Guidance on Identifying, Accepting, and Reporting Brokered Deposits
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FDIC Financial Institution Letters › Guidance on Identifying, Accepting, and Reporting Brokered Deposits
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STUDY ON CORE DEPOSITS AND BROKERED DEPOSITS
Submitted to Congress pursuant to the
Dodd-Frank Wall Street Reform and Consumer Protection Act
Federal Deposit Insurance Corporation
July 8, 2011
2
TABLE OF CONTENTS
I. SUMMARY................................................................................................................................................1
II. DEFINITIONS .........................................................................................................................................4
A. CORE DEPOSITS......................................................................................................................................4
B. BROKERED DEPOSITS..............................................................................................................................5
III. LEGAL HISTORY OF BROKERED DEPOSITS..............................................................................8
A. FDIC AND FHLBB RULEMAKING ..........................................................................................................8
B. THE FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT...................................13
C. THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT..............................................16
D. SECTION 337.6 OF THE FDIC’S REGULATIONS .....................................................................................17
E. FDIC ADVISORY OPINIONS...................................................................................................................18
IV. DEPOSITS AND THEIR LEGAL TREATMENT............................................................................19
A. LISTING SERVICES................................................................................................................................19
B. MARKETERS .........................................................................................................................................21
C
R LEGAL TREATMENT............................................................................19
A. LISTING SERVICES................................................................................................................................19
B. MARKETERS .........................................................................................................................................21
C. INVESTMENT COMPANIES .....................................................................................................................25
D. PASS-THROUGH ARRANGEMENTS ........................................................................................................27
E. BANK NETWORKS.................................................................................................................................28
F. PREPAID PRODUCTS ..............................................................................................................................31
V. FDIC USE OF THE CORE AND BROKERED DEPOSITS CONCEPTS ......................................32
A. SUPERVISION........................................................................................................................................32
B. ASSESSMENTS.......................................................................................................................................33
VI. STUDIES AND ANALYSES ...............................................................................................................34
A. MATERIAL LOSS REVIEWS....................................................................................................................34
B. STUDIES OF CORE AND BROKERED DEPOSITS.......................................................................................35
VII. CONCLUSIONS REGARDING CORE AND BROKERED DEPOSITS .....................................46
A. CORE DEPOSITS....................................................................................................................................46
B
.....................34
B. STUDIES OF CORE AND BROKERED DEPOSITS.......................................................................................35
VII. CONCLUSIONS REGARDING CORE AND BROKERED DEPOSITS .....................................46
A. CORE DEPOSITS....................................................................................................................................46
B. BROKERED DEPOSITS............................................................................................................................47
VIII. ANALYSIS AND CONCLUSIONS REGARDING PARTICULAR KINDS OF DEPOSITS ...48
A. PROBLEMS THAT DEPOSITS CAN PRESENT...........................................................................................48
B. DEPOSIT CHARACTERISTICS .................................................................................................................49
C. RECIPROCAL BROKERED DEPOSITS ......................................................................................................53
D. SWEEP DEPOSITS..................................................................................................................................54
E. REFERRALS FROM AFFILIATES..............................................................................................................56
F. ALL HIGH RATE DEPOSITS....................................................................................................................58
IX. RECOMMENDATIONS......................................................................................................................59
X. DODD-FRANK ISSUES........................................................................................................................62
A. EVALUATE THE DEFINITION OF CORE DEPOSITS FOR THE PURPOSE OF CALCULATING THE DEPOSIT
INSURANCE PREMIUMS OF BANKS.............................................................................................................62
B
..........................59
X. DODD-FRANK ISSUES........................................................................................................................62
A. EVALUATE THE DEFINITION OF CORE DEPOSITS FOR THE PURPOSE OF CALCULATING THE DEPOSIT
INSURANCE PREMIUMS OF BANKS.............................................................................................................62
B. EVALUATE THE POTENTIAL IMPACT ON THE DIF OF REVISING THE DEFINITIONS OF BROKERED
DEPOSITS AND CORE DEPOSITS TO BETTER DISTINGUISH BETWEEN THEM...............................................62
C. EVALUATE AN ASSESSMENT OF THE DIFFERENCES BETWEEN CORE DEPOSITS AND BROKERED
DEPOSITS AND THEIR ROLE IN THE ECONOMY AND BANKING SECTOR OF THE UNITED STATES...............63
D, E. EVALUATE THE POTENTIAL STIMULATIVE EFFECT ON LOCAL ECONOMIES OF REDEFINING CORE
DEPOSITS AND EVALUATE THE COMPETITIVE PARITY BETWEEN LARGE BANKS AND COMMUNITY BANKS
THAT COULD RESULT FROM REDEFINING CORE DEPOSITS .......................................................................64
i
APPENDIX A ..............................................................................................................................................66
APPENDIX B ..............................................................................................................................................69
APPENDIX C ............................................................................................................................................115
ii
..................................................................................66
APPENDIX B ..............................................................................................................................................69
APPENDIX C ............................................................................................................................................115
ii
I.
