Assets ................
Listing services deposits/Total Domestic
Deposits.
Listing services deposits/Total Brokered
Deposits.
7366
7364
85.89
100.00
23.18
28.11
9.57
11.18
3.56
4.34
0
0
1.36
1.61
3015
86730
4089.05
514.81
173.12
0
239.09
December 2017
(1) ................
(2) ................
(3) ................
Listing services deposits/Assets ................
Listing services deposits/Total Domestic
Deposits.
Listing services deposits/Total Brokered
Deposits.
Listing Service Deposit Usage at Failed
Banks
In this section, we examine the extent
to which failed banks relied on nonbrokered listing service deposits.
Because of data limitations on listing
service deposits, the analysis includes
only banks that failed between April 8,
2011 and December 15, 2017. During
this period, 180 banks failed.
Table 9 reports number (percentage in
parenthesis) of failed banks that
5679
5678
45.92
97.71
19.69
25.43
7.71
9.66
3.48
4.35
0
0
1.18
1.49
2527
2550800
1627.28
281.10
122.34
0
1197.21
reported positive listing service deposits
on their balance sheet prior to their
failure. In this table, data are analyzed
according to the Call Report data
reported a selected number of quarters
before the bank failure date. Listing
service deposits were first reported on
Call Reports in March 2011. We are
limited to 63 failures, which failed
between January 2013 and December
2017, to have 8 quarters of Call Report
data with listing service deposit
information. In contrast, there are 180
failures, which failed between April
2011 to December 2017, with 1 quarter
of Call Report data with listing service
deposit information.
The data suggest a number of
consistent patterns. Somewhere
between 60 and 65 percent of the failed
banks used listing service deposits for at
least 8 quarters before they failed. There
is also evidence that suggests that some
of these failed banks increased use of
listing service deposits in the quarters
leading up to their failure.
TABLE 9—LISTING DEPOSITS USAGE IN FAILED BANKS BY QUARTER BEFORE FAILURE
8
7
6
5
4
3
2
1
Number of quarters before failure
Number of
observations
Number of banks
with positive listing
deposits reported
(%)
(1)
(2)
(3)
..........................................................................................................................................................................................................
..........................................................................................................................................................................................................
..........................................................................................................................................................................................................
..........................................................................................................................................................................................................
..........................................................................................................................................................................................................
..........................................................................................................................................................................................................
..........................................................................................................................................................................................................
..........................................................................................................................................................................................................
63
71
83
98
114
132
158
180
40
44
51
62
72
85
108
116
(63.49)
(61.97)
(61.45)
(63.27)
(63.16)
(64.39)
(68.35)
(64.44)
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Notes:
1 Based on 180 failures between April 8, 2011 and December 15, 2017. All failures are after March 2011 when the listing services deposits were first reported on
the Call Reports.
Figure 4 graphs the failing banks’
listing service deposits to assets ratio
prior to failure, based on 180 failures
between April 8, 2011, and December
15, 2017. The median listing service
deposits ratio increases from
approximately 4% at 5 quarters before
failure to just over 5% at 1 quarter
before failure. The listing service
deposit ratios at the 90th percentile of
the distribution (the failed banks most
reliant on listing service deposits)
increased from about 26% at 5 quarters
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before failure to 33% at 1 quarter before
failure, which shows an increase of
listing service deposit usage as banks
approach failure.
Figure 5 graphs the failing banks’
usage of listing service deposits (as a
percentage of assets) prior to failure,
based on 63 failures between January
11, 2013 and December 15, 2017. This
time frame incorporates banks that
failed and had at least 8 quarters of data
on listing service deposits. Figure 5
shows that the median bank usage of
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listing service deposits remains
relatively stable as the banks approach
failure. In contrast, those banks most
reliant on listing service deposits (the
90th percentile of the distribution),
show an initial increase in listing
service deposits as the banks approach
failure.81
81 Given the small sample size involved in this
analysis, it is inappropriate to draw strong overall
conclusions regarding the behavior of listing service
deposits balances at failing banks. Moreover, since
all weak banks do not fail, the behavior of listing
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Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
2397
Figure 4
Distribution of Listing Services Deposits to Total Assets Ratio in the Quarters Prior to
Failure
,~~~··~·~·-~······~····~-~······-···············~·--
-~-~·--·-~···················~··············~·····~·-·······~·-~·····-·~··~·~-·--·~·-·--·-········-·-··-·············-~·-··-····
35
30
25
"'
"'
~
.,.- .,.---
.....
---
..,_ -
-+
Qj
....0
20
~
• p90 Listing Deposits
Ill
1-
~ p50
15
0
"*'
Listing Deposits
- ,._ P10 Listing Deposits
10
5
0
.
•
5
-==
..
4
•
-
--
•
===--~·~·
. -----·-----...
3
2
,_=
1
Notes:
Based on 180 failures between April 8, 2011 and December 15, 2017. All failures are
after March 2011 when the listing services deposits were first reported on the Call
Reports.
service deposit funding at weak banks (not analyzed
in this memo) could also inform the regulatory
debate about safety and soundness issues associated
with listing service deposit usage.
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Failure Prediction and Listing Service
Deposits
We estimate three-year failure
prediction models using 2011 and 2014
data to predict failures between 2012
and 2017. We estimate failure models as
a function of non-brokered listing
service deposits and non-listing, nonbrokered deposits. Table 10 reports the
estimated coefficients and p-values of
the logistic regressions.
In the failure model specification
reported in Column (1) of Table 10, only
the listing service deposits ratio is
included to characterize a bank’s
liability structure. Column (1) of Table
10 reports that the listing service
deposits ratio has a positive and
statistically significant effect on a bank’s
estimated probability of failure.
Because we measure the banks’
liability components as ratios, as a bank
increases its use of listing service
deposits, there are necessarily offsetting
changes in the bank’s other funding
sources. By including other funding
measures in the models, we investigate
whether the implicit shift in a bank’s
liability structure (as a bank increases
its dependence on listing service and
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other non-listing, non-brokered
deposits) is a possible source of the
increase in failure probability.
Column (2) of Table 10 reports the
results of the failure probability model
when we include a bank’s equity to
asset ratio to control for bank leverage.
By including the equity ratio in the
model, the coefficient estimates on
listing service deposits measure the
effect of increasing a bank’s reliance on
this deposit source and decreasing its
reliance on other liabilities, holding the
bank’s equity ratio unchanged. The
estimated coefficient on the listing
service deposits ratio becomes
statistically insignificant when equity is
held constant.
Column (3) of Table 10 reports the
failure model estimates when the model
includes a bank’s listing service
deposits and non-listing, non-brokered
deposits. In this specification, the
estimated coefficient on the listing
deposits ratio measures the effect of
increasing listing deposits, holding
constant non-listing, non-brokered
deposits and reducing other bank
liabilities. The estimated coefficient on
listing service deposits is positive and
statistically significant. Moreover, the
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estimated coefficient on non-listing,
non-brokered deposits is positive and
statistically significant. To the extent
that non-listing, non-brokered deposits
is a measure of banks’ core deposits, this
result differs from those reported in
Tables 1 and 2 based on a dataset with
longer bank failure experiences. Column
(4) of Table 10 reports the failure model
estimates when the model includes a
bank’s listing deposits, non-listing nonbrokered deposits, and equity ratios. In
this specification, the estimated
coefficient on the listing deposits ratio
measures the effect of increasing listing
deposits, holding constant non-listing
non-brokered deposits and equity, and
reducing other bank liabilities. The
coefficient of listing deposits becomes
statistically insignificant. The
coefficient of non-listing, non-brokered
deposits is no longer statistically
significant when the equity ratio is held
constant.
This analysis is based on a small
sample limited to failures between 2012
and 2017. We believe it is inappropriate
to place a high degree of confidence in
the results of the analysis based on this
limited sample.
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2399
TABLE 10—THREE YEAR FAILURE PREDICTION MODELS INCLUDING LISTING SERVICES DEPOSITS
Variables
Intercept ............................................................................................................................................
Listing services deposits ...................................................................................................................
Equity ................................................................................................................................................
Non-listing, non-brokered deposits ...................................................................................................
Nonperforming loans .........................................................................................................................
Other real estate owned ...................................................................................................................
Income before taxes .........................................................................................................................
Interest expense ................................................................................................................................
Asset growth .....................................................................................................................................
CRE loans .........................................................................................................................................
C&D loans .........................................................................................................................................
C&I loans ...........................................................................................................................................
Consumer loans ................................................................................................................................
CAMELS 3 ........................................................................................................................................
CAMELS 4 or 5 .................................................................................................................................
Pseudo R2 ........................................................................................................................................
Wald Chi2 ..........................................................................................................................................
N ........................................................................................................................................................
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
Coefficient
estimates
(1)
(2)
(3)
(4)
*** ¥8.068
[0.000]
** 0.021
[0.025]
........................
........................
........................
........................
*** 0.137
[0.000]
*** 0.088
[0.002]
*** ¥0.256
[0.002]
0.394
[0.146]
¥0.005
[0.687]
¥0.011
[0.335]
¥0.009
[0.693]
0.008
[0.734]
0.007
[0.872]
0.941
[0.274]
*** 3.656
[0.000]
0.500
*** 259
13,857
*** ¥2.929
[0.000]
0.013
[0.248]
*** ¥0.537
[0.000]
........................
........................
*** 0.124
[0.001]
* 0.065
[0.064]
** ¥0.218
[0.008]
** 0.728
[0.024]
0.002
[0.890]
¥0.022
[0.104]
¥0.017
[0.548]
0.036
[0.164]
¥0.004
[0.959]
0.643
[0.382]
*** 1.459
[0.008]
0.609
*** 374
13,857
*** ¥15.281
[0.000]
*** 0.109
[0.000]
........................
........................
*** 0.087
[0.000]
*** 0.138
[0.000]
* 0.054
[0.066]
*** ¥0.310
[0.000]
*** 0.668
[0.000]
¥0.002
[0.858]
¥0.019
[0.151]
0.0001
[0.996]
0.011
[0.649]
¥0.018
[0.799]
0.790
[0.313]
*** 3.170
[0.000]
0.526
*** 287
13,857
** ¥4.416
[0.019]
0.028
[0.215]
*** ¥0.519
[0.000]
0.015
[0.456]
*** 0.125
[0.001]
0.059
[0.101]
*** ¥0.222
[0.006]
*** 0.861
[0.001]
0.003
[0.835]
¥0.023
[0.102]
¥0.015
[0.584]
0.036
[0.165]
¥0.007
[0.929]
0.650
[0.373]
*** 1.449
[0.009]
0.609
*** 377
13,857
Notes:
1 Using year-end Call Reports 2011 and 2014 to predict 113 failures between 2012 and 2017.
2 Listing services deposits are defined as estimated amount of deposits obtained through the use of deposit listing services that are not brokered.
3 Non-listing, non-brokered deposits are defined as domestic deposits minus listing service deposits and brokered deposits.
4 All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating 4 or 5, and Asset Growth. CAMELS rating 3 and
CAMELS rating 4 or 5 are dummy variables indicating that the institution is CAMELS 3-rated and the institution is CAMELS 4 or 5-rated, respectively. Asset Growth is
the institution’s one-year asset growth rate.
5 The regressions include time fixed effects, but the coefficient estimates are not reported.
6 Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5 percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in brackets.
Failure Loss Rate Models Including
Listing Service Deposits
In this section, we examine whether
banks’ reliance on listing service
deposits are associated with differential
failure loss rates. Data on listing
deposits limits the sample to banks that
failed between April 8, 2011, and
December 15, 2017.
Failed bank loss rates are modeled as
a function of the income and balance
sheet characteristics of the failed bank.
The explanatory variables included in
the model are listing service deposits,
non-listing, non-brokered deposits,
equity, nonperforming loans, other real
estate owned, income earned but not
collected, and loans to executive
officers. In addition, we include a
bank’s concentration in CRE
(commercial real estate), C&D
(construction and development), C&I
(commercial and industrial), and
consumer loans. The model allows loss
rates to differ for small (asset size $500
million or less), medium (asset size
between $500 million to $1 billion), and
large (asset size $1 billion and higher)
banks. The year fixed-effects are added
to capture any difference in
unconditional loss rates across years.
Call Report/TFR data are from the last
quarter before the bank failure date.
TABLE 11—LOSS RATE MODELS INCLUDING LISTING DEPOSITS
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Variable
Intercept ............................................................................................................................................
Listing Services Deposits ..................................................................................................................
Equity ................................................................................................................................................
Non-listing, non-brokered deposits ...................................................................................................
Nonperforming loans .........................................................................................................................
Other real estate owned ...................................................................................................................
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Coefficient
estimate
Coefficient
estimate
Coefficient
estimate
Coefficient
estimate
(1)
(2)
(3)
(4)
*** 11.256
[0.001]
** 0.103
[0.029]
........................
........................
........................
........................
** 0.273
[0.021]
*** 0.528
*** 11.920
[0.001]
* 0.092
[0.053]
¥0.359
[0.247]
........................
........................
** 0.254
[0.033]
*** 0.520
¥1.982
[0.813]
** 0.259
[0.012]
........................
........................
* 0.149
[0.086]
** 0.296
[0.012]
* 0.507
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¥0.231
[0.979]
** 0.237
[0.026]
¥0.269
[0.391]
0.135
[0.126]
** 0.280
[0.020]
*** 0.503
2400
Federal Register / Vol. 84, No. 25 / Wednesday, February 6, 2019 / Proposed Rules
TABLE 11—LOSS RATE MODELS INCLUDING LISTING DEPOSITS—Continued
Variable
Income earned but not collected ......................................................................................................
Loan to executive officers .................................................................................................................
Bank size $500 mil–$1 billion ...........................................................................................................
Bank size > $1 billion ........................................................................................................................
CRE loans .........................................................................................................................................
C&D loans .........................................................................................................................................
C&I loans ...........................................................................................................................................
Consumer loans ................................................................................................................................
Adjusted R2 .......................................................................................................................................
No. of observations ...........................................................................................................................
Coefficient
estimate
Coefficient
estimate
Coefficient
estimate
Coefficient
estimate
(1)
(2)
(3)
(4)
[0.000]
*** 13.242
[0.000]
¥0.265
[0.617]
¥4.117
[0.126]
* ¥5.854
[0.089]
¥0.030
[0.607]
0.052
[0.720]
0.101
[0.379]
0.330
[0.437]
0.193
180
[0.000]
*** 13.167
[0.000]
¥0.287
[0.588]
¥3.924
[0.145]
* ¥5.773
[0.094]
¥0.025
[0.668]
0.052
[0.720]
0.096
[0.405]
0.359
[0.398]
0.195
180
[0.001]
* 13.802
[0.000]
¥0.180
[0.733]
¥2.638
[0.347]
¥4.358
[0.217]
¥0.034
[0.558]
0.006
[0.965]
0.105
[0.360]
0.242
[0.568]
0.203
180
[0.001]
*** 13.692
[0.000]
¥0.205
[0.699]
¥2.633
[0.348]
¥4.439
[0.209]
¥0.030
[0.608]
0.011
[0.941]
0.100
[0.381]
0.272
[0.524]
0.202
180
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Notes:
1 Estimates based on data from March 2011 to September 2017 to predict loss rates of 180 failures from April 8, 2011 to December 15, 2017.
2 Listing services deposits are defined as estimated amount of deposits obtained through the use of deposit listing services that are not brokered.
3 Non-listing, non-brokered deposits are defined as domestic deposits minus listing service deposits and brokered deposits.
4 All financial variables are normalized by total assets with the exception of Bank size between $500 mil–$1 bil and Bank size > $1 billion. Bank size between $500
mil–$1 bil is a dummy variable indicating that the institution’s asset size is between $500 million and $1 billion. Bank size > $1 billion is a dummy variable indicating
that the institution’s asset size is over $1 billion.
5 Failure year fixed effects are included but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5 percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in brackets.
Table 11 reports the results of the
failure loss rate model. Column (1) of
Table 11 shows that higher
nonperforming loans, other real estate
owned, and income earned but not
collected are associated with higher loss
rates. Large failed banks tend to have
lower loss rates compared to small
banks.
In the specification reported in
Column (1), the listing service deposits
ratio is included. The estimated
coefficient for the listing service
deposits ratio measures the effect of an
increase in this ratio and an offsetting
reduction in other funding sources on
the loss rate. The positive and
statistically significant coefficient on
listing service deposits suggests that an
increase in listing service deposits (and
an offsetting decrease in other funds
either equity or other liabilities)
increases the DIF loss rate.
Column (2) of Table 11 reports results
when the failed bank’s equity ratio is
also included as an explanatory
variable. The positive and statistically
significant coefficient on the listing
service deposits ratio suggests that
increasing reliance on listing service
deposits, holding bank equity constant
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and reducing other liabilities, increases
the DIF loss rate. The estimated
coefficient on equity is not statistically
significant.
Column (3) of Table 11 reports results
when listing services deposits and nonlisting, non-brokered deposits ratios are
included as funding measures. The
estimated coefficient on listing services
deposits ratio remains positive and
statistically significant suggesting that,
holding the non-listing, non-brokered
deposits ratios constant, increasing
listing services deposits and decreasing
other bank liabilities and possibly
equity, increases the failure loss rate.
Column (4) of Table 11 reports results
when the listing services deposits, nonlisting non-brokered deposits, and
equity ratios are included as funding
measures. The estimated coefficient on
the listing services deposits ratio is
positive and statistically significant,
suggesting that, holding non-listing nonbrokered deposits and equity ratios
constant, increasing listing services
deposits and decreasing other bank
liabilities increases the failure loss rate.
An unexpected result is that equity
remains statistically insignificant in
reducing DIF loss rates. The non-listing,
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non-brokered deposits ratio also
becomes statistically insignificant.
The results reported in Table 11
suggest that the use of listing service
deposits are associated with higher loss
rates on average. At the same time, the
sample size is small and specialized to
the failures from 2012 to 2017. Unlike
the full brokered deposit sample results
(reported in an early section) and FDIC
practical resolution experience, equity
does not clearly reduce FDIC losses.82
Dated at Washington, DC, on December 18,
2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie Best,
Assistant Executive Secretary.
[FR Doc. 2018–28273 Filed 2–5–19; 8:45 am]
BILLING CODE 6714–01–P
82 The limited data in listing service deposit
sample may not be representative of the
characteristics of the true failure population. On
balance, we believe it is inappropriate to place a
high degree of confidence in the results of the
analysis of this limited and potentially
unrepresentative sample period.
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]]>Agencies
[Federal Register Volume 84, Number 25 (Wednesday, February 6, 2019)]
[Proposed Rules]
[Pages 2366-2400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28273]
[[Page 2365]]
Vol. 84
Wednesday,
No. 25
February 6, 2019
Part III
Federal Deposit Insurance Corporation
-----------------------------------------------------------------------
12 CFR Part 337
Unsafe and Unsound Banking Practices: Brokered Deposits and Interest
Rate Restrictions; Proposed Rule
Federal Register / Vol. 84 , No. 25 / Wednesday, February 6, 2019 /
Proposed Rules
[[Page 2366]]
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 337
RIN 3064-AE94
Unsafe and Unsound Banking Practices: Brokered Deposits and
Interest Rate Restrictions
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Advance notice of proposed rulemaking and request for comment.
-----------------------------------------------------------------------
SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is
undertaking a comprehensive review of the regulatory approach to
brokered deposits and the interest rate caps applicable to banks that
are less than well capitalized. Since the statutory brokered deposit
restrictions were put in place in 1989, and amended in 1991, the
financial services industry has seen significant changes in technology,
business models, and products. In addition, changes to the economic
environment have raised a number of issues relating to the interest
rate restrictions. A key part of the FDIC's review is to seek public
comment through this Advance Notice of Proposed Rulemaking (ANPR) on
the impact of these changes. The FDIC will carefully consider comments
received in response to this ANPR in determining what actions may be
warranted.
DATES: Comments must be received by the FDIC no later than May 7, 2019.
ADDRESSES: You may submit comments on the notice of proposed rulemaking
using any of the following methods:
Agency Website: https://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the agency
website.
Email: comments@fdic.gov. Include RIN 3064-AE94 on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street NW Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Public Inspection: All comments received, including any
personal information provided, will be posted generally without change
to https://www.fdic.gov/regulations/laws/federal.
FOR FURTHER INFORMATION CONTACT: Legal Division--Thomas Hearn, Counsel,
(202) 898-6967; thohearn@fdic.gov; Vivek V. Khare, Counsel, (202) 898-
6847, vkhare@fdic.gov; Division of Risk Management Supervision--Thomas
F. Lyons, Chief, Policy and Program Development, (202) 898-6850,
tlyons@fdic.gov; Judy Gross, Senior Policy Analyst, (202) 898-7047,
jugross@fdic.gov; Division of Insurance and Research--Ashley Mihalik,
Chief, Banking and Regulatory Policy, (202) 898-3793,
amihalik@fdic.gov.
SUPPLEMENTARY INFORMATION:
I. Policy Objectives
The policy objective of this ANPR is to obtain input from the
public as the FDIC comprehensively reviews its brokered deposit and
interest rate regulations in light of significant changes in
technology, business models, the economic environment, and products
since the regulations were adopted. The FDIC is inviting comment on all
aspects of the brokered deposit and interest rate regulations.
