Brokered Deposit Guidance: FDIC Issues Frequently Asked Questions on Identifying, Accepting, and Reporting Brokered Deposits

Sullivan & Cromwell LLP - January 14, 2015

On January 5, 2015, the Federal Deposit Insurance Corporation (the “FDIC”) issued a Financial Institutions Letter (FIL-2-2015) (the “Guidance”), setting forth sweeping guidance regarding brokered deposits in the form of FAQs.  The Guidance answers a wide range of questions regarding classification of deposits as brokered, as well as acceptance and reporting of brokered deposits.

The subjects of the Guidance include “facilitation” generally, bank networks, listing services, prepaid and debit cards, timing of acceptance of deposits, and interest rate restrictions.  Relying on the assertion that the FDIC is authorized to interpret the concept of brokered deposits “broadly,” in almost every case the FDIC has answered the question posed by concluding that the deposit at issue is brokered, which, in some cases, represents a departure from industry understanding and/or practice.  As a result, the Guidance further confirms that the concept of brokered deposits extends well beyond high interest rate “hot money” deposits that prompted the Federal Deposit Insurance Act (“FDIA”) amendments on this subject, as well as beyond brokered deposits of limited or no (or even negative) franchise value that have prompted more recent concerns. 

The Guidance is relevant to all insured depository institutions (“IDIs”) regardless of size, and should prompt even IDIs that have not viewed their deposits as brokered to review their deposits in light of the interpretations.  In particular, an increase in the scope of deposits classified as brokered may have implications for an institution’s deposit insurance assessment rate, its contingency funding plan, and compliance with the federal banking agencies’ proposed minimum liquidity coverage ratio (“LCR”) requirement.  In addition, it is unknown whether an IDI that historically had not classified its deposits as brokered would be expected to amend its call reports to reflect the change in status of any deposits that are classified as brokered under the Guidance.

The FAQs in the Guidance are presented as clarifications generally of previous interpretations set out in the FDIC’s 2011 Study on Core Deposits and Brokered Deposits (the “2011  Study”), which the FDIC staff has previously indicated was definitive and current guidance on the subject.  In some cases the answers represent positions that have never before been set out in written form or, as indicated, represent a departure from industry practice.  Nonetheless, the FDIC chose to undertake this process as “guidance,” rather than as a rule that would have provided notice and the opportunity for comment. 

Potential consequences of the new interpretations in the Guidance include the following:

  • Referrals by insurance agents, lawyers and accountants result in brokered deposits.  It is unclear to us how IDIs can monitor this with any degree of certainty.
  • Outside of a narrow set of specific instances, virtually any third-party involvement or intermediation between a depositor and an IDI amounts to “facilitating the placement of deposits” and gives rise to brokered deposits.  Dual employees, even those jointly employed by the bank and a subsidiary of the bank (such as a broker-dealer or investment adviser) or the bank’s holding company (including, potentially, the CEO) are treated as deposit brokers, and any deposits that they refer or solicit will be deemed brokered.
  • General purpose cards sold by third parties, whether or not reloadable, give rise to brokered deposits in most circumstances if federal deposit insurance flows through to the purchasing customers.  As a result, the availability of general purpose prepaid cards covered by federal deposit insurance may decrease, and the availability of general purpose prepaid cards without insurance and limited purpose cards (e.g., for transit, health benefits and the like) may increase.
  • The brokered status of deposits may be more difficult to terminate because any ongoing involvement by an intermediary, including any payment of a renewal fee, holding of an account in the name of third parties as agent or custodian for the owner, or access to account information (such as account balances), requires that the deposits remain classified as brokered apparently regardless of the tenor of the deposit relationship or other considerations.
  • To the extent that an IDI may need to reclassify deposits as brokered as a result of the written guidance, the increase in brokered deposits may have an impact on the IDI’s FDIC deposit insurance assessments and its liquidity coverage ratio (if applicable), and it may even be necessary to amend past call reports.
  • There are a number of additional possible collateral consequences for IDIs on which at this time there is no further guidance.  Because the guidance states “(Updated 12/24/2014),” it is possible that further updates or clarifications may be forthcoming.