Summary
Given the role that funding plays in the success or failure of a bank, the issue of
core and brokered deposits is an important one to the Federal Deposit Insurance
Corporation (the FDIC). Over the years, the FDIC and others have studied the specific
role of core and brokered deposits in the performance of banks and the loss they impose
on the Deposit Insurance Fund (the DIF or the fund) when a bank fails. With regard to
brokered deposits, the FDIC began studying the issue almost 30 years ago, when it first
attempted to regulate these deposits, and last undertook a formal study of the subject in
2002. Since 1989 and the passage of the statute governing brokered deposits (the
brokered deposit statute),1 the FDIC has remained focused on brokered deposits. While
its views on core and brokered deposits have long been a part of its supervisory
programs, more recently, they were incorporated into the deposit insurance assessment
system.
During the early part of the current wave of heightened bank failures, the FDIC
began observing a disturbing pattern among many failed banks that was similar to a
pattern observed in the banking crisis of the late 1980s and early 1990s. A number of
failures were occurring where there were concentrations in commercial real estate (CRE)
and construction and development (C&D) lending funded by large amounts of brokered
deposits, and this trend once again brought brokered deposits to the forefront
rbing pattern among many failed banks that was similar to a
pattern observed in the banking crisis of the late 1980s and early 1990s. A number of
failures were occurring where there were concentrations in commercial real estate (CRE)
and construction and development (C&D) lending funded by large amounts of brokered
deposits, and this trend once again brought brokered deposits to the forefront. In
response to these trends, in October 2008, the FDIC issued a notice of proposed
rulemaking proposing to increase assessment rates for well-managed, well-capitalized
banks that used brokered deposits to grow quickly and noted that “A number of costly
institution failures, including some recent failures, have experienced rapid asset growth
before failure and have funded this growth through brokered deposits.”2,3
In recent years the FDIC has also observed, as have many in the banking industry,
that technological advances and the evolution of the Internet have altered the ways that
banks obtain deposits. When the statute governing brokered deposits was enacted in
1989, banks either did not use or barely used deposit listing and placement services,
sweeps and reciprocal brokered deposits, for example. Some in the industry have
questioned whether the statute governing brokered deposits, enacted in 1989, before the
advent of these technological changes and innovations, should be changed.
Consequently, the FDIC viewed Congress’s mandate in the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank) that the FDIC conduct a study
1 12 U.S.C. § 1831f. Generally speaking, the current statute prohibits an adequately capitalized bank from
accepting, renewing or rolling over brokered deposits without a waiver from the FDIC and prohibits an
undercapitalized bank from accepting, renewing or rolling over brokered deposits at all. It also imposes
restrictions on the interest rate that a less-than-well-capitalized bank can pay on any deposit
1831f. Generally speaking, the current statute prohibits an adequately capitalized bank from
accepting, renewing or rolling over brokered deposits without a waiver from the FDIC and prohibits an
undercapitalized bank from accepting, renewing or rolling over brokered deposits at all. It also imposes
restrictions on the interest rate that a less-than-well-capitalized bank can pay on any deposit. 12 U.S.C. §
1831f.
2 73 Fed. Reg. 61560, 61565 (Oct. 16, 2008).
3 Throughout this document, the word “bank” is used synonymously and interchangeably with the words
“insured depository institution,” unless the context requires or suggests otherwise.