To facilitate comment, the remainder of this ANPR has been
structured in the following manner: (II) Brokered Deposits and Interest
Rate Restrictions, addressing (A) Current Law and Regulations, (B)
History and Research, (C) Brokered Deposit Issues, (D) Interest Rate
Issues; (III) Requests for Comment; and Appendices with additional
background and descriptive statistics.
II. Brokered Deposits and Interest Rate Restrictions
Brokered and high-rate deposits became a concern among bank
regulators and Congress before any statutory restrictions were put in
place. This concern arose because: (1) Such deposits could facilitate a
bank's rapid growth in risky assets without adequate controls; (2) once
problems arose, a problem bank could use such deposits to fund
additional risky assets to attempt to ``grow out'' of its problems, a
strategy that ultimately increased the losses to the deposit insurance
fund when the institution failed; and (3) brokered and high-rate
deposits were sometimes volatile because deposit brokers (on behalf of
customers), or the customers themselves, were often drawn to high rates
and were prone to leave the bank when they found a better rate or they
became aware of problems at the bank.
Before proceeding further, it should be noted that, historically,
most institutions that use brokered and higher-rate deposits have done
so in a prudent manner and appropriately measure, monitor, and control
risks associated with brokered deposits. Moreover, well-capitalized
institutions are not subject to restrictions on accepting brokered
deposits or setting interest rates. Nonetheless, the FDIC also
recognizes that institutions sometimes are concerned that the use of
brokered deposits can have other regulatory consequences, such as
implications for deposit insurance pricing in certain circumstances, or
may be viewed negatively by investors or other stakeholders.
A. Current Law and Regulations
Section 29 of the Federal Deposit Insurance Act (FDI Act), titled
``Brokered Deposits,'' was originally added to the FDI Act by the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA). The law originally restricted troubled institutions (not
meeting their minimum capital requirements at the time) from (1)
accepting deposits from a deposit broker without a waiver and (2)
soliciting deposits by offering rates of interest on deposits that were
significantly higher than the prevailing rates of interest on deposits
offered by other insured depository institutions (or ``IDIs'') having
the same type of charter in such depository institution's normal market
area.\1\
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\1\ See Public Law 101-73, August 9, 1989, 103 Stat. 183.
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Two years later, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), which added the Prompt
Corrective Action (PCA) capital regime to the FDI Act and also amended
the threshold for the brokered deposit and interest rate restrictions
from a troubled institution to a bank falling below the ``well
capitalized'' PCA level. At the same time, the FDIC was authorized to
waive the brokered deposit restrictions for a bank that is adequately
capitalized upon a finding that the acceptance of such deposits does
not constitute an unsafe or unsound practice with respect to the
institution.\2\ FDICIA did not authorize the FDIC to waive the brokered
deposit restrictions for less than adequately capitalized institutions.
Most recently, earlier this year, Section 29 of the FDI Act was amended
as part of the Economic Growth, Regulatory Relief, and Consumer
Protection Act, to except a capped amount of certain reciprocal
deposits from treatment as brokered deposits.\3\
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\2\ See Public Law 102-242, December 19, 1991, 105 Stat. 2236.
\3\ The statute was amended 1994 as part of the Riegle Community
Development and Regulatory Improvement Act of 1994. The changes were
generally technical to ensure that the interest rate restrictions
under Section 29(g)(3) were consistent with the PCA framework, among
other things. See Public Law 103-325, September 23, 1994, 108 Stat.
2160.
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[[Page 2367]]
Section 337.6 of the FDIC's Rules and Regulations implements and
closely tracks the statutory text of Section 29, particularly with
respect to the definition of ``deposit broker'' and its exceptions.\4\
Section 29 of the FDI Act does not directly define a ``brokered
deposit,'' rather, it defines a ``deposit broker'' for purposes of the
restrictions.\5\ Thus, the meaning of the term ``brokered deposit''
turns upon the definition of ``deposit broker.''
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\4\ See 12 CFR 337.6. The FDIC issued two rulemakings related to
the interest rate restrictions under this section. A discussion of
those rulemakings, and the interest rate restrictions, is provided
in Section (II)(B) of this ANPR.
\5\ See 12 U.S.C. 1831f.
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Section 29 and the FDIC's implementing regulation define the term
``deposit broker'' to include:
(1) Any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured
depository institutions or the business of placing deposits with
insured depository institutions for the purpose of selling interests in
those deposits to third parties; and
(2) An agent or trustee who establishes a deposit account to
facilitate a business arrangement with an insured depository
institution to use the proceeds of the account to fund a prearranged
loan.
This definition is subject to the following nine statutory
exceptions:
(1) An insured depository institution, with respect to funds placed
with that depository institution;
(2) An employee of an insured depository institution, with respect
to funds placed with the employing depository institution; \6\
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\6\ The term ``employee'' is defined as ``any employee (A) who
is employed exclusively by the insured depository institution; (B)
whose compensation is primarily in the form of salary; (C) who does
not share such employee's compensation with a deposit broker; and
(D) whose office space or place of business is used exclusively for
the benefit of the insured depository institution which employs such
individual.''
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(3) A trust department of an insured depository institution, if the
trust in question has not been established for the primary purpose of
placing funds with insured depository institutions;
(4) The trustee of a pension or other employee benefit plan, with
respect to funds of the plan;
(5) A person acting as a plan administrator or an investment
adviser in connection with a pension plan or other employee benefit
plan provided that that person is performing managerial functions with
respect to the plan;
(6) The trustee of a testamentary account;
(7) The trustee of an irrevocable trust (other than one described
in paragraph (1)(B)), as long as the trust in question has not been
established for the primary purpose of placing funds with insured
depository institutions;
(8) A trustee or custodian of a pension or profit sharing plan
qualified under section 401(d) or 430(a) of the Internal Revenue Code
of 1986; or
(9) An agent or nominee whose primary purpose is not the placement
of funds with depository institutions.
As listed above, the statute includes nine exceptions to the
definition of ``deposit broker.'' The FDIC's regulations include the
following tenth exception: ``An insured depository institution acting
as an intermediary or agent of a U.S. government department or agency
for a government sponsored minority or women-owned depository
institution program (``MWODI'').\7\
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\7\ See 12 CFR 337.6(a)(5)(J). The exception was adopted by the
FDIC shortly after FDICIA was enacted in 1991, and the FDIC
indicated in the preamble for the final rule that implemented the
FDICIA revisions to section 29 that those revisions were not
intended to apply to deposits placed by insured depository
institutions assisting government departments and agencies in
administration of MWODI deposit programs. See 57 FR 23933, 23040
(1992).
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In addition to restricting the acceptance of brokered deposits by
less than well-capitalized IDIs, Section 29 of the FDI Act also
prohibits such IDIs from paying rates that significantly exceed their
normal market area or the national rate as established by the FDIC by
regulation. This provision was intended to prohibit ``the solicitation
of deposits by in-house salaried employees through so-called money-desk
operations.'' \8\ More specifically, the provision addressed a concern
that emerged during various legislative hearings that brokered deposit
restrictions could easily be circumvented by in-house solicitation of
high-rates.\9\ In implementing this legislative restriction, from 1989
to 2009, the FDIC pegged the national rate to comparable Treasury rates
in its regulation. However, the national rate calculation was changed
in 2009, pursuant to a notice-and-comment rulemaking, when yields on
Treasuries fell dramatically during the crisis, compressing the rate
caps. The FDIC moved to a simple average of rates paid by all banks and
branches that offer a specific product. This national rate data is
provided to the FDIC by a data-gathering company and is published
weekly on the FDIC's website. The history of the interest rate
restrictions and its associated issues are discussed more fully in
Section D.
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\8\ See H.R. Conf. Rep. No. 101-222, 101st Cong., 1st Sess. 402
(1989).
\9\ See ``Problems of the Federal Savings and Loan Insurance
Corporation: Hearings Before the Committee on Banking, Housing, and
Urban Affairs of the United States Senate,'' (part II) 101st Cong.,
1st Sess. 230-231 (1989).
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B. History and Research
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.\10\ Even as early as the 1970s, the
FDIC noted concerns about brokered deposits, as stated in the FDIC's
Division of Bank Supervision Manual--``The use of brokered deposits has
been responsible for abuses in banking and has contributed to some bank
failures, with consequent losses to the larger depositors, other
creditors, and shareholders.'' \11\
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\10\ History of the Eighties--Lessons for the Future, p. 119,
Federal Deposit Insurance Corporation December 1997 https://www.fdic.gov/bank/historical/history/.
\11\ FDIC, ``Division of Bank Supervision Manual,'' Section L,
page 3, November 1, 1973.
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However, the potential abuses associated with brokered deposits
received relatively little attention until the failure of Penn Square
Bank in 1982. This failure resulted in the largest bank payout of
insured deposits in the history of the FDIC up until that time.\12\
Brokered deposits allowed the bank to grow rapidly from $30 million in
assets in 1977 to $436 million in assets when it failed in 1982, with
much of the growth in high risk loans to small oil and gas
producers.\13\ In response to the rising use of brokered deposits and
data suggesting negative consequences, in April 1984 the FDIC and the
Federal Home Loan Bank Board (FHLBB) adopted a joint final rule
restricting pass through deposit insurance for deposits obtained
through a deposit broker.\14\ The agencies indicated that data showed
that institutions used brokered deposits to pursue rapid growth in
risky real estate-related lending without adequate controls and to
increase risky lending after problems arose. In January 1985, the Court
of Appeals for the District of Columbia Circuit ruled that the FDI Act
did not permit the FDIC to eliminate pass-through deposit insurance for
deposit brokers.\15\
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\12\ History of the Eighties--Lessons for the Future, p. 119,
Federal Deposit Insurance Corporation December 1997 https://www.fdic.gov/bank/historical/history/.
\13\ See id; see also, Belly Up: The Collapse of the Penn Square
Bank (1985), Chapter 9, Phillip L. Zweig.
\14\ See 49 FR 13003 (April 2, 1984).
\15\ FAIC Securities, Inc. v. United States, 768 F.2d 352 (D.C.
Cir. 1985).
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[[Page 2368]]
While the case was pending, and after the decision, Congressional
hearings regarding brokered deposits were held between 1984 and 1988
and, in 1989, as noted earlier, as part of FIRREA. Pursuant to these
hearings, Congress imposed restrictions on brokered deposits for
institutions that did not meet their minimum capital requirements and
later tied the restrictions to the PCA framework in 1991 through
FDICIA. Congress also imposed rate restrictions on institutions that
were less than well capitalized out of concern that institutions would
be able to circumvent brokered deposit restrictions by merely
advertising or otherwise offering very high rates. Since enactment of
Section 29, the FDIC has continued to study the role of brokered
deposits in the performance of banks, their impact on safety and
soundness, and the loss they impose on the Deposit Insurance Fund (DIF)
when a bank fails.
Brokered Deposit Usage and Relevant Data
From the 1960s up until 2000, brokered retail CDs and wholesale CDs
were the main type of brokered deposits used in the banking system.
Starting in the 1980s deposit listing services began generating
deposits for IDIs by advertising CD rates on behalf of institutions.
Beginning in 1999, broker-dealers first started to offer brokerage
customers an automatic sweep of their customers' idle funds to IDIs.
Beginning in 2003, a network was established through which banks
could place customer funds in time deposits at other banks and receive
time deposits in an equal amount of funds in return, such deposits
being referred to as ``reciprocal deposits.'' Similar services evolved
for money market deposit accounts (MMDAs).
As of September 30, 2018, insured depository institutions held $986
billion in brokered deposits, which amounted to 8.0 percent of the
$12.3 trillion in industry domestic deposits. These brokered deposits
were held by 2,221 insured depository institutions, representing 40.6
percent of the 5,477 total number of insured depository institutions.
Although 2,221 institutions held brokered deposits as of September
30, 2018, a significant portion of these deposits are concentrated in a
small number of institutions. One hundred institutions held 89.4
percent, or $881 billion, of the $986 billion brokered deposits in the
banking system, with five institutions accounting for 39.4 percent, or
$389 billion, of all brokered deposits. The remaining 2,121
institutions using brokered deposits account for the remaining $104
billion in brokered deposits.
Consistent with this concentration, among the 2,221 institutions
holding brokered deposits as of September 30, 2018, the median holding
was 4.7 percent of total domestic deposits, but 6 institutions held
brokered deposits in excess of 90 percent of total domestic deposits;
25 institutions held brokered deposits between 50 percent and 90
percent of total domestic deposits; and 79 institutions held brokered
deposits between 25 percent and 50 percent of total domestic deposits.
Brokered Deposits Held by Insured Depository Institutions as of September 30, 2018 \16\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
Total number banks with Total brokered Share of total Total domestic Share of total
Asset size group of banks brokered deposits brokered deposits domestic
deposits (billions) deposits (%) deposits (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Under $1 Billion........................................ 4,704 1,656 $31.92 3.2 $988.05 8.0
$1-10 Billion........................................... 635 439 90.16 9.1 1,349.56 11.0
$10-50 Billion.......................................... 97 89 171.87 17.4 1,605.40 13.0
Over $50 Billion........................................ 41 37 691.78 70.2 8,378.84 68.0
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All Banks........................................... 5,477 2,221 985.73 .............. 12,321.84 ..............
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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.
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\16\ Descriptive statistics detailing the historical holdings of
brokered deposits by bank size and PCA capital classification status
can be found in Appendix 1.
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Master Certificate of Deposits
Information about brokered deposits that the FDIC collects from
banks through the Call Report does not reflect certain elements of the
structure of the brokered deposit market. However, industry
participants have informed the FDIC that a sizable portion of reported
brokered deposits are wholesale Master Certificate of Deposits. These
instruments are held on the books of the issuing bank in the name of a
subsidiary of Depository Trust Corporation (DTC) as custodian for
deposit brokers who are often broker dealers. These broker dealers, in
turn, issue retail CDs, typically in denominations of $1,000, under the
Master Certificate of Deposit to their retail clients.
The retail customers' ownership interests in the brokered retail
CDs are reflected on the books of the deposit broker that issued them.
These Master Certificates of Deposits are reported by banks on Call
Report Schedule RC-E, Memoranda Item 1.c as deposits of $250,000 or
less even though issued in the name of DTC for more than $250,000 to
reflect the substance of the retail CDs issued under them. The FDIC,
however, has no Call Report information about what portion of reported
brokered deposits of $250,000 or less are Master Certificates of
Deposits as described above. In the event of a failure, the deposit
broker maintains records of the retail CDs held by its customers, and
these records would be submitted to the FDIC in order to make payments
on deposit insurance to the retail CD holders.
Sweep Deposits
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
[[Page 2369]]
purpose'' exception.\17\ Thus, the deposits placed on behalf of their
clients would not be brokered deposits.
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\17\ See FDIC Advisory Opinion No. 05-02 (2005).
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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.
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.
Reciprocal Deposits
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.
On May 24, 2018, the Economic Growth, Regulatory Reform, and
Consumer Protection Act took effect, allowing certain banks to except a
limited amount of reciprocal deposits (as defined by the Act) from
brokered deposits. Under the reciprocal deposit exception, well-
capitalized and well-rated institutions are not required to treat such
reciprocal deposits as brokered deposits up to the lesser of 20 percent
of its total liabilities, or $5 billion. Institutions that are not both
well capitalized and well rated may also exclude reciprocal deposits
from their brokered deposits under certain circumstances.
The immediate result of this Act has significantly reduced the
percentage of reciprocal deposits that are classified as brokered
deposits. As of March 30, 2018, the last reporting quarter before the
Act took effect, reciprocal deposits of $48.5 billion were reported. As
of June 30, 2018, the first quarter end after the Act took effect,
brokered reciprocal deposits had fallen to $17.1 billion. As of
September 30, 2018, brokered reciprocal deposits had fallen to $13.7
billion. For banks with assets less than $1 billion, their percentage
of reciprocal deposits as a percent of brokered deposits declined from
33.7 percent on March 31, 2018, to 15.4 percent on June 30, 2018 and,
11.5 percent on September 30, 2018.
Listing Service Deposits
Deposits whose placement at insured depository institutions are
facilitated, in a passive manner, by deposit listing services have not
been reported as brokered deposits. However, since 2011, such deposits
have been reported on banks' Call Reports. As of September 30, 2018,
insured depository institutions reported holding $69.6 billion in
listing service deposits that are not reported as brokered deposits,
which amounted to 0.6 percent of industry domestic deposits. One
quarter of insured depository institutions held non-brokered listing
service deposits as of September 30, 2018.
As of September 30, 2018, 22 institutions were not well capitalized
for PCA purposes. Of these institutions, 13 institutions held non-
brokered listing service deposits, for which the ratio of non-brokered
listing service deposits to domestic deposits was 3.6 percent, while
the ratio for the 1,356 well-rated institutions holding such deposits
was 2.9 percent. Among insured depository institutions with non-
brokered listing service deposits, the share of non-brokered listing
service deposits to domestic deposits has declined from a median of 4.6
percent on September 30, 2011 to 2.9 percent as of September 30, 2018.
FDIC Studies That Discuss Brokered Deposits
In the wake of the recent financial crisis, the Dodd-Frank Act
directed the FDIC to conduct a study of core and brokered deposits,
which the FDIC completed in July 2011. Recently the FDIC updated its
analysis with data through the end of 2017. The results of that
analysis confirm the previous findings of the 2011 study and can be
found in Appendix 2.
The research provided in the study shows that higher brokered
deposit use is associated with higher probability of bank failure and
higher insurance fund loss rates. Banks with higher levels of brokered
deposits are also, in general, more costly to the DIF when they fail.
The study also found that, on average, brokered deposits are correlated
with higher levels of asset growth, higher levels of nonperforming
loans, and a lower proportion of core deposit funding. FDIC's study
also describes the three characteristics of brokered deposits that have
posed risk to the DIF:
1. Rapid growth--the extent to which deposits can be gathered
quickly and used imprudently to expand risky assets or investments.
2. Volatility--the extent to which deposits might flee if the
institution becomes troubled or the customer finds a more appealing
interest rate or terms elsewhere. Volatility tends to be also be
mitigated somewhat by deposit insurance, as insured depositors have
less incentive to flee a problem situation.
3. Franchise Value--the extent to which deposits will be attractive
to the purchasers of failed banks, and therefore not contribute to
losses to the DIF.
In December 2017, the FDIC published Crisis and Response: An FDIC
History, 2008-2013.\18\ The history shows that failures and downgrades
were highly correlated with reliance on brokered deposits and other
wholesale funding sources.\19\ Generally speaking, failures were more
concentrated among banks that made relatively greater use of brokered
deposits and other wholesale funding sources.
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\18\ Federal Deposit Insurance Corp., Crisis and Response: An
FDIC History, 2008-2013 (2017), available at: https://www.fdic.gov/bank/historical/crisis/crisis-complete.pdf.
\19\ In addition to brokered deposits, wholesale funding
includes federal funds purchased, securities sold under repurchase
agreements, and other borrowed money.
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The history noted that, although the use of brokered deposits and
other wholesale funding sources within a sound liquidity management
program is not in itself a risky practice, significant reliance on
wholesale funds may reflect a decision that an institution has made to
grow its business more aggressively. On the liability side, the history
indicated that if the institution comes under stress, wholesale
counterparties may be more apt to withdraw funding or demand additional
collateral.
In addition to these publications, the following reports prepared
by the Inspectors General of the federal banking agencies have detailed
how brokered deposits were sometimes used by failed banks in the most
recent crisis. These reports include the following:
Safety and Soundness: Analysis of Bank Failures Reviewed by
the
[[Page 2370]]
Department of the Treasury Office of Inspector General, OIG-16-052,
August 15, 2016
Summary Analysis of Failed Bank Reviews, Board of Governors of
the Federal Reserve System, Office of Inspector General, September 2011
Follow Up Audit of FDIC Supervision Program Enhancements, FDIC
Office of Inspector General, Report No. MLR-11-010, December 2011
In these reports, brokered deposits were most commonly cited as a
contributor to problems at troubled and failed institutions, largely by
allowing institutions with concentrations in poorly underwritten and
administered commercial real estate loans, including acquisition,
construction, and development loans (ADC) or other risky assets, to
grow rapidly. Institutions that failed were typically subject to the
brokered deposit restrictions and interest rate restrictions before
failure because their capital levels deteriorated to below well
capitalized. However, for those institutions that failed and still had
brokered deposits at the time of failure, either the acquirer did not
want the brokered deposits or did not pay a premium for them, either of
which increases the cost to the DIF.
Brokered Deposits in Bank Failures 2007-2017
The FDIC and the DIF were significantly affected by the previous
financial crisis between 2007 and 2017. During this time, excluding
Washington Mutual, 530 banks failed and were placed in FDIC
receivership and, as of December 31, 2017, the estimated loss to the
DIF for these institutions is $74.4 billion.
Based upon regulatory reporting data, 47 institutions that failed
relied heavily on brokered deposits and caused losses to the DIF that
triggered material loss reviews. These 47 institutions held total
assets representing 13 percent of the $703.9 billion in aggregate total
assets of the 530 failed institutions, but accounted for $28.4 billion
in estimated losses to the DIF, representing 38 percent of the $74.4
billion in all DIF estimated losses for that same period.\20\
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\20\ The estimated loss data is as of November 26, 2018,
available at: https://www5.fdic.gov/hsob/hsobRpt.asp.
