The Federal Deposit Insurance Corp. on Tuesday proposed a measure that would boost banks’ standards for accepting brokered deposits, or “hot money.”
Brokered deposits have caught flak because at-risk banks can use them to make their books more robust at times when longer-term customers are pulling their deposits.
But brokered deposits aren’t sticky, detractors say, and the short-term gains and losses can lead to volatility. Brokers, generally, are in search of high returns, which cost banks more. And they may bail if banks come under stress. The FDIC has expressed concern that if a bank with a heavy reliance on brokered deposits were to fail, that could cost the Deposit Insurance Fund more.
Tuesday’s measure would label more third parties as deposit brokers. That, in effect, would reverse a 2020 Trump-era rule change that allowed less-well-capitalized banks to access hot money, from which they’d previously been restricted.
“More recent events have also underscored the uncertain nature of third-party funding arrangements,” FDIC Chair Martin Gruenberg said Tuesday in a statement, citing the 2022 bankruptcy of crypto-heavy Voyager Digital and last year’s failure of First Republic Bank.
"Voyager was not considered a 'deposit broker' — and therefore deposits it placed in its partner bank were not considered brokered — merely because it had an exclusive deposit placement arrangement with one bank," Gruenberg said. "Such exclusive deposit placement arrangements were specifically excluded from the definition of a 'deposit broker' under the 2020 final rule even though they plainly met the definition of deposit broker."
Ultimately, Voyager’s failure “created the same legal, operational, and liquidity risks for its partner bank as if it had been classified as a deposit broker,” Gruenberg said.
Likewise, the bank run that ended First Republic “included a significant outflow of sweep deposits from an affiliate of the bank, and in particular uninsured affiliated sweep deposits,” Gruenberg said. “This case suggests that affiliated sweeps, particularly those that are uninsured, are no more ‘sticky’ than unaffiliated sweeps, contrary to a provision in the 2020 Final Rule.”
Not every member of the FDIC’s board agreed.
“The deposit landscape has become too complex to continually decide which arrangements are brokered and which are not in a fair and risk-sensitive way. And I am generally skeptical of sweeping rules that cut banks off from certain types of funding as their condition deteriorates, as is the case with brokered deposits,” FDIC Vice Chair Travis Hill said in a statement. “Revamping this rule is a major undertaking that, in my opinion, is a poor use of our time and resources.”
The FDIC board of directors issued the brokered deposit proposal, 3-2, voting along party lines — with Democrats voting for, and Republicans against. The proposed rule faces a 60-day public comment period.
The FDIC on Tuesday also voted to advance tougher guidelines that could force asset managers to prove they’re not exerting outsized influence over banks where they’re amassing significant stakes.
Asset managers or other investors with more than a 10% stake in a bank can be considered controlling interests. But "passivity agreements," in which they promise regulators they won’t play an active role in bank management, help them dodge strict oversight. Further, the FDIC does not review new large investments in banks if the Federal Reserve sees nothing with the arrangements.
A proposal Tuesday from Consumer Financial Protection Bureau Director Rohit Chopra, an FDIC board member, would remove that exemption.
"It is highly inappropriate for the FDIC to abdicate the responsibility Congress entrusted to us to safeguard the ownership and control of the banks we supervise," Chopra said Tuesday, according to Reuters.
At issue are the political ramifications of influence. Some Republicans have concerns that index funds will align with activists who push a progressive social or environmental agenda. Some Democrats, meanwhile, have said large investors could hamstring banks to fit their narrow interests, or prompt antitrust concerns with their large stakes.
One Republican, though — FDIC board member Jonathan McKernan — offered a proposal that would have directed the agency to order a review of some existing passivity agreements and ensure the FDIC has the bandwidth to monitor those investors’ commitments. The aim would be for the FDIC to forge new agreements with those investors that would end the self-certification standard and require monitoring from the agency.
Gruenberg, however, said formal FDIC board action was not required for that, so McKernan tabled the resolution.
Gruenberg, for his part, said he is open to the passivity agreement review and the push to end self-certification.
Eric Pan, CEO of the Investment Company Institute, which represents asset managers, called the proposal “alarming … in the absence of a clearly identified problem.”
"We fear that the FDIC is asking the investment funds industry to prove a negative, setting up a flawed foundation on which to impose harmful limits and red tape on investment funds and increase costs on American investors,” Pan said in a statement seen by Reuters.
The FDIC knows “these investments are made for the purpose of seeking higher returns for American investors,” Pan added, according to the Financial Times.
Hill, the FDIC vice chair, expressed concern that the change could reduce asset managers’ investments in banks — a sentiment that dovetails with the Securities Industry and Financial Markets Association. The trade group warned that changes to the passivity agreement standard could harm banks’ access to capital.