1
of core and brokered deposits4 as a timely opportunity to conduct a comprehensive study
of deposits to evaluate the brokered deposit statute and whether the core and brokered
deposit classification scheme used for supervision and assessment purposes can be
improved.
To prepare this study, the FDIC solicited comments on the issues from the
banking industry and the public. The FDIC received approximately 75 written comments
that are discussed below. The FDIC also organized a roundtable discussion with
representatives from bank trade groups, bank regulators, deposit brokers, banks that use
brokered deposits, including traditional brokered deposits, sweep deposits and reciprocal
deposits, and those that do not, and the academic community. The FDIC discussed the
issues at meetings with the FDIC Advisory Committee on Community Banking and held
16 separate meetings with banks, trade groups and other interested parties. The FDIC
also reviewed more than 20 Material Loss Reviews (MLRs) produced by the Offices of
Inspector General of the various federal banking regulatory agencies, as well as their
Semiannual Reports to Congress. In addition, the FDIC undertook a statistical analysis
of core and brokered deposits and conducted a literature review of academic studies on
core and brokered deposits
sted parties. The FDIC
also reviewed more than 20 Material Loss Reviews (MLRs) produced by the Offices of
Inspector General of the various federal banking regulatory agencies, as well as their
Semiannual Reports to Congress. In addition, the FDIC undertook a statistical analysis
of core and brokered deposits and conducted a literature review of academic studies on
core and brokered deposits.
In comments and discussions, the banking industry repeatedly expressed a few
fundamental issues and concerns. First, they argued that the brokered deposit statute
creates liquidity problems if a bank becomes less than well capitalized. If a bank is
adequately capitalized, the brokered deposit statute allows the bank to accept, renew or
roll over brokered deposits only with a waiver from the FDIC and, even then, the bank is
subject to interest rate restrictions. If it becomes undercapitalized, it cannot accept,
renew or roll over brokered deposits at all. Commenters argued that the liquidity
problems can result and contribute to the failure of a bank that would not otherwise have
failed.
Second, commenters argued that a combination of the statute and supervisory
practices stigmatizes brokered deposits; according to commenters, some banks will not
accept them even when they are an optimal source of funds and examiners tend to
criticize those banks that do accept them, regardless of the bank’s capital level or the
appropriateness of the deposits as part of the bank’s asset and liability term and rate
structure
combination of the statute and supervisory
practices stigmatizes brokered deposits; according to commenters, some banks will not
accept them even when they are an optimal source of funds and examiners tend to
criticize those banks that do accept them, regardless of the bank’s capital level or the
appropriateness of the deposits as part of the bank’s asset and liability term and rate
structure.
4 Section 1506 of Dodd-Frank requires that, as part of the study, the FDIC include “legislative
recommendations, if any, to address concerns arising in connection with the definitions of core deposits and
brokered deposits.” Dodd-Frank also requires that the study evaluate: (1) the definition of core deposits for
the purpose of calculating the deposit insurance premiums of banks; (2) the potential impact on the Deposit
Insurance Fund of revising the definitions of brokered deposits and core deposits to better distinguish
between them; (3)an assessment of the differences between core deposits and brokered deposits and their
role in the economy and banking sector of the United States; (4) the potential stimulative effect on local
economies of redefining core deposits; and (5) the competitive parity between large banks and community
banks that could result from redefining core deposits.
Dodd-Frank Sections IX and X of this study contain the FDIC’s recommendations and its evaluation of the
five issues set out in Dodd-Frank.
2
omy and banking sector of the United States; (4) the potential stimulative effect on local
economies of redefining core deposits; and (5) the competitive parity between large banks and community
banks that could result from redefining core deposits.
Dodd-Frank Sections IX and X of this study contain the FDIC’s recommendations and its evaluation of the
five issues set out in Dodd-Frank.