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For example, the largest of these 47 institutions was IndyMac Bank,
F.S.B., which failed on July 11, 2008. As of December 31, 2017, the
estimated loss to the DIF for IndyMac, is $12.3 billion, representing
40 percent of IndyMac's $30.7 billion in total assets at failure and
approximately 16.5 percent of the total $74.4 billion in estimated
losses to the DIF from bank failures between 2007 and 2017. In its last
Thrift Financial Report (``TFR'') filed prior to failure, as of March
30, 2008, IndyMac reported brokered deposits of $5.5 billion, which
represented 28.98 percent of the institution's $18.9 billion in total
deposits.\21\ In its TFR filed for the 4th quarter of 2005,
approximately 12 quarters before the institution failed, IndyMac
reported $1.4 billion in brokered deposits, representing 18.4 percent
of its then $7.4 billion in total deposits. This data suggests that
IndyMac accelerated its use of brokered deposits as its problems
mounted.\22\
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\21\ Of the $5.4 billion in brokered deposits that IndyMac
reported on it Call Report for March 31, 2008, 98.42 percent were in
brokered certificates of deposits documented as master certificates
of deposits issued in the name of CEDE & Co, a subsidiary of DTC, as
sub-custodian for deposit brokers.
\22\ See Safety and Soundness: Material Loss Review of IndyMac
Bank, FSB, United States Department of Treasury, Office of Inspector
General, February 26, 2009 https://www.treasury.gov/about/organizational-structure/ig/Documents/oig09032.pdf.
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Another, more pronounced, example is ANB Financial National
Association (ANB Financial), which failed on May 9, 2008. As of
November 26, 2018, the estimated loss to the DIF for ANB Financial is
$1.029 billion, representing 54 percent of the institution's $1.89
billion in total assets at failure. In its Call Report filed prior to
failure, i.e., as of March 30, 2008, ANB Financial reported brokered
deposits of $1.578 billion, which represented 86.96 percent of the
institution's $1.815 billion in total deposits. In the Call Report
filed for the 4th quarter of 2005, approximately 12 quarters before the
institution failed, ANB Financial reported $256.8 million in brokered
deposits, representing 50.46 percent of its then $508 million in total
deposits.\23\ The brokered deposits remaining at failure for both
IndyMac and ANB's brokered deposits were master CDs issued in the name
of DTC as sub-custodian for deposit brokers, which were the primary
source for the remaining brokered deposits at failure for most of the
other 34 institutions referenced above.
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\23\ See Safety and Soundness: Material Loss Review of ANB
Financial National Association, United States Department of
Treasury, Office of Inspector General, November 28, 2008 https://www.treasury.gov/about/organizational-structure/ig/Documents/oig09013.pdf
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Brokered Deposits and Assessments
The FDIC has amended its assessment regulations to address the
risks to the DIF associated with brokered deposits. For small banks
(generally, IDIs with less than $10 billion in total assets), brokered
deposits can increase a bank's assessment rate if the bank's ratio of
brokered deposits to total assets exceeds 10 percent.\24\ The brokered
deposit ratio is one of several financial measures used to determine
assessment rates for small banks. For new small banks in Risk
Categories II, III and IV, and large and highly complex institutions
that are not well capitalized, or that are not CAMELS composite 1- or
2-rated, brokered deposits can increase a bank's assessment rate
through the brokered deposit adjustment.\25\ Under the adjustment, a
bank's assessment will increase if its ratio of brokered deposits to
domestic deposits is greater than 10 percent.
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\24\ For banks that are well capitalized and well rated,
reciprocal deposits that are treated as brokered deposits are
deducted from brokered deposits for purposes of the brokered deposit
ratio. See 12 CFR 327.16(a).
\25\ See 12 CFR 327.16(e)(3).
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C. Brokered Deposit Issues
As noted above, Section 29 does not explicitly define the term
``brokered deposit.'' Restrictions on brokered deposits are tied to the
statutory definition of ``deposit broker'' that Congress adopted in
1989 as part of the legislative response to the bank and thrift crisis.
That definition includes dealers in the brokered CD market, and broker
dealers that sweep customer funds to unaffiliated insured depository
institutions which, when combined, represent over 90% of reported
brokered deposits according to industry sources as discussed more fully
above. Therefore, based on those same sources, the interpretive issues
tend to relate to a small segment of reported brokered deposits.
Determining what constitutes a deposit broker, and thus a brokered
deposit, is very fact-specific and requires a close review of the
arrangement, the documents governing the arrangement, and the third
party's remuneration, among other things. Given the wide, and evolving,
variety of third-party arrangements, FDIC staff review them on a case-
by-case basis, applying the statutory provisions to the facts and
circumstances presented. Staff interpretations are typically documented
in Advisory Opinions.\26\ In addition, on June 30, 2016, the FDIC
issued, after soliciting comment, an updated set of Frequently Asked
Questions,\27\ that compiles information
[[Page 2371]]
about the law, regulation, and FDIC staff interpretations in a single
online location.
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\26\ FDIC Staff Advisory Opinions are available at: https://www.fdic.gov/regulations/laws/rules/.
\27\ See Identifying, Accepting, and Reporting Brokered
Deposits: Frequently Asked Questions (rev. Jul 14, 2016). An initial
set of Frequently Asked Questions was issued in January 2015, but
without notice and comment at that time.
---------------------------------------------------------------------------
The FDIC continues to receive inquiries, and in recent years, FDIC
staff has been asked about the application of the ``deposit broker''
definition, and its statutory and regulatory exceptions, to new types
of third parties that are involved in placing or facilitating the
placement of third-party funds at IDIs. Many of these questions relate
to advancements in technology, and new business practices and products
that IDIs might utilize to offer services to customers and also to
gather deposits. The inherent challenge often is to distinguish between
third party service providers to the IDI and third parties that are
engaged in the business of placing or facilitating the placement of
deposits, albeit using updated technology.
Generally, in determining whether deposits placed through these new
deposit placement arrangements are brokered, staff has looked to
precedents involving the definition of ``deposit broker'' and has
attempted to consistently apply that analysis to these new products. If
a third party is placing funds on behalf of itself, the funds are not
brokered. If a third party is in the business of either (1) placing
funds, or (2) facilitating the placement of funds--of another third-
party (such as its customers)--then it meets the definition of
``deposit broker'' and the deposits are brokered, unless an exception
applies.
Below is a discussion of a few of the most typical issues for which
questions have arisen, organized in the context of the definitions and
exceptions.
The FDI Act defines ``deposit broker'' to mean:
(A) any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured
depository institutions or the business of placing deposits with
insured depository institutions for the purpose of selling interests in
those deposits to third parties; \28\ and
---------------------------------------------------------------------------
\28\ The second phrase in FDI Act section 29(g)(1)(A) provides
that a ``deposit broker'' includes, ``any person engaged in . . .
the business of placing deposits with insured depository
institutions for the purpose of selling interests in those deposits
to third parties.'' This clause appears to reference the practice
involving master certificates of deposits issued to deposit brokers
who, in turn, issue retail CDs in denominations of $1,000 to their
retail customers. Industry participants have previously informed the
FDIC that the practice of issuing master certificates of deposit
from which smaller retail CDs are issued dates back to the early
1980s. 12 U.S.C. 1831f(g)(1)(A).
In a 1983 advanced notice of proposed rulemaking that preceded
the 1984 final rule, the FDIC and FHLBB described the underlying
market practice:
CD Participations. Some brokers engage in the practice of
``participating certificates of deposit to their customers. Under
this arrangement a broker-dealer purchases a certificate of deposit
issued by an insured institution and sells interests in it to
customers. Upon sale of the participations in the deposit to its
customer, the broker so informs the issuing institution and requests
that the deposits be registered in its own name as nominee for
others. The broker's records, in turn, reflect the ownership
interest of each customer in the deposit. A CD participation program
results in a ``flow-through'' of insurance coverage to each owner of
the deposit. The ownership interest of each participant in the
deposit is added to the individually owned deposits held by the
participant at the same institution and the total is insured to a
maximum of $100,000, provided the proper recordkeeping requirements
are maintained.
48 FR 50339 (November 1, 1983).
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(B) an agent or trustee who establishes a deposit account to
facilitate a business arrangement with an insured depository
institution to use the proceeds of the account to fund a prearranged
loan.'' \29\
---------------------------------------------------------------------------
\29\ 12 U.S.C. 1831f(g)(1); 12 CFR 337.6(a)(5(i). As stated
above, section 29(g)(1)(B) provides that ``deposit broker''
includes: ``An agent or trustee who establishes a deposit account to
facilitate a business arrangement with an insured depository
institution to use the proceeds of the account to fund a prearranged
loan.'' The preamble to the 1984 FDIC/FHLBB final rule, provided
background as to what this language was intended to address:
Certificates of deposit held in trust for bondholders under
``loans-to-lenders'' or industrial development bond (``IDB'')
programs are covered by the final rule. These programs entail a
transaction where the proceeds of an IDB issuance are placed with an
insured institution, in exchange for a certificate of deposit, to
fund a designated project. Because of the trust arrangement
involved, under the Agencies' current insurance coverage rules each
bondholder owns an insured interest in the deposit up to $100,000
and the deposit, therefore, may be fully insured by either the FDIC
or the FSLIC.
49 FR 13003, 13010 (April 2, 1984).
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1. Engaged in the Business of Placing Deposits or Facilitating the
Placement of Deposits
The first phrase of FDI Act section 29(g)(1)(A), defines a deposit
broker as, ``any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured
depository institutions.'' \30\ In evaluating whether certain third
parties comport with the statutory definition of ``deposit broker,''
and being ``engaged in the business of placing deposits, or
facilitating the placement of deposits,'' staff at the FDIC reviews
every arrangement on a case-by-case basis considering the following
factors:
---------------------------------------------------------------------------
\30\ 12 U.S.C. 1831f(g)(1)(A).
---------------------------------------------------------------------------
[cir] Whether the third party receives fees from the insured
depository institution that are based (in whole or in part) on the
amount of deposits or the number of deposit accounts.
[cir] Whether the fees can be justified as compensation for
administrative services (such as recordkeeping) or other work performed
by the third party for the insured depository institution (as opposed
to compensation for bringing deposits to the insured depository
institution).
[cir] Whether the third party's deposit placement activities, if
any, is directed at the general public as opposed to being directed at
members (or ``affinity groups'') or clients.
[cir] Whether there is a formal or contractual agreement between
the insured depository institution and the third party (e.g., referring
or marketing entity) to place or steer deposits to certain insured
depository institutions.
[cir] Whether the third party is given access to the depositor's
account, or will continue to be involved in the relationship between
the depositor and the insured depository institution.
2. Exclusions From the ``Deposit Broker'' Definition
The statutory ``deposit broker'' definition excludes the following:
(A) An insured depository institution, with respect to funds placed
with that depository institution;
(B) An employee of an insured depository institution, with respect
to funds placed with the employing depository institution;
(C) A trust department of an insured depository institution, if the
trust in question has not been established for the primary purpose of
placing funds with insured depository institutions;
(D) The trustee of a pension or other employee benefit plan, with
respect to funds of the plan;
(E) A person acting as a plan administrator or an investment
adviser in connection with a pension plan or other employee benefit
plan provided that that person is performing managerial functions with
respect to the plan;
(F) The trustee of a testamentary account;
(G) The trustee of an irrevocable trust (other than one described
in paragraph (1)(B)), as long as the trust in question has not been
established for the primary purpose of placing funds with insured
depository institutions;
(H) A trustee or custodian of a pension or profit-sharing plan
qualified under section 401(d) or 403(a) of Title 26; or
(I) An agent or nominee whose primary purpose is not the placement
of funds with depository institutions.\31\
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\31\ 12 U.S.C. 1831f(g)(2).
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In 1992, the FDIC incorporated in its regulations the list of
statutory exceptions to the ``deposit broker''
[[Page 2372]]
definition and added as an additional exception, ``an insured
depository institution acting as an intermediary or agent of a U.S.
government department or agency for a government sponsored minority or
women-owned depository institution.'' \32\
---------------------------------------------------------------------------
\32\ 12 CFR 337.6(a)(5)(ii)(J). As provided earlier, the FDIC
added this exception in response to comments submitted in response
to a 1992 notice of proposed regulation.
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(a) IDI Exception
The statute provides an exception for an IDI with respect to funds
placed with that IDI. Staff notes that based on the plain language of
the statute, staff has consistently applied this exception strictly to
the IDI itself and not to separately incorporated legal entities such
as subsidiaries or other affiliates. One challenging issue relates to
wholly-owned subsidiaries that place deposits under an exclusive
relationship with the parent IDI. With regard to wholly-owned
subsidiaries, for some purposes the subsidiary is treated as part of
the parent IDI (e.g., certain financial reporting); whereas for other
purposes--such as under the Bank Merger Act and for receivership
purposes--they are treated separately.
(b) Employee Exception
Section 29(g)(2)(B) of the FDI Act provides that ``deposit broker''
does not include ``an employee of an insured depository institution,
with respect to funds placed with the employing depository
institution'' (employee exception). The employee exception recognizes
that banks are corporate entities that operate through the natural
persons they employ.
To address concerns that the employee exception could be used to
evade the deposit broker definition, the term ``employee'' is defined
for purposes of section 29, as any employee:
1. Who is employed exclusively by the insured depository
institution;
2. Whose compensation is primarily in the form of a salary;
3. Who does not share such employee's compensation with a deposit
broker;
4. Whose office space or place of business is used exclusively for
the benefit of the insured depository institution which employs such
individual.\33\
---------------------------------------------------------------------------
\33\ 12 U.S.C. 1831f(g)(4).
---------------------------------------------------------------------------
Particularly after the passage of the Gramm-Leach-Bliley Act and
the permissibility of additional relationships among affiliated
entities, FDIC staff has dealt with an increase in questions about IDI
employees who also have some form of contractual relationship with a
third party, usually an affiliate of the IDI. In addition, FDIC staff
has informally addressed questions related to the use of premises that
are shared by the IDI and an affiliate.
(c) Pension or Other Employee Benefit Plans
Section 29(g)(2)(D) and (E) exclude from the deposit broker
definition, trustees of pension and other employee benefit plans with
respect to funds in the plan, and administrators or investment advisors
provided that the person is performing managerial functions with
respect to the plan.\34\ Section 29(g)(2)(H) excludes a trustee or
custodian of a pension or profit-sharing plan under sections 401(d) or
403(a) of the Internal Revenue Code.\35\
---------------------------------------------------------------------------
\34\ 12 U.S.C. 1831f(g)(2)(D) and (E).
\35\ 12 U.S.C. 1831f(g)(2)(H).
---------------------------------------------------------------------------
Individual retirement accounts (IRAs) are retirement accounts set
up outside of a pension plan or employee benefit plan and thus are not
expressly covered by these exceptions. Certain non-retirement savings
plans are also granted tax-favored status under the Internal Revenue
Code, such as 529 savings plans for higher education tuition and health
savings accounts but are not expressly covered by the exception. If a
bank's trust department serves as the trustee or custodian of such
plans, and the trust has not been established for the primary purpose
of placing funds with IDIs, the plans' deposits would not be treated as
brokered deposits because of the exception for trust departments. FDIC
staff has received a number of questions about this exception.
(d) Primary Purpose Exception
The primary purpose exception applies to ``an agent or nominee
whose primary purpose is not the placement of funds with depository
institutions.'' \36\ In particular, the primary purpose exception
applies to a third party when that third party is acting as agent/
nominee for the depositor. Staff's evaluation of a third party's
primary purpose in placing deposits has been in the context of that
particular agent/principal relationship.
---------------------------------------------------------------------------
\36\ 12 U.S.C. 1831f(g)(2)(I).
---------------------------------------------------------------------------
In interpreting what it means for a third-party agent to act
pursuant to a ``primary purpose,'' staff has generally analyzed whether
placing--or facilitating the placement--of deposits of its customers/
clients when acting as agent for those customers/clients, is for a
substantial purpose other than to provide (1) deposit insurance, or (2)
a deposit-placement service. In analyzing this principle, staff has
considered whether the deposit-placement activity is incidental to some
other purpose.
In determining whether a deposit-placement activity is incidental
to some other purpose, staff reviews the reason or intent of the third
party when acting as agent or nominee in placing the deposits, as well
as other factors which might indicate whether the third party agent is
incentivized to place deposits at the IDI. Factors that staff has
considered include the existence and structure of fee arrangements and
of any programmatic relationship between the third party and the
insured depository institution.
Fees:
[cir] Whether the entity placing deposits receives fees from the
insured depository institution that are based (directly or indirectly)
on the amount of deposits or the number of deposit accounts opened.
[cir] Whether the fees can be justified as compensation for
recordkeeping or other work performed by the third party for the IDI
(as opposed to compensation for bringing deposits to the IDI).
Programmatic relationship:
[cir] Whether there is a formal or contractual agreement between
IDIs and the placing/referring entity to place or steer deposits to
certain IDIs.
Importantly, when interpreting the applicability of the primary
purpose exception, staff analyzes the deposit placement arrangement,
including the underlying agreements, between the third party agent, the
depositor, and the IDI to determine the primary purpose of the agent.
The exception applies to agents or nominees, which by definition, act
on behalf of principals. When acting in that capacity, the third party
agent/nominee is limited to the principal's goals and objectives. Staff
does not solely rely upon the business purpose of the third party
involved. Staff has not considered the size of the third party or the
amount or percentage of revenue that the deposit-placement activity
generates.
Primary Purpose Exception for Affiliated Sweeps
Beginning in 1999, the FDIC became aware of broker dealers offering
their brokerage customers an automatic sweep program by which
customers' idle funds were swept to affiliated insured depository
institutions.
In 2005, the FDIC's General Counsel issued a staff opinion
indicating FDIC staff view that, when certain conditions are observed,
the primary purpose of a broker dealer in sweeping customer funds into
deposit accounts at its affiliated IDI is to facilitate the
[[Page 2373]]
customers' purchase and sale of securities. Among the conditions are
that funds are not swept to a time deposit account and do not exceed 10
percent of the total assets handled by the affiliated broker dealer.
The insured depository institution is permitted to pay fees to the
affiliated broker dealer but the fees must be flat fees (i.e., per
account or per customer fees) representing payment for recordkeeping or
administrative services and not for the placement of deposits. The fee
arrangements must satisfy Section 23B of the Federal Reserve Act.\37\
---------------------------------------------------------------------------
\37\ See 12 U.S.C. 371c-1.
---------------------------------------------------------------------------
(e) Other Issues
Deposit Listing Services. Deposit listing services come in
different forms, but all connect those seeking to place a deposit with
those seeking a deposit by listing the deposit rates of IDIs.
Depositors use listing services to find the best rate available for a
given deposit type and, in the case of a CD, a term. Since the statute
was first enacted, staff has distinguished between a company that
compiles information about interest rates in passive manner versus a
deposit broker that is in the business of placing or facilitating the
placement of deposits. A particular company can advertise itself as a
listing service as well as meet the definition of a ``deposit broker.''
In recognition of this possibility, staff at the FDIC developed
criteria for analyzing whether a ``listing service'' acts as a
``deposit broker.'' \38\
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\38\ See generally, FDIC Staff Adv. Op. Nos. 90-24 (June 12,
1990); 92-50 (July 24, 1992); 02-04 (November 13, 2002).
---------------------------------------------------------------------------
In 2004 FDIC staff provided criteria to assist the industry in
analyzing whether a deposit listing services would be viewed as a
deposit broker. In particular, staff advisory opinions indicate that a
listing service is not viewed as a deposit broker if it meets the
following criteria:
(1) The person or entity providing the listing service is
compensated solely by means of subscription fees (i.e., the fees paid
by subscribers as payment for their opportunity to see the rates
gathered by the listing service) and/or listing fees (i.e., the fees
paid by depository institutions as payment for their opportunity to
list or ``post'' their rates). The listing service does not require a
depository institution to pay for other services offered by the listing
service or its affiliates as a condition precedent to being listed;
(2) The fees paid by depository institutions are flat fees: They
are not calculated on the basis of the number or dollar amount of
deposits accepted by the depository institution as a result of the
listing or ``posting'' of the depository institution's rates;
(3) In exchange for these fees, the listing service performs no
services except: (A) The gathering and transmission of information
concerning the availability of deposits; and/or (B) the transmission of
messages between depositors and depository institutions (including
purchase orders and trade confirmations). In publishing or displaying
information about depository institutions, the listing service must not
attempt to steer funds toward particular institutions (except that the
listing service may rank institutions according to interest rates and
also may exclude institutions that do not pay the listing fee).
Similarly, in any communications with depositors or potential
depositors, the listing service must not attempt to steer funds toward
particular institutions; and
(4) The listing service is not involved in placing deposits. Any
funds to be invested in deposit accounts are remitted directly by the
depositor to the insured depository institution and not, directly or
indirectly, by or through the listing service.\39\
---------------------------------------------------------------------------
\39\ See FDIC Staff Advisory Opinion 04-04.
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In 2004, when staff last provided its views on listing services,
listing services had already evolved into internet exchange platforms
with automated order entry and confirmation services. At the time,
however, listing service sites did not provide any advice to
prospective depositors, and there was only a flat subscription fee paid
by both the banks and those seeking to view the posted rates. Today,
the FDIC has observed that certain listing service websites provide
additional services. For example, based upon information gathered from
bankers interested in participating in listing services, the FDIC notes
that some listing services appear to:
[cir] Offer advice to banks on liability and funds management and
regulatory compliance screening for subscribing banks.
[cir] Send customer information (on behalf of the prospective
depositors) directly to the banks that are listing rates.
[cir] Charge a fee to banks based upon the asset size of the bank,
rather than a flat subscription fee.
[cir] Post rates of ``featured'' or ``preferred'' vendors at the
very top of its rate board.
The FDIC notes the ambiguity over how these new listing service
features could be applied in light of the 2004 criteria. The features
above seem to indicate that some listing services are no longer acting
in a passive capacity but are instead steering deposits to particular
institutions or are otherwise providing services that meet the
definition of ``deposit broker.''
Accounting or related software products that contemplate the bank
using the same software. Some companies provide accounting and other
administrative support via software services to clients. These
companies, on behalf of their clients, place deposits at either one or
a group of preferred banks. Because the companies place deposits at
IDIs, the software companies meet the definition of ``deposit broker''
(unless they meet one of the exceptions). The primary purpose exception
applies to an agent or nominee whose primary purpose is not the
placement of funds with depository institutions. Banks who receive
deposits from software companies argue that the primary purpose of the
software companies is to provide accounting services (e.g., bankruptcy
management) and the placement of deposits is incidental to this
purpose. In analyzing whether a particular arrangement meets the
primary purpose arrangement, as noted above, staff currently reviews
whether the placement (of third party funds) is for a substantial
purpose other than to provide (1) deposit insurance, or (2) a deposit-
placement service. In previous cases that staff reviewed relating to
accounting software products, staff has not distinguished between
providing integrated accounting software and providing access to a
deposit account that offers core banking functions (such as daily cash
management). Moreover, in the previous arrangements that staff has
reviewed, there is typically a contractual volume based fee being paid
by the bank to the software company based upon the volume of deposits
being placed. As a result, staff has viewed that the software companies
are incentivized to place funds of prospective depositors at preferred
banks because of the fees that the placement generates.
Prepaid cards. Some companies operate general purpose prepaid card
programs, in which prepaid cards are sold to members of the public
through the assistance of a prepaid card company or a program manager.
After collecting funds from the cardholders, sometimes at retail stores
or directly from the card company, funds are placed into a custodial
deposit account at an insured depository institution (sometimes with
``pass-through'' deposit insurance coverage). The funds may be accessed
by the cardholders through the
[[Page 2374]]
use of their cards. In regard to this scenario, staff at the FDIC has
taken the position that the prepaid card company or the program manager
likely qualifies as a ``deposit broker'' because it is a third party
that is in the business of facilitating the placement of customer
deposits at an insured depository institution. Some have argued that a
particular prepaid card arrangement is covered by the ``primary purpose
exception''--specifically, that the ``primary purpose'' of a prepaid
card company (in establishing deposit accounts at an insured depository
institution) is not to provide the cardholders with a deposit-placement
service, but to enable the cardholders to make purchases through the
interbank payment system. Staff at the FDIC has not distinguished
between (1) acting with the purpose of placing deposits for other
parties, and (2) acting with the purpose of enabling other parties to
use deposits to make purchases. When funds are placed into demand
deposit accounts (as in the case of custodial accounts used by prepaid
card companies), the deposits will be available for withdrawals or
transfers or spending. Thus, prepaid card companies have not been
viewed as meeting the ``primary purpose'' exception.
Software applications for personal use that involve funds being
placed at an insured depository institution. Some applications provide
customers the opportunity to link their existing bank accounts (and
other accounts, such as credit cards, and 401k)--with software
applications--in an effort to provide efficiencies in budgeting, bill-
paying, and opening up a new deposit account. In some cases, the
application aggregates customer information based upon available
account balances and spending patterns and provides that information to
depository institutions to assist in targeting certain customers with
financial products. Once the customer is targeted with a financial
product, the customer may be transferred to the bank to open up the
deposit account or the application may assist in transferring customer
information to the bank for purposes of establishing the deposit
account. The software provider may receive compensation from the
financial institution based upon the referral. FDIC staff has received
inquiries about whether various arrangements between software
applications and IDIs should be viewed as brokered.
D. Interest Rate Restrictions
As noted earlier, the purpose of Section 29 generally is to limit
the acceptance or solicitation of certain deposits by insured
depository institutions that are not well capitalized. This purpose is
promoted through two means: (1) The prohibition against the acceptance
of brokered deposits by depository institutions that are less than well
capitalized (as described above); and (2) certain restrictions on the
interest rates that may be paid by such institutions. In enacting
section 29, Congress added the interest rate restrictions to prevent
institutions from avoiding the prohibition against the acceptance of
brokered deposits by soliciting deposits internally through ``money
desk operations.'' Congress viewed the gathering of deposits by weaker
institutions through either third-party brokers or ``money desk
operations'' as potentially an unsafe or unsound practice.\40\ The FDIC
has simplified the application of these restrictions through two
rulemakings.
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\40\ See H.R. Conf. Rep. No. 101-222 at 402-403 (1989),
reprinted in 1989 U.S.C.C.A.N. 432, 441-42.
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Under Section 29, well-capitalized institutions can pay any rate of
interest on any deposit. However, the statute imposes different
interest rate restrictions on different categories of insured
depository institutions that are less than well capitalized. These
categories are (1) adequately-capitalized institutions with waivers to
accept brokered deposits (including reciprocal deposits excluded from
being considered brokered deposits); \41\ (2) adequately-capitalized
institutions without waivers to accept brokered deposits; \42\ and (3)
undercapitalized institutions.\43\ The statutory restrictions for each
category are described in detail below.
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\41\ 12 U.S.C. 1831f(e).
\42\ 12 U.S.C. 1831f(g)(3).
\43\ 12 U.S.C. 1831f(h).
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Adequately-capitalized institutions with waivers to accept brokered
deposits. Institutions in this category may not pay a rate of interest
on deposits that ``significantly exceeds'' the following: ``(1) The
rate paid on deposits of similar maturity in such institution's normal
market area for deposits accepted in the institution's normal market
area; or (2) the national rate paid on deposits of comparable maturity,
as established by the [FDIC], for deposits accepted outside the
institution's normal market area.'' \44\
---------------------------------------------------------------------------
\44\ 12 U.S.C. 1831f(e).
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Adequately capitalized institutions without waivers to accept
brokered deposits. In this category, institutions may not offer rates
that ``are significantly higher than the prevailing rates of interest
on deposits offered by other insured depository institutions in such
depository institution's normal market area.'' \45\ For institutions in
this category, the statute restricts interest rates in an indirect
manner. Rather than simply setting forth an interest rate restriction
for adequately capitalized institutions without waivers, as noted
previously, the statute defines the term ``deposit broker'' to include
``any insured depository institution that is not well capitalized . . .
which engages, directly or indirectly, in the solicitation of deposits
by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured
depository institutions in such depository institution's normal market
area.'' \46\ In other words, the depository institution itself is a
``deposit broker'' if it offers rates significantly higher than the
prevailing rates in its own ``normal market area.'' Without a waiver,
the institution cannot accept deposits from a ``deposit broker.'' Thus,
the institution cannot accept these deposits from itself. In this
indirect manner, the statute prohibits institutions in this category
from offering rates significantly higher than the prevailing rates in
the institution's ``normal market area.''
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\45\ 12 U.S.C. 1831f(g)(3).
\46\ Id.
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Undercapitalized institutions. In this category, institutions may
not offer rates ``that are significantly higher than the prevailing
rates of interest on insured deposits (1) in such institution's normal
market areas; or (2) in the market area in which such deposits would
otherwise be accepted.'' \47\
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\47\ 12 U.S.C. 1831f(h).
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Rulemakings Related to Section 29's Interest Rate Restrictions
The FDIC has implemented the interest rate restrictions under
section 29 of the FDI Act through two rulemakings.\48\ Although the
statute, as noted above, sets forth a basic framework, it does not
provide certain key details, such as definitions for the terms--
``national rate,'' ``significantly exceeds,'' ``significantly higher,''
and ``market area.'' As a result, in 1992, the FDIC defined these key
terms before updating the ``national rate'' and clarifying the rate
restrictions again in 2009.
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\48\ See 57 FR 23933 (1992); 74 FR 26516 (2009).
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``Significantly Exceeds.'' Through Section 337.6, the FDIC has
provided that a rate of interest ``significantly exceeds'' another
rate, or is ``significantly higher'' than another rate, if the first
rate exceeds the second rate
[[Page 2375]]
by more than 75 basis points.\49\ In adopting this standard, the FDIC
offered the following explanation: ``Based upon the FDIC's experience
with the brokered deposit prohibitions to date, it is believed that
this number will allow insured depository institutions subject to the
interest rate ceilings . . . to compete for funds within markets, and
yet constrain their ability to attract funds by paying rates
significantly higher than prevailing rates.'' \50\ This interpretation
of the statute has remained unchanged since the 1992 rulemaking.
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\49\ See 12 CFR 337.6(b)(2)(ii), (b)(3)(ii) and (b)(4). See
also, 55 FR 39135 (1990) (FDIC's final rule that took the view that
``significantly exceeds'' means more than 50 basis points. At the
time, this was believed to be a reasonable compromise between the
need to permit troubled institutions to compete on a reasonable
basis in their market area and yet prevent such institutions from
bidding excessively for an increased share of market-area deposits
by paying excessive rates).
\50\ 57 FR at 23939.
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``Market Area.'' In Section 337.6, prior to the adoption of the
2009 final rule, the term ``market area'' was defined as follows: ``A
market area is any readily defined geographical area in which the rates
offered by an one insured depository institution soliciting deposits in
that area may affect the rates offered by other insured depository
institutions in the same area.'' \51\ At the time, the FDIC reasoned
that the market area will be determined on a case-by-case basis, based
on the evident or likely impact of a depository institution's
solicitation of deposits in a particular area, taking into account the
means and media used and volume and sources of deposits resulting from
such solicitation.\52\
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\51\ See 57 FR 23933 (1992) and 74 FR 26516 (2009).
\52\ Id.
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The ``National Rate.'' In Section 337.6, as part of the 1992
rulemaking, the ``national rate'' was defined as follows: ``(1) 120
percent of the current yield on similar maturity U.S. Treasury
obligations; or (2) In the case of any deposit at least half of which
is uninsured, 130 percent of such applicable yield.'' \53\ In defining
the ``national rate'' in this manner, the FDIC understood that the
spread between Treasury securities and depository institution deposits
can fluctuate substantially over time but relied upon the fact that
such a definition is ``objective and simple to administer.'' \54\ By
using percentages (120 percent or 130 percent of the yield on U.S.
Treasury obligations) instead of a fixed number of basis points, the
FDIC hoped to ``allow for greater flexibility should the spread to
Treasury securities widen in a rising interest rate environment.'' In
deciding not to rely on published deposit rates, the FDIC offered the
following explanation: ``The FDIC believes this approach would not be
timely because data on market rates must be available on a
substantially current basis to achieve the intended purpose of this
provision and permit institutions to avoid violations. At this time,
the FDIC has determined not to tie the national rate to a private
publication. The FDIC has not been able to establish that such
published rates sufficiently cover the markets for deposits of
different sizes and maturities.'' \55\
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\53\ 12 CFR 337.6(b)(2)(ii)(B).
\54\ 57 FR 23933, 23938 (June 5, 1992).
\55\ Id. at 23939.
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2009 Rulemaking on the Interest Rate Restrictions
For many years, the 1992 definition of ``national rate'' functioned
well because rates on Treasury obligations tracked closely with rates
on deposits. By 2009, however, the rates on certain Treasury
obligations were low compared to deposit rates. Consequently, the
``national rate'' as defined in the FDIC's regulations became
artificially low. By setting a low rate, the FDIC's regulations
required some insured depository institutions to offer unreasonably low
rates on some deposits, thereby restricting access even to market-rate
funding.
As part of the 2009 rulemaking, the FDIC addressed two issues that
developed after the 1992 rulemaking: (1) The obsolescence of the FDIC's
1992 definition of the ``national rate''; and (2) the difficulty
experienced by insured depository institutions and examiners in
determining prevailing rates in its ``market areas.''
In response to the first problem, the FDIC redefined the ``national
rate'' as ``a simple average of rates paid by all insured depository
institutions and branches for which data are available.'' As noted in
the 2009 rulemaking, the updated ``national rate'' methodology
represented an objective average and the exclusion of certain branches
or offices was viewed by the FDIC, at the time, as contrary to
providing a meaningful restriction on insured depository institutions
that are not well capitalized.\56\
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\56\ See 74 FR 26516 (2009).
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In response to the second problem, the FDIC created a presumption
that the prevailing rate in any market would be the national rate (as
defined above). An insured depository institution could rebut this
presumption by presenting evidence to the FDIC that the prevailing rate
in a particular market is higher than the national rate. If the FDIC
agreed with this evidence, the institution would be permitted to pay as
much as 75 basis points above the local prevailing rate. In evaluating
this evidence, the FDIC may use segmented market rate information (for
example, evidence by State, county or MSA). Also, the FDIC may consider
evidence as to the rates offered by credit unions but only if the
insured depository institution competes directly with the credit unions
in the particular market. Finally, the FDIC may consider evidence that
the rates on certain deposit products differ from the rates on other
products. For example, in a particular market, the rates on NOW
accounts might differ from the rates on MMDAs. NOW accounts might be
distinguished from MMDAs because the two types of accounts are subject
to different legal requirements.\57\
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\57\ 12 CFR 337.6(f).
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Ultimately, the 2009 rulemaking simplified the approach of applying
the rate restrictions and, importantly, has provided community banking
institutions, that may not compete in the national deposit marketplace
(e.g., listing services), the ability to offer competitive deposit
rates in its local market area.
Additional Interest Rate Issues
Since the FDIC's adoption of the 2009 rulemaking, federal funds
rates stayed at historically low levels and only recently have begun to
rise. In addition, institutions also have created new products that do
not fit into the posted national rates and rate caps.
Calculation of rates. Since the crisis that began in 2008, the
``national rate'' has been relatively low due to the low interest rate
environment. Moreover, because the national rate is an average for all
banks and branches, the largest banks with large numbers of branches
have had a disproportional effect on average interest rates. Even as
other interest rates have begun to rise, the average has stayed low as
the largest banks have been slow to increase interest rates on
deposits.
[[Page 2376]]
[GRAPHIC] [TIFF OMITTED] TP06FE19.011
New products. The FDIC has recently seen an increase in promotional
deposit products and products with special features. These products and
promotions are generally not compatible with the standard products
included in the FDIC's published weekly national rate caps. An example
of a product with a special feature is one that provides a one-time
cash payment for opening up a deposit account or provides airline miles
or other bonuses with specific deposit products. Such deposit products
may have common maturities (or be demand accounts) and as a result they
may be included as part of the ``national rate'' calculation without
acknowledgement of the up-front payment or other bonus received in
place of interest paid on the deposit.
Special features. Some institutions are also offering deposit
products with special features that may raise questions about how the
rate cap should apply. Below are examples of three types of deposit
products with special features:
[cir] Step up rates. Certain deposit products have variable rate
features that allow the interest rate to increase before the deposit
matures. With these products, particularly time deposits with longer
maturities, the institution could fall to less than well capitalized
during the term of the deposit. As a result, and as the FDIC has seen
in the past, an institution could pay a rate that exceeds the interest
rate restrictions after the downgrade.
[cir] Atypical maturities. Unusual maturity periods (for example,
13 or 15 months instead of 12 or 18 months) make it difficult to
compare with either national rates or prevailing local rates.
[cir] Exceptionally long maturities for time deposits combined with
penalty-free early withdrawal. In some cases, institutions have
structured deposit products with exceptionally long maturities in order
to extrapolate exceptionally high interest rates for the deposits
coupled with withdrawal rights that are significantly shorter than the
term of the deposit maturity (e.g., 7 day penalty period on a 5 year
certificate of deposit).
III. Request for Comments
The FDIC seeks comment on all aspects of its regulatory approach to
brokered deposits and interest rate restrictions, and in particular the
following:
[cir] Are there ways the FDIC can improve its implementation of
Section 29 of the FDI Act while continuing to protect the safety and
soundness of the banking system? If so, how?
Brokered Deposits
[cir] Are there types of deposits that are currently considered
brokered that should not be considered brokered? If so, please explain
why.
[cir] Are there types of deposits that are currently not considered
brokered that should be considered brokered? If so, please explain why.
[cir] Are there specific changes that have occurred in the
financial services industry since the brokered deposits regulation was
adopted that the FDIC should be cognizant of as it reviews the
regulation? If so, please explain.
[cir] Do institutions currently have sufficient clarity regarding
who is or is not a deposit broker and what is or is not a brokered
deposit? Are there ways the FDIC can provide additional clarity through
updates to the brokered deposits regulation, consistent with the
statute and the policy considerations described above?
[cir] Are there areas where changes might be warranted but could
not be effectuated under the current statute? Are there any statutory
changes that warrant consideration from Congress?
[cir] Should the FDIC make changes to the Call Report instructions
so that the agency can gather more granular information about types of
brokered deposits?
[cir] In general, the FDIC welcomes any additional data or market
information related to brokered deposits, particularly related to those
types of brokered deposits that are not specifically reported by
institutions in their Call Reports (e.g., Master Certificates of
Deposits held in the name
[[Page 2377]]
of DTC and deposits placed through unaffiliated sweep programs).
Interest Rate Restrictions
[cir] Are there alternatives that the FDIC should consider in
addressing Section 29's interest rate restrictions for less than well
capitalized institutions?
[cir] Should the methodology used to calculate the ``national
rate'' be changed? If so, how?
[cir] Should there remain a presumption that the prevailing rate in
any ``market area'' is the national rate? If not, how should the FDIC
define the ``normal market area''?
[cir] Should the amount of the rate cap, currently 75 basis points
over either the national rate or the prevailing market rate, be
revised? If so, how?
[cir] How should deposits with promotional or special features be
treated with respect to the national rate or the prevailing market
rate?
[cir] How should the rates offered by internet-based or electronic
commerce-based institutions be calculated?
Appendix 1
Descriptive Statistics on Core and Brokered Deposits
Core Deposits
Core deposits are not defined by statute. Rather, they are defined
for analytical and examination purposes in the Uniform Bank Performance
Report (UBPR). Through 2010, the Federal Financial Institutions
Examination Council (FFIEC) defined ``core deposits'' to include all
demand and savings deposits, including money market deposit, NOW and
ATS accounts, other savings deposits, and time deposits in amounts
under $100,000.\58\ Under this definition, core deposits were
equivalent to total domestic deposits less time deposits over $100,000
and included insured brokered deposits. As of March 31, 2011, the
definition was revised to reflect the permanent increase to FDIC
deposit insurance coverage from $100,000 to $250,000 and to exclude
insured brokered deposits from core deposits. This revision defines
core deposits as the sum of demand deposits, all NOW and ATS accounts,
MMDAs, other savings deposits and time deposits under $250,000, minus
all brokered deposits under $250,000. For periods before March 2011,
the definition was revised to the sum of demand deposits, all NOW and
ATS accounts, MMDAs, other savings deposits and time deposits under
$100,000, minus all brokered deposits under $100,000.
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\58\ An automatic transfer service account is a deposit or
account of an individual or sole proprietorship on which the
depository bank has reserved the right to require at least seven
days' written notice prior to withdrawal or transfer of any funds in
the account and from which, pursuant to written agreement arranged
in advance between the reporting bank and the depositor, withdrawals
may be made automatically through payment to the depository bank
itself or through transfer of credit to a demand deposit or other
account in order to cover checks or drafts drawn upon the bank or to
maintain a specified balance in, or to make periodic transfers to,
such other accounts.
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Historically, reliance on core deposits has varied by bank size.
Banks with less than $1 billion in total assets generally have had the
heaviest reliance on core deposits, and banks with $50 billion or more
in total assets have had the least reliance on core deposits. Since
2010, the ratio of core deposits to total assets has changed less for
smaller banks than it has for larger banks. At year-end 2010, core
deposits equaled 75 percent of total assets at banks with less than $1
billion in assets, but only 47 percent for banks with $50 billion or
more in total assets. By the third quarter of 2018, core deposits
equaled 76 percent of total assets at banks with less than $1 billion
in assets and 58 percent of at banks with $50 billion or more in total
assets (See Chart 1.)
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\59\ Through 2010 core deposits include insured brokered
deposits. Beginning in 2011, brokered deposits are excluded from
core deposits.