2
Third, as discussed above, commenters argued that the brokered deposit statute is
outdated and has not kept pace with technological change and innovation. Commenters
focused on three types of deposits—reciprocal deposits, deposit sweeps from broker-
dealers, and referrals from affiliates and agents—that are defined as brokered deposits
but, in the commenters’ view, do not share the same characteristics as traditional
brokered deposits and should not be treated in the same way, either under the statute, for
supervisory purposes or for assessment purposes. They also focused on high rate
deposits, in general, and on listing service deposits, not all of which meet the definition of
a brokered deposit. Commenters considered these deposits higher risk than other
deposits.
While these comments raise important issues, the FDIC continues to have serious
concerns about brokered deposits. As discussed below, research, including the FDIC’s
own research undertaken in connection with this study, shows that, in general, as
brokered deposit levels increase, the probability that a bank will fail also increases.
Banks with higher levels of brokered deposits are also, in general, more costly to the DIF
when they do fail. On average, brokered deposits are also correlated with higher levels of
asset growth, higher levels of nonperforming loans, and a lower proportion of core
deposit funding. All of these factors contribute to a higher likelihood of bank failure
ty that a bank will fail also increases.
Banks with higher levels of brokered deposits are also, in general, more costly to the DIF
when they do fail. On average, brokered deposits are also correlated with higher levels of
asset growth, higher levels of nonperforming loans, and a lower proportion of core
deposit funding. All of these factors contribute to a higher likelihood of bank failure.
Conversely, research shows that, generally, banks’ increasing reliance on core deposits
reduces the chance of failure and reduces the DIF’s losses when banks do fail.
Consequently, statistical studies support the view that the concepts of core and brokered
deposits, as currently defined, remain useful in evaluating and predicting bank
performance.
Based upon these studies, the FDIC has concluded that the brokered deposit
statute continues to serve an essential function and recommends that Congress not amend
or repeal it. During the most recent crisis, the statute has, in large measure, prevented
failing banks from increasing their brokered deposits, and, therefore, from taking on
greater risk in an effort to grow out of trouble and prevented greater FDIC losses when
banks fail. The statute is also an important component of prompt corrective action under
12 U.S.C. § 1838(o), requiring regulators and banks to take corrective measures to
confront problems. Although banks have many incentives to remain well capitalized,
including lower deposit insurance assessments, for banks that rely on brokered deposits,
the statute has increased the incentive to remain well capitalized.
Despite technological change and other deposit gathering innovations, the FDIC
has found that, for supervisory and assessment purposes, the statute is sufficiently
flexible to allow the FDIC to treat deposits, including new forms of brokered deposits,
appropriately
ance assessments, for banks that rely on brokered deposits,
the statute has increased the incentive to remain well capitalized.
Despite technological change and other deposit gathering innovations, the FDIC
has found that, for supervisory and assessment purposes, the statute is sufficiently
flexible to allow the FDIC to treat deposits, including new forms of brokered deposits,
appropriately. FDIC examiner guidance states that there should be no particular stigma
attached to the acceptance by well-capitalized banks of brokered deposits per se and that
the proper use of such deposits should not be discouraged. The FDIC can and has
granted waivers to allow adequately capitalized banks to accept, renew or roll over
certain brokered deposits when appropriate, and, through the supervisory process and in
the deposit insurance assessment system, distinguishes among types of brokered deposits.
3
In the absence of sufficient data, the FDIC evaluated particular kinds of deposits
based on their characteristics to determine whether, and the extent to which, they have the
potential to fuel rapid growth, create liquidity problems or increase losses to the FDIC in
the event of failure.5 Because of the lack of sufficient data, the analysis could not reach
firm conclusions, but it suggests that reciprocal deposits based upon real customer
relationships, deposits swept from affiliated broker-dealers, and referrals from affiliates
appeared likely to pose fewer problems than other brokered deposits, although they
should not be considered core deposits. The analysis also suggests that high rate deposits
and non-brokered listing services appeared likely to pose problems similar to most
brokered deposits
ts based upon real customer
relationships, deposits swept from affiliated broker-dealers, and referrals from affiliates
appeared likely to pose fewer problems than other brokered deposits, although they
should not be considered core deposits. The analysis also suggests that high rate deposits
and non-brokered listing services appeared likely to pose problems similar to most
brokered deposits. Much of this analysis is already taken into account in supervision and
deposit insurance assessments, but the study contemplates possible additional action
(primarily through changes to the assessment system) to take into account the risks of
these particular kinds of deposits, though any such action would require additional
reporting and notice-and-comment rulemaking. The benefits of such action must be
weighed against the burden of this additional reporting.