[GRAPHIC] [TIFF OMITTED] TP06FE19.012
Through mid-year 2009, almost all core deposits at community banks
were estimated to be insured, but, at the end of third quarter 2009,
when banks began reporting insured deposits at the then temporary
insurance limit of $250,000, estimated insured deposits were greater
than core deposits. Estimated insured deposits represented a smaller
share of core deposits at the largest banks, as a result of their
holdings of large uninsured demand deposits. At
[[Page 2378]]
September 30, 2010, for banks with assets over $50 billion, estimated
insured deposits represented only 69 percent of core deposits, but, at
March 31, 2011, after the coverage of all noninterest bearing
transaction accounts over $250,000 was established temporarily under
the Dodd-Frank Act, estimated insured deposits rose to 84 percent. (See
Chart 2.)
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\60\ Through 2010 core deposits include insured brokered
deposits. Beginning in 2011, brokered deposits are excluded from
core deposits.
[GRAPHIC] [TIFF OMITTED] TP06FE19.013
Note: From October 14, 2008 to December 31, 2010, domestic non-
interest bearing transaction accounts were guaranteed in full under
the Transaction Account Guarantee Program (TAG), part of the FDIC's
Temporary Liquidity Guarantee Program (TLGP). From December 31, 2010
to December 31, 2012, the Dodd-Frank Act provided temporary
unlimited deposit insurance coverage for non-interest bearing
transaction accounts. These programs account for the observed shifts
up and down in the Estimated Insured Deposits as a Share of ``Core''
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Deposits shown in the chart during these periods.
Effective with the March 31, 2011, UBPR, the FFIEC revised the
definition of core deposits to take into account the increase in the
deposit insurance limit to $250,000 under Dodd-Frank. The new
definition includes time deposits up to $250,000 but excludes brokered
deposits of any denomination. Using Call Report and Thrift Financial
Report (TFR) data as of March 31, 2011, the new definition of core
deposits added $24.9 billion (or 0.3 percent) to core deposits.
However, the increase in core deposits, as the result of the new
definition, occurred almost exclusively at smaller banks and thrifts,
since the decrease in core deposits due to exclusion of brokered
deposits tended to be less than the increase in core deposits due to
inclusion of time deposits within the new threshold of up to $250,000.
Core deposits at banks and thrifts with assets under $10 billion
increased by $143.2 billion under the new definition, but core deposits
at banks with assets of at least $10 billion declined by $118.3
billion. Large credit card banks and specialty lenders with affiliated
brokerage firms were among those banks with the largest decline in core
deposits as a result of the revised definition.
Brokered Deposits
FDIC-insured banks report total brokered deposits and the amount of
brokered deposits under the insurance limit on their Call Reports and
TFRs.
[[Page 2379]]
Before 2010, brokered deposits were reported as insured, as any
deposits, up to the $100,000 threshold. Beginning March 31, 2010, the
threshold for reporting insured brokered deposits on Call Reports and
TFRs was increased to $250,000.\61\ Insured depository institutions
also began reporting total reciprocal brokered deposits in their June
30, 2009, Call Reports and TFRs. The Economic Growth, Regulatory
Reform, and Consumer Protection Act, enacted on May 24, 2018, allows
certain banks to except a limited amount of reciprocal deposits from
brokered deposits.
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\61\ Certain brokered retirement accounts are included in
insured brokered deposits.
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As of September 30, 2018, brokered deposits totaled $985.7 billion.
Fewer than half of all FDIC-insured banks (2,221 banks, or 40.6
percent) reported brokered deposits on their September 30, 2018, Call
Reports. As of this date, brokered deposits made up 8.0 percent of
industry domestic deposits, in contrast to second quarter 2009 when
banks began reporting total reciprocal brokered deposits, brokered
deposits accounted for 10.1 percent of industry domestic deposits.
Brokered Deposits Held by Insured Depository Banks as of September 30, 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
Total number banks with Total brokered Share of total Total domestic Share of total
Asset size group of banks brokered deposits brokered deposits domestic
deposits (billions) deposits (%) deposits (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Under $1 Billion........................................ 4,704 1,656 $31.92 3.2 $988.05 8.0
$1-10 Billion........................................... 635 439 90.16 9.1 1,349.56 11.0
$10-50 Billion.......................................... 97 89 171.87 17.4 1,605.40 13.0
Over $50 Billion........................................ 41 37 691.78 70.2 8,378.84 68.0
-----------------------------------------------------------------------------------------------
All Banks........................................... 5,477 2,221 985.73 .............. 12,321.84 ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
Brokered deposits typically make up a lower share of deposit
funding for small banks compared to banks with $10 billion or more in
assets. In aggregate, banks with assets between $10 billion and $50
billion reported brokered deposits equal to 10.7 percent of their
domestic deposits as of September 30, 2018, the highest of any asset
cohort group, while banks with assets under $1 billion reported
brokered deposits equal to just 3.2 percent of domestic deposits. (See
Chart 3.)
[GRAPHIC] [TIFF OMITTED] TP06FE19.014
[[Page 2380]]
Note: The reversal of growth in the use of brokered deposits
occurring between 2009 and 2012 is likely the joint result of the
dramatic decline in interest rates occurring over that period,
coupled with significant new restrictions on the use of brokered
deposits by banks classified as adequately and undercapitalized.
At the end of the third quarter of 2018, insured brokered deposits
made up more than 82.5 percent of total brokered deposits at all banks.
Insured brokered deposits as a percent of all brokered deposits was
highest at banks with assets of $50 billion or less. In aggregate,
insured brokered deposits made up 93.7 percent of total brokered
deposits at banks with assets between $1-10 billion, as compared to
79.5 percent at banks with assets greater than $50 billion. (See Chart
4.)
[GRAPHIC] [TIFF OMITTED] TP06FE19.015
Section 29 of the Federal Deposit Insurance Act (FDI Act) sets
forth restrictions on the acceptance of brokered deposits that also
appear in the FDIC's regulations.\62\ Under Section 29, banks are
restricted from accepting, renewing, or rolling over brokered deposits
if they are less than well capitalized. This restriction may be waived
for adequately capitalized banks. Undercapitalized institutions are not
allowed to receive new brokered deposits and must follow an FDIC-
approved plan to remove them from their books over time. After rising
to a peak in mid-2009, the use of brokered deposits as a share of
domestic deposits declined for both adequately capitalized banks and
well capitalized banks. As of September 30, 2018, of the 5,477 insured
depository institutions, 99.6 percent were well capitalized, while 0.2
percent were rated as adequately capitalized. Of those rated as
adequately capitalized, roughly half held brokered deposits. (See Chart
5.) \63\
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\62\ See 12 U.S.C. 1831f; 12 CFR 337.6.
\63\ Please note that the data and chart are based only on
capital ratio thresholds used for PCA. However, an IDI that
otherwise meets the ratio threshold requirements for the well
capitalized PCA category: (1) Will be classified as an adequately
capitalized if it is subject to a written agreement, order, capital
directive, or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure; and (2)
may be reclassified as adequately capitalized, if, following notice
and an opportunity for hearing, the bank is determined to be unsafe
or unsound or has failed to correct a less-than-satisfactory rating
for asset quality, management, earnings, or liquidity. See 12 CFR
6.4(c)(1)(v) and (e), 12 CFR 208.43(b)(1)(v) and (c), and 12 CFR
324.403(b)(1)(v) and (d).
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[[Page 2381]]
[GRAPHIC] [TIFF OMITTED] TP06FE19.016
Brokered Deposits during the 2007-2017 Financial Crisis
During the financial crisis and the years that followed, from the
beginning of 2007 through the end of 2017, the Deposit Insurance Fund
(DIF) incurred $74.4 billion in losses as of December 31, 2016. During
this period, excluding Washington Mutual, 530 banks failed and were
placed in FDIC receivership.
Typically, as institutions get closer to failure, their capital
level declines and they are no longer able to accept, renew, or roll
over brokered deposits, so levels of brokered deposits at failure are
usually low. Nevertheless, of the 530 failed banks, twelve,
approximately 2.3 percent, held a majority (50% or greater) as brokered
deposits; 280 or approximately 52.8 percent, held less than 1% of their
total deposits as brokered deposits.\64\ (See Chart 6.)
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\64\ 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. Master
Certificates of Deposits are held on the books of the issuing bank
in the name of a subsidiary of Depository Trust Corporation (DTC) as
custodian for deposit brokers who are often broker dealers. These
broker dealers, in turn, issue retail CDs, typically in
denominations of $1,000, under the Master Certificate of Deposit to
their retail clients.
\65\ Banks that used reciprocal deposits are not included in
Non-DTC CD Brokered Deposits unless they also held other non-DTC CD
brokered deposits. While all reciprocal deposits were brokered
deposits between 2007 and 2017, since May 24, 2018, a significant
portion of reciprocal deposits are excepted from brokered deposits.
Chart 6
Brokered Deposits at 530 Failed Institutions, 2007-2017
----------------------------------------------------------------------------------------------------------------
Number failed
Number failed institutions Number failed
Brokered deposits as % of total institutions % of w/non-DTC % of institutions
deposits w/DTC-titled Institutions titled institutions w/internet
brokered CDs brokered deposits
deposits \65\
----------------------------------------------------------------------------------------------------------------
90-100.......................... 1 0.19 0 0.00 1
80-89........................... 2 0.38 0 0.00 1
70-79........................... 3 0.57 0 0.00 2
60-69........................... 0 0.00 0 0.00 8
50-59........................... 6 1.13 1 0.19 8
40-49........................... 8 1.51 1 0.19 16
30-39........................... 17 3.21 0 0.00 31
20-29........................... 30 5.66 3 0.57 46
10-19........................... 53 10.00 20 3.77 57
5-9............................. 56 10.57 33 6.23 47
1-4............................. 74 13.96 77 14.53 55
0-1............................. 8 1.51 184 34.72 27
0............................... 272 51.32 211 39.81 231
----------------------------------------------------------------------------------------------------------------
[[Page 2382]]
Reciprocal Deposits
A reciprocal deposit is an arrangement based upon a network of
banks that place funds at other participating banks in order for
depositors to receive insurance coverage for the entire amount of their
deposits. In these arrangements, institutions within the network are
both sending and receiving identical amounts of deposits
simultaneously. As a result of this arrangement, the institutions
themselves (along with the network sponsors) are ``in the business of
placing deposits, or facilitating the placement of deposits, of third
parties with insured depository institutions,'' and the involvement of
deposit brokers within the reciprocal network means the deposits are
brokered deposits. Since banks first reported reciprocal deposits on
the Call Report in June 2009, reciprocal deposits as a share of total
brokered deposits increased greatly, primarily among small banks. For
banks with assets less than $1 billion, reciprocal deposits as a
percent of total brokered deposits rose from 16.4 percent on June 30,
2009, to a peak of 33.7 percent on March 31, 2018.
The Economic Growth, Regulatory Reform, and Consumer Protection
Act, enacted on May 24, 2018, allows certain banks to except a limited
amount of reciprocal deposits from brokered deposits. The immediate
result of this Act has been to dramatically reduce the percent of
reciprocal deposits that are classified as brokered deposits. For
example, for banks with assets less than $1 billion, reciprocal
deposits as a share of brokered deposits declined from 33.7 percent on
March 31, 2018, to 11.5 percent on September 30, 2018. (See Chart 7.)
For the largest banks, those with assets greater than $50 billion,
reciprocal deposits as a share of total brokered deposits has remained
relatively low, accounting for 0.1 percent of total brokered deposits
as of June 30, 2018.
[GRAPHIC] [TIFF OMITTED] TP06FE19.017
Listing Services
A ``listing service'' is a company that compiles information about
the interest rates offered by banks on deposit products, especially
CDs. A particular company can be a ``listing service'' (compiling
information about deposits) as well as a ``deposit broker''
(facilitating the placement of deposits). In recognition of this
possibility, the FDIC has set forth specific criteria to determine when
a listing service qualifies as a deposit broker.\66\
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\66\ For the specific criteria to determine when a listing
service qualifies as a deposit broker see Advisory Opinion No. 90-24
(June 12, 1990). Advisory Opinion No. 92-50 (July 24, 1992). The
criteria were subsequently updated in Advisory Opinion No. 02-04
(November 13, 2002) and Advisory Opinion No. 04-04 (July 28, 2004).
Assuming these criteria are satisfied, the FDIC takes the position
that a company is not ``facilitating the placement of deposits,''
and is therefore not a deposit broker, even if the company provides
a platform for the execution of trades. Consequently, the deposits
themselves are not classified as brokered deposits.
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The FDIC began collecting data on non-brokered, or ``passive,''
listing service deposits in the first quarter of 2011. As of September
30, 2018, a total of 1,369 banks reported a positive balance for non-
brokered listing service deposits. In aggregate, these banks held
approximately $69.6 billion in listing service deposits, which
represented 0.6 percent of total domestic deposits. (See Chart 8.)
Listing service deposits made up a higher share of domestic
deposits at smaller banks. On average from 2011 to the third quarter of
2018, non-brokered listing service deposits represented 1.3 percent of
domestic deposits at banks with less than $10 billion in total assets,
compared to 0.9 percent of domestic deposits at banks with $10 billion
to $50 billion in total assets. (See Chart 8.)
[[Page 2383]]
[GRAPHIC] [TIFF OMITTED] TP06FE19.018
Banks that are less than well capitalized are subject to
restrictions on accepting, renewing, or rolling over brokered deposits,
and historically some of these banks have turned to listing service
deposits as an alternate source of founding. (See Chart 9.)
[GRAPHIC] [TIFF OMITTED] TP06FE19.019
Listing service deposits, however, may only provide funding to less
than well capitalized banks to the extent that such a bank can offer
rates high enough to attract deposits. A low interest rate environment,
such as the one during and after the financial crisis, enabled less
than well-capitalized banks to list high rate deposits and attracts
funding. As interest rates have been rising in recent years, these
banks are less likely to be able to use listing service deposits as an
alternate source of funding to brokered deposits. From 2010 through
most of 2015, rates were low enough
[[Page 2384]]
that weekly average rates on 1-year CDs fell below the FDIC rate cap.
Thus, for most banks during that time, the FDIC rate cap was not a
binding constraint in attracting funding and banks were more likely to
be able to offer high rates via listing services to attract deposits.
Since 2016, average market rates have exceeded the FDIC rate cap.
Appendix 2
Statistical Analysis
The analysis summarized in this appendix uses data from FDIC's
Failure Transaction Database, Call Reports/TFRs, and supervisory CAMELS
ratings.
Failure Probability Models
The sample used for analysis includes banks and thrifts that failed
between 1988 and 2017. These banks were insured by the Bank Insurance
Fund (BIF), Savings Association Insurance Fund (SAIF), and DIF. The
data exclude thrifts resolved by FSLIC or the Resolution Trust
Corporation (RTC). It is well documented that FHLBB supervised thrifts
(insured by FSLIC) received regulatory forbearance and were allowed to
operate with lower net worth and were closed under procedures that
differ significantly from the 1991 FDICIA prompt corrective action
rules that apply over much of the sample period. Moreover, the analysis
excludes any bank or thrift that received open bank assistance. The
sample includes 1,403 failures which consist of 1,267 bank failures
between 1988 and 2017 and 136 thrift failures between 1989 and
2017.\67\ In the remaining sections, ``banks'' is used to refer to both
banks and thrifts.
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\67\ Thrift institutions refer to those with institution classes
of Stock and Mutual Savings Banks, Savings Banks and Savings and
Loans, and State Stock Savings and Loans.
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The failure prediction models have a three-year failure prediction
horizon. The models use bank data at year-end to predict the
probability of the bank failing in the next three years. The models use
year-end Call Reports from 1987 to 2014 to predict bank failures from
1988 to 2017.\68\ The models are estimated as a pooled time-series
cross section. The standard errors are clustered at the bank level.
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\68\ We use non-overlapping three year intervals. For example,
1987 Call Report data is used to predict banks failures that
occurring in 1988, 1989, and 1990; 1990 Call report data is used to
predict bank failures in 1991, 1992, and 1993. This timing pattern
is continued through the end of the sample.
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Bank failures are modeled as a function of banks' income statement
and balance sheet information, supervisory composite CAMELS ratings,
and time fixed effects to capture differences in economy-wide
unconditional average bank default rates. The model uses the total
equity-to-assets ratio rather than the Tier 1 capital ratio because the
Tier 1 capital ratio was not used in the 1980s. Core deposits are
defined as: total domestic deposits net of large time deposits \69\ and
fully insured brokered deposits.
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\69\ To reflect a change in insured deposits limit, large time
deposits are time deposits over $100,000 up to December 2009.
Starting in March 2010, large time deposits refer to time deposits
over $250,000. Because the last year-end Call Reports data used is
2017, the core deposit variable reflects the prevailing definition
through 2017.
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A bank's nonperforming loans and other real estate owned are used
to measure a bank's asset quality. Nonperforming loans are defined as a
sum of loans past due 90+ days and non-accruing loans. We also include
a bank's concentration in CRE, C&D, C&I, and consumer loans. A bank's
asset growth rate measures percent change in bank's total assets from
one year ago.
Bank earnings are measured as a ratio--income before taxes to
assets. A bank's interest expense is also included as an explanatory
variable. A bank's composite CAMELS ratings are represented as separate
binary (0,1) variables to allow for non-linear ratings effects on the
probability of default. ``CAMELS 3'' is a binary variable that
indicates a bank's composite CAMELS rating is 3. ``CAMELS 4 or 5'' is a
binary variable that indicates a bank's composite CAMELS rating is 4 or
5. All financial variables are normalized by total assets with the
exception of CAMELS 3, CAMELS 4 or 5, and Asset Growth.
Time fixed effects are included to capture any difference in the
unconditional probability of bank failure across years. The
unconditional likelihood of a bank failing differs by period in part
because macroeconomic conditions and regulation vary. In the
probability of failure models, time fixed effect coefficients estimate
the unconditional failure probability for 3-year periods.\70\
---------------------------------------------------------------------------
\70\ For example, when Call Report and CAMELS ratings data from
December 1987 are used to predict failures in 1988, 1989, and 1990,
the time fixed effect coefficient measures the unconditional
probability of failure for 1988, 1989, and 1990.
---------------------------------------------------------------------------
Loss Rate Models
Failed bank loss rates are computed as a ratio of the most recent
estimate of the failure expense and the bank's total assets as of the
quarter before its failure. For the most part, the loss rates for
recent bank failures are estimates and not final costs as a
receivership process can take many years to conclude. The sample used
for the analysis includes banks that failed between April 13, 1984 and
December 15, 2017.\71\ The banks in the sample were insured by the BIF,
SAIF, and DIF. The analysis excludes any banks that received open bank
assistance.
---------------------------------------------------------------------------
\71\ The loss rate data for more recent bank failures is updated
through 2017.
---------------------------------------------------------------------------
Failed bank loss rates are modeled as a function of the income and
balance sheet characteristics of the failed bank. The model explains
loss rates using a failed bank's equity, nonperforming loans, other
real estate owned, core deposits, brokered deposits, income earned but
not collected, and total loans to executives as explanatory variables.
These variables are scaled by a bank's asset size. The model allows
loss rates to differ for small (asset size $500 million or less),
medium (asset size between $500 million to $1 billion), and large
(asset size $1 billion and higher) banks. Call Report/TFR data are from
the last quarter before the bank failure date.\72\
---------------------------------------------------------------------------
\72\ There are some banks in the sample that have not filed Call
Reports or TFRs on the quarter prior to its failure. For those
banks, we use Call Reports as of two quarters prior to failure.
---------------------------------------------------------------------------
Reciprocal Deposit Data
Banks began reporting their reciprocal brokered deposit funds
separated from non-reciprocal brokered deposits beginning in June 2009.
In analyzing the effects of reciprocal deposits, we use Call Reports/
TFRs and CAMELS rating data from June 2009 through December 2017. The
analysis examines reciprocal deposit data through December 2017. During
this time period, all reciprocal deposits were considered brokered
deposits. The Economic Growth, Regulatory Reform, and Consumer
Protection Act, which was signed into law on May 24, 2018, allows
certain banks to except a limited amount of reciprocal deposits from
brokered deposits.
Listing Service Deposit Data
Banks began reporting deposits obtained through the use of deposit
listing services that are not brokered deposits beginning in March
2011. In analyzing the effects of reciprocal deposits, we use Call
Reports and CAMELS rating data from March 2011 through December 2017.
Estimation Results
Core Deposits and Bank Failure Probability
In this section, we examine the relationship between core deposits
and bank failure probabilities. Core deposits provide a bank with a
stable and
[[Page 2385]]
relatively cost effective source of funds. Core deposits, moreover, are
an important component of customer-bank relationships. Many core
depositors have long-term financial relationships with a bank that
involve deposits, lending, and other financial services that generate
bank profits. A bank's core deposit base is a measure of the size of a
bank's opportunity set for relationship lending. Academic studies as
well as FDIC resolutions experience suggest that core deposits are a
significant source of bank franchise value.
Table 1 reports the results of a failure probability model that
includes equity and the core deposits to assets ratio as predictive
variables. The estimated coefficient on equity is negative,
statistically significant, and very large in magnitude, suggesting that
adequate equity buffers are among the most important factors lowering a
bank's risk of default. The coefficient estimate on core deposits is
also negative and statistically significant. Controlling for bank
equity, the core deposits ratio is negative and statistically
significant, suggesting that banks with higher core deposits have lower
failure probability.\73\
---------------------------------------------------------------------------
\73\ The regression includes time fixed effects, but the
coefficient estimates are not reported in Table 1.
Table 1--Core Deposits and Bank Failure Probabilities
------------------------------------------------------------------------
Coefficient
Variable estimates
------------------------------------------------------------------------
Intercept............................................... *** -2.331
[0.000]
Equity.................................................. *** -0.284
[0.000]
Core deposits........................................... *** -0.027
[0.000]
Nonperforming loans..................................... *** 0.132
[0.000]
Other real estate owned................................. *** 0.124
[0.000]
Income before taxes..................................... *** -0.145
[0.000]
Interest expense........................................ *** 0.172
[0.000]
CAMELS rating 3......................................... *** 0.867
[0.000]
CAMELS rating 4 or 5.................................... *** 1.687
[0.000]
Asset growth............................................ *** 0.012
[0.000]
CRE loans............................................... *** 0.019
[0.000]
C&D loans............................................... *** 0.061
[0.000]
C&I loans............................................... *** 0.024
[0.000]
Consumer loans.......................................... *** 0.013
[0.000]
Pseudo R2............................................... 0.515
Wald Chi2............................................... *** 3,224
N....................................................... 98,237
------------------------------------------------------------------------
Notes:
\1\ Uses December Call Report data from 1987, 1990, 1993, 1996, 1999,
2002, 2005, 2008, 2011, and 2014 to predict failures from 1988-2017.
\2\ Core deposits are defined as domestic deposits minus time deposits
over the insurance limit and fully insured brokered deposits.
\3\ All financial variables are normalized by total assets with the
exception of CAMELS rating 3, CAMELS rating 4 or 5, and Asset Growth.
CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables
indicating that the institution is CAMELS 3-rated and the institution
is CAMELS 4 or 5-rated, respectively. Asset Growth is the
institution's one-year asset growth rate.
\4\ Year fixed effects are included but not reported.
\5\ Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. **
Indicates statistical significance at the 5 percent level. * Indicates
statistical significance at the 10 percent level. P-values are
reported in brackets.
Brokered Deposits and the Probability of Bank Failure
In this section, we examine the relationship between brokered
deposits and bank failure probability and loss rates to the insurance
fund. To summarize the results in this section, we find that brokered
deposit use is associated with higher probability of bank failure and
higher insurance fund loss rates. Brokered deposits may elevate a
bank's risk profile in part because brokered deposits are frequently
used as a substitute for bank core deposits and, less frequently, for
equity, and so from the FDIC's perspective, banks that use brokered
deposits operate with a higher risk liability structure relative to
banks that do not use brokered deposits.
Bank failure probability model estimates are reported in Table 2.
Column (1) of Table 2 reports that brokered deposits have a positive,
statistically significant effect on a bank's estimated probability of
failure over a three-year horizon. In this logistic regression
specification, the income
[[Page 2386]]
before tax ratio is negatively correlated with bank failures, implying
that banks with higher earnings ratios are less likely to fail. Banks
with higher nonperforming loan and other real estate owned ratios are
more likely to fail. All of these effects are statistically significant
at the 1 percent level. There is a positive and statistically
significant relationship between lagged asset growth rate and bank
failures. The estimated coefficient for the growth rate is positive and
statistically significant suggesting that, other things equal, banks
experiencing rapid growth are more likely to fail within the next 3
years. Estimates also suggest that CRE, C&D, C&I, and consumer loan
concentrations increase failure probability estimates. Banks with a
composite CAMELS rating of 3 and those with a rating of 4 or 5, are
more likely to fail compared to CAMELS 1 or 2 rated banks. This model
specification shows a statistically significant relationship between
interest expense and bank failures. The model also includes time fixed
effects, but these estimates are not reported.\74\
---------------------------------------------------------------------------
\74\ The omitted period, the period without an estimate of time
fixed effect, is 1988-1990 and so time fixed effects estimates the
unconditional probability of a 3 year period relative to the
unconditional probability for 1988-1990. The time fixed effect
coefficients estimates are negative and statistically significant
indicating that the unconditional probability of failure was lower
in the periods 1991-1993, 1994-1996, 1997-1999, 2000-2002, 2003-
2005, 2006-2008, 2012-2014 and 2015-2017 (relative to 1988-1990).
The time fixed effect coefficient for 2009-2011 is negative but
statistically insignificant indicating no average default rate
difference relative to 1988-1990.
---------------------------------------------------------------------------
In the estimates reported in Table 2, Column (1), brokered deposits
are the only funding variable included in the regression (equity and
core deposits are excluded from the regression). In this specification,
brokered deposits are clearly associated with an increase in bank
failure probability, but the reason for the increase is unclear. When a
bank increases its brokered deposit-to-asset ratio, there must be an
offsetting change in at least one of the bank's other funding sources.
That is, the bank must change its equity-to-asset ratio, its core
deposit-to-asset ratio, or its other non-core deposits and other
liabilities to asset ratio to offset the increase in its brokered
deposit ratio. This implicit shift in a bank's liability structure is
one possible source of the increase in bank fragility that is
identified by the positive coefficient on brokered deposits reported in
Column (1). For example, if the bank's equity-to-asset ratio declines
to offset an increase in a bank's brokered deposit ratio, then the bank
is using brokered deposits to increase its leverage which would
increase its probability of failure. We investigate these potential
capital structure effects on bank failure probability using a series of
regressions reported in Columns (2) and (3) of Table 2.
To control for bank leverage, we include a bank's equity-to-asset
ratio in the failure model. The results are reported in Table 2, Column
(2). By controlling for the equity ratio, the estimated coefficient on
brokered deposits measures the effect of increasing a bank's reliance
on brokered deposits and decreasing its reliance on other liabilities
(such as core deposits, federal funds purchased, and FHLB advances),
holding a bank's equity-to-asset ratio unchanged. The negative and
statistically significant coefficient estimate on the equity ratio
implies that greater equity lowers a bank's probability of default. The
positive and statistically significant coefficient on the brokered
deposits ratio (unchanged from previous) suggests that, holding bank
leverage constant, a higher brokered deposits ratio (with decreased
reliance on other funding sources) unambiguously increases the
probability that a bank will fail in the subsequent three years. These
results show that the use of brokered deposits increases a bank's
failure probability even when they are not used as a substitute for
bank equity.
Controlling for a bank's leverage ratio, the use of brokered
deposits raises the estimated probability of bank failure. Why? As we
have demonstrated in the prior section, core deposits are an important
category of bank liabilities. Core deposits are associated with a lower
probability of bank failure. Other things held constant, should a bank
with a large core deposit franchise become distressed, long-standing
FDIC resolution experience suggests that it is much more likely to be
recapitalized through a purchase or a merger and not through an FDIC
resolution. Thus, one possible avenue through which failure probability
might be affected by the use of brokered deposits is if brokered
deposits are used as a substitute for core deposit funding.
In Table 2, Column (3), we estimate the effects of brokered
deposits on the probability of bank failure holding constant a bank's
core deposit ratio. In this specification, core deposits are negative
and statistically significant whereas brokered deposits are positive
and statistically significant. The interpretation is that, holding
constant the asset risk characteristics of a bank, provided a bank's
share of funding from core deposits remains unchanged, on average, the
use of brokered deposits increases a bank's probability of failure.
In Table 2, Column (4), we include three bank funding categories as
controls: brokered deposits, equity, and core deposits. The
coefficients of equity and core deposits are both negative and
statistically significant, indicating that higher equity and core
deposit funding shares both reduce the probability of bank failure. In
this specification, the estimated coefficient on the brokered deposits
ratio measures the effect of increasing brokered deposits, holding
constant equity and core deposits, and reducing reliance on other bank
liabilities. The estimated coefficient on brokered deposits is not
statistically significant. These results suggest that brokered deposits
can be substituted for other bank liabilities without any statistically
measureable effect on a bank's failure probability, provided that a
bank's share of equity and core deposit funding and its asset risk
characteristics remain unchanged.
Table 2--Brokered Deposits and Failure Probability Over a Three-Year Horizon
----------------------------------------------------------------------------------------------------------------
Coefficient Coefficient Coefficient Coefficient
Variable estimates estimates estimates estimates
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
Intercept....................................... *** -6.447 *** -4.674 *** -5.119 *** -2.312
[0.000] [0.000] [0.000] [0.000]
Brokered deposits............................... *** 0.026 *** 0.022 *** 0.013 -0.001
[0.000] [0.000] [0.014] [0.790]
Equity.......................................... .............. *** -0.273 .............. *** -0.284
.............. [0.000] .............. [0.000]
Core deposits................................... .............. .............. *** -0.016 *** -0.027
[[Page 2387]]
.............. .............. [0.000] [0.000]
Nonperforming loans............................. *** 0.164 *** 0.138 *** 0.164 *** 0.132
[0.000] [0.000] [0.000] [0.000]
Other real estate owned......................... *** 0.142 *** 0.117 *** 0.147 *** 0.124
[0.000] [0.000] [0.000] [0.000]
Income before taxes............................. *** -0.148 *** -0.149 *** -0.140 *** -0.145
[0.000] [0.000] [0.000] [0.000]
Interest expense................................ *** 0.114 *** 0.199 *** 0.097 *** 0.172
[0.000] [0.000] [0.000] [0.000]
CAMELS rating 3................................. *** 0.992 *** 0.862 *** 1.002 *** 0.867
[0.000] [0.000] [0.000] [0.000]
CAMELS rating 4 or 5............................ *** 2.280 *** 1.596 *** 2.347 *** 1.688
[0.000] [0.000] [0.000] [0.000]
Asset growth.................................... *** 0.009 *** 0.014 *** 0.007 *** 0.012
[0.000] [0.000] [0.000] [0.000]
CRE loans....................................... *** 0.022 *** 0.020 *** 0.021 *** 0.019
[0.000] [0.000] [0.000] [0.000]
C&D loans....................................... *** 0.065 *** 0.066 *** 0.062 *** 0.061
[0.000] [0.000] [0.000] [0.000]
C&I loans....................................... *** 0.031 *** 0.030 *** 0.028 *** 0.024
[0.000] [0.000] [0.000] [0.000]
Consumer loans.................................. *** 0.021 *** 0.015 *** 0.018 *** 0.013
[0.000] [0.000] [0.000] [0.000]
Pseudo R\2\..................................... 0.471 0.509 0.473 0.515
Wald Chi2....................................... *** 3,678 *** 3,193 *** 3,763 *** 3,228
No. of observations............................. 98,237 98,237 98,237 98,237
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Uses December Call Report data from 1987, 1990, 1993, 1996, 1999, 2002, 2005, 2008, 2011, and 2014 to
predict failures from 1988-2017.
\2\ Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured
brokered deposits.
\3\ All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating
4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the
institution is CAMELS 3-rated and the institution is CAMELS 4 or 5-rated, respectively. Asset Growth is the
institution's one-year asset growth rate.
\4\ Year fixed effects are included but not reported.
\5\ Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
brackets.
To summarize, these series of regression model estimates show that
the use of brokered deposits is associated with a higher probability of
bank failure. The higher probability owes to a core deposit or equity
effect: When banks substitute brokered deposits for core deposits or
equity, this can increase their probability of failure. It is also
possible that the use of brokered deposits is a general indicator of a
higher risk appetite on the part of bank management which, may be
reflected in the riskiness of the assets that a bank purchases. We turn
to this issue in the next section.
Brokered Deposits and Bank Asset Growth and Quality
To determine whether the use of brokered deposits may also be a
general indicator of a higher risk appetite on the part of bank
management, as reflected in the bank's asset growth or nonperforming
loans, the FDIC examined the relationship between brokered deposits and
asset growth, and between brokered deposits and nonperforming loans.
To assess whether the use of brokered deposits helps to explain the
variation in observed bank growth rates, we estimate alternative models
in which a bank's 3-year growth rate is in part determined by its 3-
year average use of brokered deposits. Overall, the regression analysis
suggests that banks using brokered deposits often exhibit higher 3-year
growth rates compared to banks that do not use brokered deposits. This
positive relationship is likely to be the result of a complex series of
choices made by bank management that drive both a bank's growth rate
and its use of brokered deposits. The underlying structural choice
models are undoubtedly much more complex than the models estimated in
this analysis. For example, we would expect that aggregate and local
market lending conditions, interest rates and employment all to be
factors included in the simultaneous determination of a bank's growth
rate and brokered deposit usage.
To analyze the relationship between brokered deposits and asset
quality, we estimated various models that explain the level of non-
performing bank loans at the end of three years using macroeconomic
controls and bank-specific measures of risk, including variables that
measure their use of brokered deposit funding. Nonperforming loans are
defined as a sum of loans past due 90+ days, non-accruing loans, and
other real estate owned. Banks that are willing to undertake riskier
funding structures may also be willing to invest in higher risk loan
portfolios. If this is true, banks that fund themselves with brokered
deposits would also tend to be banks with higher non-performing loans.
The results of the regression analysis include an estimated
coefficient for the brokered deposits to assets ratio that is positive
and statistically significant, implying that an increase in the
brokered deposit ratio is associated with an increase in the
nonperforming loans ratio three years into the future. In contrast,
higher core deposits are
[[Page 2388]]
associated with more conservative lending practices. Banks with high
reserves, liquid assets, and consumer loans tend to have a lower
nonperforming loan-to-asset ratio three years later. In contrast, banks
with high interest expenses, income before taxes, C&I loans, C&D loans,
and CRE loans are more likely to have a higher nonperforming loan ratio
three years later. An increase in bank size, on average, is associated
with a lower nonperforming loan ratio.
The FDIC also tested an alternative definition of a nonperforming
loans ratio (the sum of loans past due 90+ days and non-accruing
loans), and the results are qualitatively similar to those in the
initial regression analysis. Brokered deposits continue to be
positively correlated with nonperforming loan ratios.
Loss Rate Models
In this section, we investigate whether banks' use of brokered
deposit funding is associated with higher DIF loss rates when a bank
fails. Banks with heavy reliance on brokered deposits may have a low
franchise value because they lack a large core deposit customer base.
In addition, banks that fund themselves with brokered deposits tend to
have higher non-performing loans which may contribute to higher DIF
losses.
Table 3 reports the results of the loss rate regression analysis.
Column (1) of Table 3 suggests that higher nonperforming loans, other
real estate owned, income earned but not collected, loans to executives
to asset ratios are associated with higher loss rates. Banks with
higher C&D, C&I, and consumer loans also tend to have higher loss
rates. Medium-sized (asset size between $500 million to $1 billion) and
large failed banks (asset size $1 billion and higher) tend to have
lower loss rates compared to small banks (asset size $500 million or
less). The year fixed-effects (not reported) are added to capture any
difference in unconditional loss rates across years. These fixed
effects capture loss rate differences that may be driven by year-to-
year differences in the strength of the economy or supervision and
regulation.\75\
---------------------------------------------------------------------------
\75\ For example, legislative changes such as the cross
guarantee provision in FIRREA of 1989 and the least cost resolution
requirement in FDICIA of 1991. Unconditional loss rates of banks
that failed in 1998, 2007, 2008, and 2009 are higher compared to
loss rates in 1984 (the base year) with statistical significance.
Compared to loss rates in 1984, loss rates are substantially lower
in 1985, 1990, 1991, 1992, 1993, 1994, 2000, and 2004 with
statistical significance.
---------------------------------------------------------------------------
In the failure loss rate model specification reported in Table 3,
Column (1), only brokered deposits are included as a funding variable.
The estimated coefficient for brokered deposits measures the effect of
an increase in brokered deposits and an offsetting reduction in other
funding sources on the loss rate. The positive and statistically
significant coefficient on brokered deposits in Column (1) suggests
that an increase in a bank's reliance on brokered deposits (and an
offsetting decrease in other funds either equity or other liabilities)
increases the DIF loss rate.
In Table 3 Column (2), the failed bank's equity ratio is also
included as an explanatory variable. The positive and statistically
significant coefficient on brokered deposits suggests that increasing
reliance on brokered deposits, holding bank equity constant and
reducing other liabilities (such as core deposits, fed funds purchased,
FHLB advances), there is an increase in the DIF loss rate. The negative
and statistically significant coefficient on the equity ratio suggests
that increasing equity and decreasing a bank's reliance on other
liabilities with no change in brokered deposits reduces the loss rate.
In Table 3, Column (3), the failed bank's core deposit ratio and
brokered deposit ratio are included as explanatory variables. The
positive and statistically significant coefficient on brokered deposits
suggests that, increasing reliance on brokered deposits, holding core
deposits constant and reducing other liabilities (such as federal funds
purchased, FHLB advances) and possibly equity, there is an increase in
the DIF loss rate. The negative and statistically significant
coefficient on the core deposit ratio suggests that increasing core
deposits and decreasing a bank's reliance on other liabilities while
holding brokered deposits constant reduces the DIF loss rate.
The model specification reported in Table 3, Column (4) includes
brokered deposits, equity, and core deposits as funding measures. In
this specification, the estimated coefficient on brokered deposits is
negative and statistically insignificant suggesting that, other control
variables held constant, when equity and core deposits are unchanged,
increasing brokered deposits and decreasing other bank liabilities has
no statistically measurable effect on loss rates. In contrast,
replacing other liabilities with equity or core deposits with no change
in brokered deposits decreases a bank's failure loss rate.
To summarize these results, we find that the use of brokered
deposits results in higher loss rates to the DIF. These higher losses
can be linked to two causes, a leverage effect and a core deposit
effect. The leverage effect arises because brokered deposits are often
used as a substitute for bank equity and so when brokered deposits are
in use there is less capital to cushion the DIF's loss. The core
deposit effect is the substitution of brokered for core deposits. This
lowers bank franchise value which also increases the DIF loss rate.
Table 3--Bank Failure Loss Rate Models
----------------------------------------------------------------------------------------------------------------
Coefficient Coefficient Coefficient Coefficient
Variable estimates estimates estimates estimates
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
Intercept....................................... *** 6.350 *** 9.324 *** 9.680 *** 17.465
[0.000] [0.000] [0.000] [0.000]
Brokered deposits............................... *** 0.104 *** 0.082 * 0.063 -0.015
[0.000] [0.003] [0.061] [0.665]
Equity.......................................... .............. *** -0.470 .............. *** -0.550
.............. [0.000] .............. [0.000]
Core deposits................................... .............. .............. ** -0.044 *** -0.102
.............. .............. [0.030] [0.000]
Nonperforming loans............................. *** 0.431 *** 0.327 *** 0.441 *** 0.333
[0.000] [0.000] [0.000] [0.000]
Other real estate owned......................... *** 0.835 *** 0.738 *** 0.845 *** 0.746
[[Page 2389]]
[0.000] [0.000] [0.000] [0.000]
Income earned but not collected................. *** 3.620 *** 3.888 *** 3.690 *** 4.095
[0.000] [0.000] [0.000] [0.000]
Loan to executive officers...................... *** 0.334 ** 0.302 ** 0.323 ** 0.272
[0.008] [0.015] [0.010] [0.027]
Bank size between $500 mil-$1 bil............... *** -5.517 *** -5.118 *** -5.882 *** -5.886
[0.000] [0.000] [0.000] [0.000]
Bank size >$1 billion........................... *** -9.064 *** -9.015 *** -9.567 *** -10.158
[0.000] [0.000] [0.000] [0.000]
CRE loans....................................... -0.002 -0.014 -0.001 -0.013
[0.940] [0.650] [0.974] [0.674]
C&D loans....................................... *** 0.140 *** 0.163 *** 0.134 *** 0.151
[0.001] [0.000] [0.001] [0.000]
C&I loans....................................... *** 0.243 *** 0.216 *** 0.237 *** 0.199
[0.000] [0.000] [0.000] [0.000]
Consumer loans.................................. *** 0.128 *** 0.117 *** 0.125 *** 0.108
[0.000] [0.000] [0.000] [0.000]
Adjusted R...................................... 0.350 0.373 0.351 0.381
No. of observations............................. 1,943 1,943 1,943 1,943
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Estimates use data from 1984 to 2017 to predict failure loss rates in 1984 to 2017.
\2\ Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured
brokered deposits.
\3\ All financial variables are normalized by total assets with the exception of Bank size between $500 mil-$1
bil and Bank size $1billion. Bank size between $500 mil-$1 bil is a dummy variable indicating that
the institution's asset size is between $500 million and $1 billion. Bank size $1billion is a dummy
variable indicating that the institution's asset size is over $1 billion.
\4\ The regressions include year fixed effects, but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
brackets.
Analysis of Reciprocal Deposits
In this section we use the available data to analyze reciprocal
deposit use patterns and the effects of reciprocal deposits on the
probability of bank failure and DIF loss rates. Banks began reporting
reciprocal brokered deposit funds separately from non-reciprocal
brokered deposits beginning June 2009. This analysis examines
reciprocal deposit data through December 2017. During this time period,
all reciprocal deposits were considered brokered deposits. The Economic
Growth, Regulatory Reform, and Consumer Protection Act, which was
signed into law on May 24, 2018, allows certain banks to except a
limited amount of reciprocal deposits from brokered deposits.