The study, recommendations and conclusions that follow, while limited to bank
deposits, are part of a larger question of bank funding and risk management, and must be
viewed in that light. All bank liabilities, including deposit liabilities, must ultimately be
evaluated in the context of a bank’s overall risk-management strategy, asset and liability
structure, and whether a bank is overly dependent on a single source of funding.
II.
Definitions
A.
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). Until
March 31, 2011, core deposits were defined in the UBPR User Guide as the sum of
demand deposits, all NOW and automatic transfer service (ATS) accounts, money market
deposit accounts (MMDAs), other savings deposits, and time deposits under $100,000.6
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
Guide as the sum of
demand deposits, all NOW and automatic transfer service (ATS) accounts, money market
deposit accounts (MMDAs), other savings deposits, and time deposits under $100,000.6
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
5 As discussed in Section VIII below, the FDIC evaluated high rate deposits, reciprocal deposits, deposits
swept from an affiliated-broker dealer, referrals from affiliates (which, in some limited circumstances, may
include referrals from agents of the bank or affiliate), and passive (non-brokered) listing service deposits
based on the following characteristics: interest rate, customer relationship, ease of access, deposit insurance
status and time to maturity.
6 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.
4
uant 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.
4
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.
Core deposits, as an analytical and supervisory tool, are intended to include those
deposits that are stable and lower cost and that reprice more slowly than other deposits
when interest rates rise.7 These deposits are typically funds of local customers that also
have a borrowing or other relationship with the bank. However, in some instances, core
deposit accounts (e.g., time deposits) may exhibit characteristics associated with more
volatile funding sources. Conversely, deposit accounts generally viewed as volatile
funding (e.g., certificates of deposit—CDs—larger than $250,000) may be relatively
stable funding sources.
B.
Brokered Deposits
Unlike core deposits, brokered deposits are defined by statute. Section 29 of the
Federal Deposit Insurance Act (FDI Act) in essence defines a “brokered deposit” as
simply a deposit accepted through a “deposit broker.”8 Thus, the meaning of the term
“brokered deposits” turns upon the definition of “deposit broker.” In section 29 of the
FDI Act, the term “deposit broker” is defined as follows:
The term “deposit broker” means (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
the definition of “deposit broker.” In section 29 of the
FDI Act, the term “deposit broker” is defined as follows:
The term “deposit broker” means (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; and (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.9
This broad definition of “deposit broker” is subject to certain exceptions. In
section 29, these exceptions are listed as follows:
(A) an insured depository institution, with respect to funds placed
with that depository institution;
(B) an employee10 of an insured depository institution, with
respect to funds placed with the employing depository institution;
7 See FDIC’s Risk Management Manual of Examination Policies.
8 See 12 C.F.R. § 337.6(a)(2).
9 12 U.S.C. § 1831f(g)(1). See also 12 C.F.R. § 337.6(a)(5)(i).
10 The term “employee” is narrowly defined as “any employee (A) who is employed exclusively by the
insured depository institution; (B) whose compensation is primarily in the form of a salary; (C) who does
not share such employee’s compensation with a deposit broker; and (D) whose office space or place of
5
.R. § 337.6(a)(2).
9 12 U.S.C. § 1831f(g)(1). See also 12 C.F.R. § 337.6(a)(5)(i).
10 The term “employee” is narrowly defined as “any employee (A) who is employed exclusively by the
insured depository institution; (B) whose compensation is primarily in the form of a salary; (C) who does
not share such employee’s compensation with a deposit broker; and (D) whose office space or place of
5
(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 . . . 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.11
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
deposit program.”12
Section 29 sets forth restrictions on the acceptance of brokered deposits that also
appear in the FDIC’s regulations.13,14 The restrictions may be summarized as follows:
Well capitalized banks may accept brokered deposits at any time
termediary or agent of a U.S. government department
or agency for a government sponsored minority or women-owned depository institution
deposit program.”12
Section 29 sets forth restrictions on the acceptance of brokered deposits that also
appear in the FDIC’s regulations.13,14 The restrictions may be summarized as follows:
Well capitalized banks may accept brokered deposits at any time.
business is used exclusively for the benefit of the insured depository institution which employs such
individual.” 12 U.S.C. § 1831f(g)(4). See also 12 C.F.R. § 337.6(a)(6).