The data show that while a minority of banks use reciprocal
deposits, those that use this source of funding tend to raise a large
percentage of their brokered deposits using reciprocal deposits. From
June 2009 through December 2010, the use of reciprocal deposits became
more widespread, but was still uncommon. Over this period, on average,
the use of brokered deposits declined from December 2011, then
increased starting in December 2015. The relative importance of
reciprocal deposits as a component of brokered deposits increased from
December 2011 to December 2013 and has since fallen. Table 4 reports
the distribution of different brokered deposit ratios by Call Report
date.\76\ The first panel of Table 4 reports the distribution of
different brokered deposit ratios (total brokered, reciprocal brokered,
and non-reciprocal brokered deposits to assets ratios) for December
2011. The median values for each of these ratios are zero; in December
2011, out of 7,366 banks, 3,015 banks had non-zero brokered deposits.
---------------------------------------------------------------------------
\76\ Banks report a total for brokered deposits and also report
the amount of this total that are reciprocal deposits. We exclude
observations when a bank reports a positive reciprocal brokered
deposit value but reports a zero value for total brokered deposits.
We also exclude from the sample banks that report higher values for
reciprocal brokered deposits than for total brokered deposits.
---------------------------------------------------------------------------
In December 2011, an average bank's reliance on brokered deposits
(2.43%) was split between reciprocal brokered deposits (0.58%) and non-
reciprocal brokered deposits (1.85%). Only a very small share of banks
has a heavy reliance on reciprocal brokered deposits. The 99th
percentile of the reciprocal brokered deposit ratio is 11.61% and the
maximum observed ratio is 49.55%.
Rows (4) and (5) of Table 4 report the distributions of the ratios
of reciprocal deposits and non-reciprocal brokered deposits to total
brokered deposits for banks that report positive brokered deposits. The
median reciprocal to total brokered deposits ratio is 0.\77\ Among
banks using brokered deposits, on average 31.44% of brokered deposits
are reciprocal deposits. Fourteen percent of banks using brokered
deposits use only reciprocal brokered deposits.
---------------------------------------------------------------------------
\77\ Only 1,348 banks reported positive reciprocal brokered
deposits out of 3,015 banks that report positive brokered deposits.
---------------------------------------------------------------------------
Rows (6) and (7) of Table 4 report the distributions of reciprocal
deposits and non-reciprocal brokered deposits to total brokered
deposits ratios for the sample of banks that report positive reciprocal
brokered deposits. The data show that while reciprocal brokered
deposits are not used widely among banks that rely on brokered deposits
for funding, when they are used, they frequently are a bank's primary
source of brokered funding.
Comparing data from December 2011 and December 2017, fewer banks
are using brokered deposits, but among those banks that do, reliance on
brokered deposits has been increasing. The mean total brokered deposits
to assets ratio in December 2017 was 2.90% which increased from 2.43%
in December 2011. The trend for banks' reliance on reciprocal deposits
is less clear. In December 2011, 1,348 banks reported positive
reciprocal deposit
[[Page 2390]]
balances. This number declined to 1,199 banks in December 2014, and has
remained relatively stable, declining somewhat to 1,184 by December
2017. The average usage of reciprocal deposits has increased; the mean
reciprocal deposits to assets ratio was 0.80% in December 2017 compared
to 0.58% in December 2011. Generally, the share of brokered deposits
funded by reciprocal versus non-reciprocal deposits has remained
stable.
Table 4--Distribution of Different Brokered Deposits Ratios by Call Report Date
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ratios N Max 99th 95th 90th Med Mean
--------------------------------------------------------------------------------------------------------------------------------------------------------
December 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1).......................... Total brokered/assets......... 7,366 90.83 27.28 12.15 7.30 0.00 2.43
(2).......................... Reciprocal brokered/assets.... 7,366 49.55 11.61 3.63 1.29 0.00 0.58
(3).......................... Non-reciprocal brokered/assets 7,366 90.83 25.47 9.82 5.40 0.00 1.85
(4).......................... Reciprocal brokered/total 3,015 100.00 100.00 100.00 100.00 0.00 31.44
brokered.
(5).......................... Non-reciprocal brokered/total 3,015 100.00 100.00 100.00 100.00 100.00 68.56
brokered.
(6).......................... Reciprocal brokered/total 1,348 100.00 100.00 100.00 100.00 97.13 70.31
brokered.
(7).......................... Non-reciprocal brokered/total 1,348 99.99 99.70 96.67 90.91 2.87 29.69
brokered.
--------------------------------------------------------------------------------------------------------------------------------------------------------
December 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1).......................... Total brokered/assets......... 5,678 87.66 29.92 13.69 9.00 0.00 2.90
(2).......................... Reciprocal brokered/assets.... 5,678 41.37 13.09 5.52 2.25 0.00 0.80
(3).......................... Non-reciprocal brokered/assets 5,678 87.66 25.32 10.27 6.62 0.00 2.10
(4).......................... Reciprocal brokered/total 2,526 100.00 100.00 100.00 100.00 0.00 31.79
brokered.
(5).......................... Non-reciprocal brokered/total 2,526 100.00 100.00 100.00 100.00 100.00 68.21
brokered.
(6).......................... Reciprocal brokered/total 1,184 100.00 100.00 100.00 100.00 86.76 67.81
brokered.
(7).......................... Non-reciprocal brokered/total 1,184 99.99 99.65 96.81 91.86 13.24 32.19
brokered.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reciprocal Deposit Usage at Failed Banks
In this section, we examine the extent to which failed banks relied
on reciprocal brokered deposits. The analysis includes banks that
failed between July 2009 and December 15, 2017. During this period, 458
banks failed.
Table 5 reports number (percentage in parenthesis) of failed banks
that reported positive reciprocal deposits and non-reciprocal brokered
deposits on their balance sheet prior to their failure. In this table,
data are analyzed according to the Call Report data reported a selected
number of quarters before the bank failure date. Reciprocal deposits
were first reported on Call Reports in June 2009. Hence, we are limited
to 180 failures, which failed between April 2011 and December 2017, to
have 8 quarters of Call Report data with reciprocal deposit
information. In contrast, there are 458 failures, which failed between
July 2009 to December 2017, with 1 quarter of Call Report data with
reciprocal deposit information.
The data suggest a number of consistent patterns. Column (3) shows
that somewhere between 60 and 70 percent of the failed banks used
brokered deposits for at least six quarters before they failed. There
is also evidence that suggests that some of these failed banks stop
using brokered deposits in the quarter prior to their failure. Of these
failed banks, roughly 20 percent used reciprocal deposits for up to
seven quarters prior to their failure, but like brokered deposits, some
also stopped using reciprocal deposit funding the quarter before they
failed.\78\
---------------------------------------------------------------------------
\78\ We have not investigated why these banks stopped using
reciprocal deposits.
Table 5--Brokered and Reciprocal Deposits Usage in Failed Banks
----------------------------------------------------------------------------------------------------------------
Number of banks Number of banks
Number of banks with positive non- with positive
Number of quarters before failure Number of with positive reciprocal reciprocal
observations brokered deposits brokered deposits brokered deposits
reported (%) reported (%) reported (%)
(1) (2) (3) (4) (5)
----------------------------------------------------------------------------------------------------------------
8...................................... 180 122 (67.78) 116 (64.44) 39 (21.67)
7...................................... 206 140 (67.96) 134 (65.05) 44 (21.36)
6...................................... 236 165 (69.92) 159 (67.37) 53 (22.46)
5...................................... 277 196 (70.76) 183 (66.06) 64 (23.10)
[[Page 2391]]
4...................................... 322 224 (69.57) 211 (65.53) 67 (20.81)
3...................................... 363 251 (69.15) 235 (64.74) 64 (17.63)
2...................................... 408 277 (67.89) 260 (63.73) 70 (17.16)
1...................................... 458 295 (64.41) 283 (61.79) 63 (13.76)
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Based on 458 Failures between July 2, 2009 and December 15, 2017. All failures after June 2009 when the
reciprocal deposits were first reported on the Call Reports.
Figure 1 graphs the failing banks' reciprocal deposits to assets
ratio prior to failure. The median reciprocal deposits ratio at 5, 4,
3, 2, and 1 quarter(s) before failure is 0%. In other words, the median
failed bank did not hold any reciprocal deposits up to 5 quarters prior
to failure. The reciprocal deposit ratios at the 90th percentile of the
distribution (the failed banks most reliant on reciprocal deposits) for
the 5 quarters before failure decline from nearly 1.6% to just over
0.2% of reciprocal deposit usage as banks approach failure.
Figure 2 graphs the failing banks' usage of non-reciprocal brokered
deposits (as a percentage of assets) prior to failure. Figure 2 shows
that the median bank usage of non-reciprocal brokered deposits also
declines as the banks approach failure. In contrast, those banks most
reliant on brokered deposits (the 90th percentile of the distribution),
do not show any significant run off in non-reciprocal brokered deposits
as the banks approach failure.
Given the small sample size involved in this analysis, it is
inappropriate to draw strong overall conclusions regarding the behavior
of reciprocal deposits balances at failing banks. Moreover, since not
all weak banks fail, the behavior of reciprocal deposit funding at weak
banks (not analyzed in this memo) could also inform the regulatory
debate about safety and soundness issues associated with reciprocal
deposit usage.
[GRAPHIC] [TIFF OMITTED] TP06FE19.020
[[Page 2392]]
[GRAPHIC] [TIFF OMITTED] TP06FE19.021
Failure Prediction and Reciprocal Deposits
We estimate three-year failure prediction models using 2009, 2012,
and 2015 data to predict failures from 2010 to 2017. We estimate
failure models as a function of reciprocal and non-reciprocal brokered
deposits. The results are reported in Table 6. Table 6 reports the
estimated coefficients and p-values of the logistic regressions.
In the failure model specification reported in Column (1) of Table
6, two funding ratios, reciprocal deposits and non-reciprocal brokered
deposits are included. Table 6 reports that the non-reciprocal brokered
deposits ratio has a positive and statistically significant effect on a
bank's estimated probability of failure.
Column (1) of Table 6 also shows that higher nonperforming loans
and other real estate owned are positively and statistically
significant variables in the bank failure probability model.
Because we measure the banks' liability components as ratios, as a
bank increases its use of reciprocal deposits and non-reciprocal
deposits, there are necessarily offsetting changes in the bank's other
funding sources. By including other funding measures in the models, we
investigate whether the implicit shift in a bank's liability structure
(as a bank increases its dependence on reciprocal and non-reciprocal
brokered deposits) is a possible source of the increase in failure
probability.
Column (2) of Table 6 reports the results of the failure
probability model when we include a bank's equity to asset ratio to
control for bank leverage. By including the equity ratio in the model,
the coefficient estimates on reciprocal and non-reciprocal brokered
deposits measure the effect of increasing a bank's reliance on these
deposit sources and decreasing its reliance on other liabilities,
holding the bank's equity ratio unchanged. Holding the bank equity
ratio constant, the estimated coefficient on non-reciprocal brokered
deposits ratio is positive with a p-value of 0.128. The estimated
coefficient on reciprocal deposits ratio remains statistically
insignificant.
Column (3) of Table 6 reports the failure model estimates when the
model includes a bank's reciprocal deposits, non-reciprocal brokered
deposits, and core deposits to assets ratios. In this specification,
the estimated coefficient on the reciprocal deposits ratio measures the
effect of increasing reciprocal deposits, holding constant non-
reciprocal brokered deposits and core deposits and reducing other bank
liabilities. The coefficient of the reciprocal deposits ratio remains
statistically insignificant. The coefficient of non-reciprocal deposits
is statistically significant when core deposits are held constant. The
coefficient of the core deposits ratio on bank failure probability is
statistically insignificant. This result differs from the results in an
earlier section as well as long standing FDIC experience where, on
average, core deposits reduce the failure probability.
Column (4) of Table 6 reports the failure model estimates when the
model includes a bank's reciprocal deposits, non-reciprocal brokered
deposits, equity, and core deposits to assets ratios. In this
specification, the estimated coefficient on the reciprocal deposits
ratio measures the effect of increasing reciprocal deposits, holding
constant non-reciprocal brokered deposits, equity, and core deposits
and reducing other bank liabilities. The coefficient of reciprocal
deposits remains statistically insignificant. The coefficient of non-
reciprocal deposits is not statistically significant when the equity
and core deposits ratios are both held constant.
The results suggest that, on average, failed banks that used
reciprocal brokered deposits did not use them as a substitute for
equity or core deposit funding. The regression results show that equity
and core deposits both decrease a bank's probability of failure. If
banks that used reciprocal deposits used them as a substitute for
equity or core deposit funding, the reciprocal deposit coefficient in
Column (1) would be positive and significant and mirror the coefficient
for non-reciprocal deposits. The fact that the reciprocal deposit
coefficient in Column (1) is insignificant is consistent with the
[[Page 2393]]
interpretation that banks that used reciprocal brokered deposits in
this sample period did not use them to substitute for equity or core
deposit funding. At the same time, this analysis is based on a small
sample limited to failures between 2010 and 2017. We believe it is
inappropriate to place a high degree of confidence in the results of
the analysis based on this limited sample.
Table 6--Three Year Failure Prediction Models for Reciprocal Deposits
----------------------------------------------------------------------------------------------------------------
Coefficient Coefficient Coefficient Coefficient
Variables estimates estimates estimates estimates
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
Intercept....................................... *** -7.053 *** -2.995 * -9.289 -1.602
[0.000] [0.000] [0.069] [0.137]
Non-reciprocal brokered deposits................ *** 0.023 0.014 *** 0.033 -0.003
[0.001] [0.128] [0.001] [0.836]
Reciprocal deposits............................. -0.015 -0.028 0.001 -0.040
[0.544] [0.349] [0.978] [0.181]
Equity.......................................... .............. *** -0.508 .............. *** -0.520
.............. [0.000] .............. [0.000]
Core deposits................................... .............. .............. 0.019 ** -0.019
.............. .............. [0.515] [0.033]
Nonperforming loans............................. *** 0.190 *** 0.142 *** 0.184 *** 0.142
[0.000] [0.000] [0.000] [0.000]
Other real estate owned......................... *** 0.086 0.040 ** 0.075 0.042
[0.001] [0.210] [0.030] [0.182]
Income before taxes............................. *** -0.090 ** -0.097 *** -0.092 ** -0.101
[0.000] [0.026] [0.000] [0.028]
Interest expense................................ -0.018 *** 0.419 0.561 * 0.359
[0.499] [0.000] [0.746] [0.078]
Asset growth.................................... ** 0.009 *** 0.021 0.014 *** 0.020
[0.037] [0.000] [0.388] [0.000]
CRE loans....................................... 0.0002 0.0007 -0.0007 0.001
[0.979] [0.929] [0.923] [0.890]
C&D loans....................................... *** 0.035 *** 0.047 *** 0.034 *** 0.046
[0.004] [0.001] [0.007] [0.001]
C&I loans....................................... 0.007 0.022 0.012 0.021
[0.534] [0.111] [0.589] [0.121]
Consumer loans.................................. -0.014 -0.030 -0.026 -0.025
[0.484] [0.599] [0.506] [0.632]
CAMELS 3........................................ *** 1.772 *** 1.498 *** 1.772 *** 1.501
[0.000] [0.000] [0.000] [0.000]
CAMELS 4 or 5................................... *** 3.730 *** 2.101 *** 3.576 *** 2.087
[0.000] [0.000] [0.000] [0.000]
Pseudo R2....................................... 0.543 0.633 0.545 0.634
Wald Chi2....................................... 867 733 838 744
No. of observations............................. 21225 21225 21225 21225
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Using year-end Call Reports from 2009, 2012, and 2015 to predict 363 failures from 2010 to 2017.
\2\ Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured
brokered deposits.
\3\ All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating
4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the
institution is CAMELS 3-rated and the institution is CAMELS 4 or 5-rated, respectively. Asset Growth is the
institution's one-year asset growth rate.
\4\ The regressions include time fixed effects, but the coefficient estimates are not reported.
\5\ Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
brackets.
Failure Loss Rate Models Including Reciprocal Deposits
In this section, we examine whether banks' reliance on reciprocal
brokered deposits are associated with differential failure loss rates.
Again, data on reciprocal brokered deposits limits the sample to banks
that failed between July 2009 and December 2017.\79\
---------------------------------------------------------------------------
\79\ The Loss rate model is based on 457 failures instead of 458
as reported in Table 5. One institution was excluded from loss rate
model estimation because of abnormality in its last Call Report
data. Namely, its core deposits to assets ratio was higher than
100%.
---------------------------------------------------------------------------
Failed bank loss rates are modeled as a function of the income and
balance sheet characteristics of the failed bank. The explanatory
variables included in the model are reciprocal deposits, non-reciprocal
brokered deposits, equity, core deposits, nonperforming loans, other
real estate owned, income earned but not collected, and loans to
executive officers. In addition, we include a bank's concentration in
CRE (commercial real estate), C&D (construction and development), C&I
(commercial and industrial), and consumer loans. The model allows loss
rates to differ for small (asset size $500 million or less), medium
(asset size between $500 million to $1 billion), and large (asset size
$1 billion and higher) banks. The year fixed-effects are added to
capture any difference in unconditional loss rates across years. Call
Report/TFR data are from the last quarter before the bank failure
date.\80\
---------------------------------------------------------------------------
\80\ There are some banks in the sample that have not filed Call
Reports/TFRs on the quarter prior to its failure. For those banks,
we use Call Reports/TFRs as of two quarters prior to failure.
[[Page 2394]]
Table 7--Loss Rate Models Including Reciprocal Brokered Deposits
----------------------------------------------------------------------------------------------------------------
Coefficient Coefficient Coefficient Coefficient
Variable estimates estimates estimates estimates
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
Intercept....................................... *** 11.754 *** 13.479 0.551 5.101
[0.000] [0.000] [0.890] [0.220]
Non-reciprocal brokered deposits................ * 0.092 * 0.095 *** 0.262 *** 0.218
[0.090] [0.073] [0.000] [0.003]
Reciprocal deposits............................. -0.253 -0.230 -0.131 -0.145
[0.448] [0.483] [0.694] [0.658]
Equity.......................................... .............. *** -0.738 .............. *** -0.623
.............. [0.000] .............. [0.001]
Core deposits................................... .............. .............. *** 0.168 ** 0.121
.............. .............. [0.001] [0.016]
Nonperforming loans............................. *** 0.502 *** 0.415 *** 0.467 *** 0.404
[0.000] [0.000] [0.000] [0.000]
Other real estate owned......................... *** 0.827 *** 0.783 *** 0.801 *** 0.771
[0.000] [0.000] [0.000] [0.000]
Income earned but not collected................. *** 6.453 *** 6.361 *** 6.276 *** 6.247
[0.000] [0.000] [0.000] [0.000]
Loan to executive officers...................... 0.041 -0.074 0.020 -0.071
[0.915] [0.844] [0.958] [0.848]
Bank size between $500 mil-$1 bil............... *** -6.063 *** -5.905 *** -5.526 *** -5.540
[0.000] [0.000] [0.001] [0.001]
Bank size > $1 billion.......................... *** -8.686 *** -8.305 *** -7.151 *** -7.253
[0.000] [0.000] [0.000] [0.000]
CRE loans....................................... 0.018 0.027 0.013 0.022
[0.695] [0.549] [0.780] [0.628]
C&D loans....................................... 0.123 * 0.137 * 0.134 * 0.143
[0.103] [0.065] [0.073] [0.053]
C&I loans....................................... ** 0.162 * 0.138 * 0.151 * 0.134
[0.043] [0.079] [0.056] [0.087]
Consumer loans.................................. ** 0.705 *** 0.758 ** 0.702 *** 0.747
[0.013] [0.007] [0.012] [0.007]
Adjusted R...................................... 0.315 0.341 0.332 0.348
No. of observations............................. 457 457 457 457
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Estimates use data from 2009 to 2017 to predict 457 failure loss rates from July 2, 2009 to December 15,
2017.
\2\ Core deposits are defined as domestic deposits minus time deposits over the insurance limit and fully
insured brokered deposits.
\3\ All financial variables are normalized by total assets with the exception of Bank size between $500 mil-$1
bil and Bank size $1billion. Bank size between $500 mil-$1 bil is a dummy variable indicating that
the institution's asset size is between $500 million and $1 billion. Bank size $1billion is a
dummy variable indicating that the institution's asset size is over $1 billion.
\4\ The regressions include year fixed effects, but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
brackets.
Table 7 reports the results of the failure loss rate model. Column
(1) of Table 7 shows that higher nonperforming loans and other real
estate owned are associated with higher loss rates. Banks with higher
C&I and consumer loans (to assets ratios also tend to have higher loss
rates. Medium-sized and large failed banks tend to have lower loss
rates compared to small banks.
In the specification reported in Column (1), reciprocal deposits
and non-reciprocal brokered deposits ratios are included. The estimated
coefficients for reciprocal deposits and non-reciprocal brokered
deposits ratios measure the effect of increases in these ratios and an
offsetting reduction in other funding sources on the loss rate. The
positive and statistically significant coefficient on non-reciprocal
brokered deposits suggests that an increase in non-reciprocal brokered
deposits (and an offsetting decrease in other funds either equity or
other liabilities) increases the DIF loss rate. The coefficient on
reciprocal deposits ratio is not statistically significant.