11 12 U.S.C. § 1831f(g)(2). See also 12 C.F.R. § 337.6(a)(5)(ii).
12 12 C.F.R. § 337.6(a)(5)(ii)(J). An example of such a program is the “Bank Deposit Financial Assistance
Program of the Department of Energy.” For this program, Congress has created a special rule governing
the insurance of the deposits. This special rule provides as follows: “[F]unds deposited by an insured
depository institution pursuant to the Bank Deposit Financial Assistance Program of the Department of
Energy shall be separately insured in an amount not to exceed the standard maximum deposit insurance
amount [i.e., $250,000] … for each insured depository institution depositing such funds.” 12 U.S.C. §
1817(i)(3).
13 See 12 U.S.C. § 1831f.
14 See 12 C.F.R. § 337.6.
6
by an insured
depository institution pursuant to the Bank Deposit Financial Assistance Program of the Department of
Energy shall be separately insured in an amount not to exceed the standard maximum deposit insurance
amount [i.e., $250,000] … for each insured depository institution depositing such funds.” 12 U.S.C. §
1817(i)(3).
13 See 12 U.S.C. § 1831f.
14 See 12 C.F.R. § 337.6.
6
Adequately capitalized banks may accept new brokered deposits and renew or roll
over existing brokered deposits if they have obtained a waiver from the FDIC.
Undercapitalized banks may never accept, renew, or roll over brokered deposits.
In section 29, the restrictions on the acceptance of brokered deposits are
accompanied by certain restrictions on deposit interest rates. The latter restrictions may
be summarized as follows:
Well capitalized banks may offer rates on deposits without restriction.
Adequately capitalized banks with waivers to accept brokered deposits may offer
rates as follows:
o In the case of deposits accepted from within the bank’s “normal market
area,” the rates may not “significantly exceed” the rates in such area.
o In the case of deposits accepted from outside the bank’s “normal market
area,” the rates may not “significantly exceed” the “national rate”
established by the FDIC.
Adequately capitalized banks without waivers to accept brokered deposits may
not offer rates that are “significantly higher” than the “prevailing rates” in the
bank’s “normal market area” (even if the deposits are accepted from outside that
area).
Undercapitalized banks may not offer rates that are “significantly higher” than the
“prevailing rates” in either: (1) the bank’s “normal market area”; or (2) the area
from which the deposits are accepted.15
Through its regulations, the FDIC has simplified the operation of the interest rate
restrictions outlined above
market area” (even if the deposits are accepted from outside that
area).
Undercapitalized banks may not offer rates that are “significantly higher” than the
“prevailing rates” in either: (1) the bank’s “normal market area”; or (2) the area
from which the deposits are accepted.15
Through its regulations, the FDIC has simplified the operation of the interest rate
restrictions outlined above. In general, under the FDIC’s regulations, any bank that is not
well capitalized may offer no more than the “national rate” plus 75 basis points for
deposits of similar size and maturity. The “national rate” is a simple average of rates
paid by all banks and branches. On a weekly basis, the FDIC publishes the rate caps on
its website. If a bank believes that the “national rate” does not correspond to the actual
rates in the bank’s particular market, the bank is permitted to offer evidence of the actual
market rates.16
In summary, in the case of banks that are not well capitalized, section 29 restricts
the acceptance of brokered deposits and also restricts deposit interest rates.
15 12 U.S.C. § 1831f.
16 See 12 C.F.R. § 337.6(e).
7
III.
Legal History of Brokered Deposits
For banks subject to the restrictions on the acceptance of brokered deposits, the
meaning of the term “brokered deposits” is critical. Though this term is defined in the
law (through the definition of “deposit broker”), some banks have disputed the
classification of certain deposits as “brokered deposits.”
This section discusses the history and purpose of the restrictions on the
acceptance of brokered deposits.
A.
FDIC and FHLBB Rulemaking
Prior to the enactment of the current statutory restrictions on the acceptance of
brokered deposits, the FDIC and the Federal Home Loan Bank Board (FHLBB), as
operating head of the Federal Savings and Loan Insurance Corporation (FSLIC),
attempted to control brokered deposits through rulemaking
purpose of the restrictions on the
acceptance of brokered deposits.
A.
FDIC and FHLBB Rulemaking
Prior to the enactment of the current statutory restrictions on the acceptance of
brokered deposits, the FDIC and the Federal Home Loan Bank Board (FHLBB), as
operating head of the Federal Savings and Loan Insurance Corporation (FSLIC),
attempted to control brokered deposits through rulemaking. This effort began in 1983,
when the FDIC and the FHLBB jointly published an advance notice of proposed
rulemaking.17 In that notice, the two agencies described three forms of deposit-
brokering:
Simple brokering: In this form, a money broker solicits deposits from customers
for placement (by the broker or by the customer) at banks.
CD participations: A broker-dealer purchases a CD issued by a bank and sells
interests in the CD to customers.
Deposit-listing services: A bank advertises interest rates and maturities through a
third party, which arranges by telephone for the sale of the bank’s deposits to the
public.
The FDIC and the FHLBB expressed concerns about these methods of gathering
deposits. They explained their concerns as follows:
The FDIC and the Board are concerned that the above-described deposit-
placement practices enable virtually all institutions to attract large
volumes of funds from outside their natural market area irrespective of the
institutions’ managerial and financial characteristics. The ability to obtain
de facto one-hundred-percent deposit insurance through the parceling of
funds eliminates the need for the depositor to analyze institutions’
likelihood of continued financial viability. The availability of these funds
to all institutions, irrespective of financial and managerial soundness,
reduces market discipline
nstitutions’ managerial and financial characteristics. The ability to obtain
de facto one-hundred-percent deposit insurance through the parceling of
funds eliminates the need for the depositor to analyze institutions’
likelihood of continued financial viability. The availability of these funds
to all institutions, irrespective of financial and managerial soundness,
reduces market discipline. Although deposit brokering can provide a
helpful source of liquidity to institutions, the practices described above
make it possible for poorly-managed institutions to continue operating
beyond the time at which natural market forces would have otherwise
17 See 48 Fed. Reg. 50339 (November 1, 1983).
8
precipitated their failure. This impediment to natural market forces results
in increased costs to the FDIC and the FSLIC in the form of either greater
insurance payments or higher assistance expenditures if the institutions are
subsequently closed because of insolvency.18
In the advance notice of proposed rulemaking, the two agencies did not, however,
express concerns about deposit volatility. On the basis of the concerns they did express,
the FDIC and the FHLBB solicited comments on “all possible avenues available for
remedying existing industry practices which may have a negative effect upon depository
institutions and produce increased costs to the insurance funds as well as to the public.”19
In early 1984, after reviewing the public comments, the FDIC and the FHLBB
published proposed rules.20 The basis of the proposed rules was the agencies’
determination that “deposit brokerage has a sufficiently adverse effect upon the
depository institutions industry to warrant remedial regulatory action.”21 In addressing
this “adverse effect,” the FDIC and the FHLBB did not propose to prohibit the
acceptance of brokered deposits. Rather, the agencies proposed to limit the insurance
coverage of such deposits at all banks
es was the agencies’
determination that “deposit brokerage has a sufficiently adverse effect upon the
depository institutions industry to warrant remedial regulatory action.”21 In addressing
this “adverse effect,” the FDIC and the FHLBB did not propose to prohibit the
acceptance of brokered deposits. Rather, the agencies proposed to limit the insurance
coverage of such deposits at all banks. The agencies justified this approach as follows:
[T]he FDIC and the Board believe that deposit brokerage represents an
outright misuse of the federal deposit insurance system. Deposit insurance
was originally intended to establish stability and to promote confidence in
the monetary and banking systems by protecting primarily small,
relatively unsophisticated depositors in their relationships with banks and
savings associations. It was never intended to protect investors seeking
the highest yields available in money markets.22
In choosing to limit deposit insurance coverage, rather than to control brokered
deposits through other means, the two agencies offered the following explanation:
The agencies believe the deposit insurance alternative would avoid the
constant monitoring of all deposit brokerage activity which would only
serve to increase the regulatory burden on depository institutions and the
supervisory role of the agencies. Alternatively, a blanket prohibition on
the use of brokered deposits would be unduly restrictive and would totally
eliminate the benefits to insured institutions of brokered deposits.