Column (2) of Table 7 reports results when the failed bank's equity
ratio is also included as an explanatory variable. The positive and
statistically significant coefficient on non-reciprocal brokered
deposits ratio suggests that increasing reliance on non-reciprocal
brokered deposits, holding bank equity constant and reducing
liabilities other than reciprocal deposits, increases the DIF loss
rate. The estimated coefficient on reciprocal deposits ratio remains
statistically insignificant. The negative and statistically significant
coefficient on the equity ratio suggests that increasing equity and
decreasing a bank's reliance on other liabilities with no change in
non-reciprocal brokered and reciprocal deposits reduces the loss rate.
Column (3) of Table 7 reports results when the reciprocal deposits,
non-reciprocal brokered deposits, and core deposits ratios are included
as funding measures. The estimated coefficient on non-reciprocal
brokered deposits ratio is positive and statistically significant
suggesting that, holding the reciprocal deposits and core deposits
ratios constant, increasing non-reciprocal deposits and decreasing
other bank liabilities and possibly equity, increases the failure loss
rate. Reciprocal deposits are statistically insignificant.
Column (4) of Table 7 reports results when the reciprocal deposits,
non-reciprocal brokered deposits, equity, and core deposits ratios are
included as funding measures. The estimated coefficient on the non-
reciprocal
[[Page 2395]]
brokered deposits ratio is positive and statistically significant,
suggesting that, holding reciprocal deposits, equity, and core deposits
ratios constant, increasing non-reciprocal deposits and decreasing
other bank liabilities increases the failure loss rate.
The results reported in Table 7 do not suggest that the use of
reciprocal deposits have been associated with higher loss rates on
average while non-reciprocal brokered deposits clearly have a strong
relationship with FDIC losses. At the same time, the sample size is
small and specialized to the crisis. Unlike the full brokered deposit
sample results (reported in an early section) and FDIC practical
resolution experience, core deposits do not clearly reduce FDIC losses.
While the reasons for this difference in findings are beyond the scope
of this analysis, it is likely that they owe in part to the intensive
FDIC resolution activity in this sample period with heavy reliance on
loss sharing agreements. There were an unusually large number of bank
franchises available through the FDIC resolution process at a time when
franchise values may also have been depressed due to unusually weak
opportunities for profitable lending growth. These issues raise
concerns that the limited data in reciprocal deposit sample may not be
representative of the characteristics of the true failure population.
On balance, we believe it is inappropriate to place a high degree of
confidence in the results of the analysis of this limited and
potentially unrepresentative sample period.
CAMELS Ratings of Banks Using Reciprocal Deposits
In this section, we investigate what type of banks use reciprocal
deposits. In particular, we analyze the financial health of these banks
by looking at their CAMELS ratings. We identify banks with positive
reciprocal deposits on their balance sheet. We investigate the
relationship between CAMELS ratings and the use of reciprocal brokered
deposits. During the crisis, in 2009 and 2010, banks with reciprocal
deposits made up higher percentages of banks with a 3, 4, or 5
composite CAMELS rating. Banks with reciprocal deposits made up a
smaller share of banks with a 1 CAMELS rating. By 2011, banks with
reciprocal deposits made up higher percentages of banks with a 2 or 3
CAMELS rating, although the share banks with reciprocal deposits and a
4 or 5 CAMELS rating was still higher than the share with a 1 CAMELS
rating. In 2017, banks with reciprocal deposits made up higher
percentages of banks with a 1 or 2 CAMELS rating.
Figure 3 charts the percentages of banks with positive reciprocal
deposits for each rating category as of December 2017. For instance,
19.35% of all banks with CAMELS rating of 1 had reciprocal deposits in
December 2017. A substantially lower share, 6.56% of 4 rated banks and
9.68% of 5 rated banks had reciprocal deposits.
[GRAPHIC] [TIFF OMITTED] TP06FE19.022
Analysis of Listing Services Deposits
In this section we use the available data to analyze non-brokered
listing service deposit use patterns and the effects of listing service
deposits on the probability of bank failure and DIF loss rates. Banks
began reporting non-brokered listing service deposit funds beginning
March 2011.
Table 8 reports the distribution of different listing service
deposit ratios by Call Report date. The first panel of Table 8 reports
the distribution of different listing service deposit ratios (total
listing service deposits relative to total assets, total domestic
deposits, and total brokered deposits) for December 2011. Row (3)
reports the distribution of the ratios of listing service deposits to
total brokered deposits, among banks that reported non-zero brokered
deposits.
Across the available Call Report filing dates, the average bank's
reliance on
[[Page 2396]]
listing service deposits shows a stable trend. The mean total listing
service to assets ratio in December 2017 was 1.18% which was similar to
1.36% in December 2011. In December 2017, the average listing service
deposit to total brokered deposit ratio was much higher at 1197.21.
Table 8--Distribution of Listing Deposits as a Ratio of Assets and Domestic Deposits by Call Report Date
----------------------------------------------------------------------------------------------------------------
N Max 99th 95th 90th Med Mean
----------------------------------------------------------------------------------------------------------------
December 2011
----------------------------------------------------------------------------------------------------------------
(1).............. Listing services 7366 85.89 23.18 9.57 3.56 0 1.36
deposits/Assets.
(2).............. Listing services 7364 100.00 28.11 11.18 4.34 0 1.61
deposits/Total
Domestic
Deposits.
(3).............. Listing services 3015 86730 4089.05 514.81 173.12 0 239.09
deposits/Total
Brokered
Deposits.
----------------------------------------------------------------------------------------------------------------
December 2017
----------------------------------------------------------------------------------------------------------------
(1).............. Listing services 5679 45.92 19.69 7.71 3.48 0 1.18
deposits/Assets.
(2).............. Listing services 5678 97.71 25.43 9.66 4.35 0 1.49
deposits/Total
Domestic
Deposits.
(3).............. Listing services 2527 2550800 1627.28 281.10 122.34 0 1197.21
deposits/Total
Brokered
Deposits.
----------------------------------------------------------------------------------------------------------------
Listing Service Deposit Usage at Failed Banks
In this section, we examine the extent to which failed banks relied
on non-brokered listing service deposits. Because of data limitations
on listing service deposits, the analysis includes only banks that
failed between April 8, 2011 and December 15, 2017. During this period,
180 banks failed.
Table 9 reports number (percentage in parenthesis) of failed banks
that reported positive listing service deposits on their balance sheet
prior to their failure. In this table, data are analyzed according to
the Call Report data reported a selected number of quarters before the
bank failure date. Listing service deposits were first reported on Call
Reports in March 2011. We are limited to 63 failures, which failed
between January 2013 and December 2017, to have 8 quarters of Call
Report data with listing service deposit information. In contrast,
there are 180 failures, which failed between April 2011 to December
2017, with 1 quarter of Call Report data with listing service deposit
information.
The data suggest a number of consistent patterns. Somewhere between
60 and 65 percent of the failed banks used listing service deposits for
at least 8 quarters before they failed. There is also evidence that
suggests that some of these failed banks increased use of listing
service deposits in the quarters leading up to their failure.
Table 9--Listing Deposits Usage in Failed Banks by Quarter Before
Failure
------------------------------------------------------------------------
Number of banks
Number of with positive
Number of quarters before failure observations listing deposits
reported (%)
(1) (2) (3)
------------------------------------------------------------------------
8.................................... 63 40 (63.49)
7.................................... 71 44 (61.97)
6.................................... 83 51 (61.45)
5.................................... 98 62 (63.27)
4.................................... 114 72 (63.16)
3.................................... 132 85 (64.39)
2.................................... 158 108 (68.35)
1.................................... 180 116 (64.44)
------------------------------------------------------------------------
Notes:
\1\ Based on 180 failures between April 8, 2011 and December 15, 2017.
All failures are after March 2011 when the listing services deposits
were first reported on the Call Reports.
Figure 4 graphs the failing banks' listing service deposits to
assets ratio prior to failure, based on 180 failures between April 8,
2011, and December 15, 2017. The median listing service deposits ratio
increases from approximately 4% at 5 quarters before failure to just
over 5% at 1 quarter before failure. The listing service deposit ratios
at the 90th percentile of the distribution (the failed banks most
reliant on listing service deposits) increased from about 26% at 5
quarters before failure to 33% at 1 quarter before failure, which shows
an increase of listing service deposit usage as banks approach failure.
Figure 5 graphs the failing banks' usage of listing service
deposits (as a percentage of assets) prior to failure, based on 63
failures between January 11, 2013 and December 15, 2017. This time
frame incorporates banks that failed and had at least 8 quarters of
data on listing service deposits. Figure 5 shows that the median bank
usage of listing service deposits remains relatively stable as the
banks approach failure. In contrast, those banks most reliant on
listing service deposits (the 90th percentile of the distribution),
show an initial increase in listing service deposits as the banks
approach failure.\81\
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\81\ Given the small sample size involved in this analysis, it
is inappropriate to draw strong overall conclusions regarding the
behavior of listing service deposits balances at failing banks.
Moreover, since all weak banks do not fail, the behavior of listing
service deposit funding at weak banks (not analyzed in this memo)
could also inform the regulatory debate about safety and soundness
issues associated with listing service deposit usage.
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[GRAPHIC] [TIFF OMITTED] TP06FE19.024
Failure Prediction and Listing Service Deposits
We estimate three-year failure prediction models using 2011 and
2014 data to predict failures between 2012 and 2017. We estimate
failure models as a function of non-brokered listing service deposits
and non-listing, non-brokered deposits. Table 10 reports the estimated
coefficients and p-values of the logistic regressions.
In the failure model specification reported in Column (1) of Table
10, only the listing service deposits ratio is included to characterize
a bank's liability structure. Column (1) of Table 10 reports that the
listing service deposits ratio has a positive and statistically
significant effect on a bank's estimated probability of failure.
Because we measure the banks' liability components as ratios, as a
bank increases its use of listing service deposits, there are
necessarily offsetting changes in the bank's other funding sources. By
including other funding measures in the models, we investigate whether
the implicit shift in a bank's liability structure (as a bank increases
its dependence on listing service and other non-listing, non-brokered
deposits) is a possible source of the increase in failure probability.
Column (2) of Table 10 reports the results of the failure
probability model when we include a bank's equity to asset ratio to
control for bank leverage. By including the equity ratio in the model,
the coefficient estimates on listing service deposits measure the
effect of increasing a bank's reliance on this deposit source and
decreasing its reliance on other liabilities, holding the bank's equity
ratio unchanged. The estimated coefficient on the listing service
deposits ratio becomes statistically insignificant when equity is held
constant.
Column (3) of Table 10 reports the failure model estimates when the
model includes a bank's listing service deposits and non-listing, non-
brokered deposits. In this specification, the estimated coefficient on
the listing deposits ratio measures the effect of increasing listing
deposits, holding constant non-listing, non-brokered deposits and
reducing other bank liabilities. The estimated coefficient on listing
service deposits is positive and statistically significant. Moreover,
the estimated coefficient on non-listing, non-brokered deposits is
positive and statistically significant. To the extent that non-listing,
non-brokered deposits is a measure of banks' core deposits, this result
differs from those reported in Tables 1 and 2 based on a dataset with
longer bank failure experiences. Column (4) of Table 10 reports the
failure model estimates when the model includes a bank's listing
deposits, non-listing non-brokered deposits, and equity ratios. In this
specification, the estimated coefficient on the listing deposits ratio
measures the effect of increasing listing deposits, holding constant
non-listing non-brokered deposits and equity, and reducing other bank
liabilities. The coefficient of listing deposits becomes statistically
insignificant. The coefficient of non-listing, non-brokered deposits is
no longer statistically significant when the equity ratio is held
constant.
This analysis is based on a small sample limited to failures
between 2012 and 2017. We believe it is inappropriate to place a high
degree of confidence in the results of the analysis based on this
limited sample.
[[Page 2399]]
Table 10--Three Year Failure Prediction Models Including Listing Services Deposits
----------------------------------------------------------------------------------------------------------------
Coefficient Coefficient Coefficient Coefficient
Variables estimates estimates estimates estimates
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
Intercept....................................... *** -8.068 *** -2.929 *** -15.281 ** -4.416
[0.000] [0.000] [0.000] [0.019]
Listing services deposits....................... ** 0.021 0.013 *** 0.109 0.028
[0.025] [0.248] [0.000] [0.215]
Equity.......................................... .............. *** -0.537 .............. *** -0.519
.............. [0.000] .............. [0.000]
Non-listing, non-brokered deposits.............. .............. .............. *** 0.087 0.015
.............. .............. [0.000] [0.456]
Nonperforming loans............................. *** 0.137 *** 0.124 *** 0.138 *** 0.125
[0.000] [0.001] [0.000] [0.001]
Other real estate owned......................... *** 0.088 * 0.065 * 0.054 0.059
[0.002] [0.064] [0.066] [0.101]
Income before taxes............................. *** -0.256 ** -0.218 *** -0.310 *** -0.222
[0.002] [0.008] [0.000] [0.006]
Interest expense................................ 0.394 ** 0.728 *** 0.668 *** 0.861
[0.146] [0.024] [0.000] [0.001]
Asset growth.................................... -0.005 0.002 -0.002 0.003
[0.687] [0.890] [0.858] [0.835]
CRE loans....................................... -0.011 -0.022 -0.019 -0.023
[0.335] [0.104] [0.151] [0.102]
C&D loans....................................... -0.009 -0.017 0.0001 -0.015
[0.693] [0.548] [0.996] [0.584]
C&I loans....................................... 0.008 0.036 0.011 0.036
[0.734] [0.164] [0.649] [0.165]
Consumer loans.................................. 0.007 -0.004 -0.018 -0.007
[0.872] [0.959] [0.799] [0.929]
CAMELS 3........................................ 0.941 0.643 0.790 0.650
[0.274] [0.382] [0.313] [0.373]
CAMELS 4 or 5................................... *** 3.656 *** 1.459 *** 3.170 *** 1.449
[0.000] [0.008] [0.000] [0.009]
Pseudo R2....................................... 0.500 0.609 0.526 0.609
Wald Chi2....................................... *** 259 *** 374 *** 287 *** 377
N............................................... 13,857 13,857 13,857 13,857
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Using year-end Call Reports 2011 and 2014 to predict 113 failures between 2012 and 2017.
\2\ Listing services deposits are defined as estimated amount of deposits obtained through the use of deposit
listing services that are not brokered.
\3\ Non-listing, non-brokered deposits are defined as domestic deposits minus listing service deposits and
brokered deposits.
\4\ All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating
4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the
institution is CAMELS 3-rated and the institution is CAMELS 4 or 5-rated, respectively. Asset Growth is the
institution's one-year asset growth rate.
\5\ The regressions include time fixed effects, but the coefficient estimates are not reported.
\6\ Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
brackets.
Failure Loss Rate Models Including Listing Service Deposits
In this section, we examine whether banks' reliance on listing
service deposits are associated with differential failure loss rates.
Data on listing deposits limits the sample to banks that failed between
April 8, 2011, and December 15, 2017.
Failed bank loss rates are modeled as a function of the income and
balance sheet characteristics of the failed bank. The explanatory
variables included in the model are listing service deposits, non-
listing, non-brokered deposits, equity, nonperforming loans, other real
estate owned, income earned but not collected, and loans to executive
officers. In addition, we include a bank's concentration in CRE
(commercial real estate), C&D (construction and development), C&I
(commercial and industrial), and consumer loans. The model allows loss
rates to differ for small (asset size $500 million or less), medium
(asset size between $500 million to $1 billion), and large (asset size
$1 billion and higher) banks. The year fixed-effects are added to
capture any difference in unconditional loss rates across years. Call
Report/TFR data are from the last quarter before the bank failure date.
Table 11--Loss Rate Models Including Listing Deposits
----------------------------------------------------------------------------------------------------------------
Coefficient Coefficient Coefficient Coefficient
Variable estimate estimate estimate estimate
(1) (2) (3) (4)
----------------------------------------------------------------------------------------------------------------
Intercept....................................... *** 11.256 *** 11.920 -1.982 -0.231
[0.001] [0.001] [0.813] [0.979]
Listing Services Deposits....................... ** 0.103 * 0.092 ** 0.259 ** 0.237
[0.029] [0.053] [0.012] [0.026]
Equity.......................................... .............. -0.359 .............. -0.269
.............. [0.247] .............. [0.391]
Non-listing, non-brokered deposits.............. .............. .............. * 0.149 0.135
.............. .............. [0.086] [0.126]
Nonperforming loans............................. ** 0.273 ** 0.254 ** 0.296 ** 0.280
[0.021] [0.033] [0.012] [0.020]
Other real estate owned......................... *** 0.528 *** 0.520 * 0.507 *** 0.503
[[Page 2400]]
[0.000] [0.000] [0.001] [0.001]
Income earned but not collected................. *** 13.242 *** 13.167 * 13.802 *** 13.692
[0.000] [0.000] [0.000] [0.000]
Loan to executive officers...................... -0.265 -0.287 -0.180 -0.205
[0.617] [0.588] [0.733] [0.699]
Bank size $500 mil-$1 billion................... -4.117 -3.924 -2.638 -2.633
[0.126] [0.145] [0.347] [0.348]
Bank size > $1 billion.......................... * -5.854 * -5.773 -4.358 -4.439
[0.089] [0.094] [0.217] [0.209]
CRE loans....................................... -0.030 -0.025 -0.034 -0.030
[0.607] [0.668] [0.558] [0.608]
C&D loans....................................... 0.052 0.052 0.006 0.011
[0.720] [0.720] [0.965] [0.941]
C&I loans....................................... 0.101 0.096 0.105 0.100
[0.379] [0.405] [0.360] [0.381]
Consumer loans.................................. 0.330 0.359 0.242 0.272
[0.437] [0.398] [0.568] [0.524]
Adjusted R2..................................... 0.193 0.195 0.203 0.202
No. of observations............................. 180 180 180 180
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Estimates based on data from March 2011 to September 2017 to predict loss rates of 180 failures from April
8, 2011 to December 15, 2017.
\2\ Listing services deposits are defined as estimated amount of deposits obtained through the use of deposit
listing services that are not brokered.
\3\ Non-listing, non-brokered deposits are defined as domestic deposits minus listing service deposits and
brokered deposits.
\4\ All financial variables are normalized by total assets with the exception of Bank size between $500 mil-$1
bil and Bank size $1 billion. Bank size between $500 mil-$1 bil is a dummy variable indicating
that the institution's asset size is between $500 million and $1 billion. Bank size $1 billion is
a dummy variable indicating that the institution's asset size is over $1 billion.
\5\ Failure year fixed effects are included but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
brackets.
Table 11 reports the results of the failure loss rate model. Column
(1) of Table 11 shows that higher nonperforming loans, other real
estate owned, and income earned but not collected are associated with
higher loss rates. Large failed banks tend to have lower loss rates
compared to small banks.
In the specification reported in Column (1), the listing service
deposits ratio is included. The estimated coefficient for the listing
service deposits ratio measures the effect of an increase in this ratio
and an offsetting reduction in other funding sources on the loss rate.
The positive and statistically significant coefficient on listing
service deposits suggests that an increase in listing service deposits
(and an offsetting decrease in other funds either equity or other
liabilities) increases the DIF loss rate.
Column (2) of Table 11 reports results when the failed bank's
equity ratio is also included as an explanatory variable. The positive
and statistically significant coefficient on the listing service
deposits ratio suggests that increasing reliance on listing service
deposits, holding bank equity constant and reducing other liabilities,
increases the DIF loss rate. The estimated coefficient on equity is not
statistically significant.
Column (3) of Table 11 reports results when listing services
deposits and non-listing, non-brokered deposits ratios are included as
funding measures. The estimated coefficient on listing services
deposits ratio remains positive and statistically significant
suggesting that, holding the non-listing, non-brokered deposits ratios
constant, increasing listing services deposits and decreasing other
bank liabilities and possibly equity, increases the failure loss rate.
Column (4) of Table 11 reports results when the listing services
deposits, non-listing non-brokered deposits, and equity ratios are
included as funding measures. The estimated coefficient on the listing
services deposits ratio is positive and statistically significant,
suggesting that, holding non-listing non-brokered deposits and equity
ratios constant, increasing listing services deposits and decreasing
other bank liabilities increases the failure loss rate. An unexpected
result is that equity remains statistically insignificant in reducing
DIF loss rates. The non-listing, non-brokered deposits ratio also
becomes statistically insignificant.
The results reported in Table 11 suggest that the use of listing
service deposits are associated with higher loss rates on average. At
the same time, the sample size is small and specialized to the failures
from 2012 to 2017. Unlike the full brokered deposit sample results
(reported in an early section) and FDIC practical resolution
experience, equity does not clearly reduce FDIC losses.\82\
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\82\ The limited data in listing service deposit sample may not
be representative of the characteristics of the true failure
population. On balance, we believe it is inappropriate to place a
high degree of confidence in the results of the analysis of this
limited and potentially unrepresentative sample period.
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Dated at Washington, DC, on December 18, 2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie Best,
Assistant Executive Secretary.
[FR Doc. 2018-28273 Filed 2-5-19; 8:45 am]
BILLING CODE 6714-01-P