Limiting the insurance coverage of brokered deposits would not defeat the
liquidity benefits of brokered deposits for well-run institutions. Such
deposits would still be obtainable, but without a ‘federal guaranty.’
Investment decisions would be made on the strength or weakness of the
18 Id. at 50340.
19 Id.
20 See 49 Fed. Reg. 2787 (January 23, 1984).
21 Id. at 2789.
22 Id.
9
posits would not defeat the
liquidity benefits of brokered deposits for well-run institutions. Such
deposits would still be obtainable, but without a ‘federal guaranty.’
Investment decisions would be made on the strength or weakness of the
18 Id. at 50340.
19 Id.
20 See 49 Fed. Reg. 2787 (January 23, 1984).
21 Id. at 2789.
22 Id.
9
involved depository institution, and not on the federal insurance feature of
the deposit.23
The FDIC and the FHLBB did not propose to eliminate deposit insurance
coverage on brokered deposits altogether, but to eliminate “pass-through” insurance
coverage for brokered deposits. Coverage of these deposits would be limited to $100,000
for each broker at each bank.
After receiving almost 7,000 comments, the FDIC and the FHLBB published final
rules.24 Through these rules, the agencies eliminated “pass-through” insurance coverage
for brokered deposits. In doing so, the agencies rejected all of the following suggested
alternative methods for controlling these deposits:
Focus on institutional accounts only;
Focus on troubled banks only;
Impose limits on deposit growth;
Require registration of deposit brokers with the Securities and Exchange
Commission;
Charge variable-rate deposit insurance assessments;
Implement increased supervisory efforts; and
Prohibit or limit the acceptance of brokered deposits.
In rejecting these alternatives, the FDIC and the FHLBB reasoned as follows:
[T]he final rule achieves the Agencies’ intended purposes by using market
discipline rather than by imposing burdensome regulatory and reporting
requirements
Charge variable-rate deposit insurance assessments;
Implement increased supervisory efforts; and
Prohibit or limit the acceptance of brokered deposits.
In rejecting these alternatives, the FDIC and the FHLBB reasoned as follows:
[T]he final rule achieves the Agencies’ intended purposes by using market
discipline rather than by imposing burdensome regulatory and reporting
requirements. The alternatives suggested are, in contrast, ineffective
and/or overly burdensome, and all assume that the Congress intended
deposit brokers to benefit through the marketing of FDIC- or FSLIC-
insured products without being directly subject to regulations intended to
ensure the soundness of the Insurance Funds.25
The basis of the final rules was the belief “that insured deposit brokerage is
inconsistent with the fundamental and overriding purposes which were meant to be
23 Id.
24 See 49 Fed. Reg. 13003 (April 2, 1984) (effective on October 1, 1984).
25 Id. at 13008.
10
served by the federal deposit insurance system.”26 In explaining the dangers of brokered
deposits, the FDIC and the FHLBB noted the following:
These funds, which are often received in large amounts at high cost, must
be invested quickly for purposes of economic efficiency. The Agencies’
experience has shown that the speed required may not allow for the usual
care to be taken in appraisals and credit checks relative to investments.
Moreover, the need to offer a high rate of return to attract brokered funds
may require institutions to take greater investment risks, a factor often
aggravated where the broker or associated parties suggest or stipulate
particular uses for the funds. Healthy institutions may become problem
cases very quickly through a very few transactions of this sort. One
institution, for example, used brokered deposits to quadruple its asset size
in a year
tract brokered funds
may require institutions to take greater investment risks, a factor often
aggravated where the broker or associated parties suggest or stipulate
particular uses for the funds. Healthy institutions may become problem
cases very quickly through a very few transactions of this sort. One
institution, for example, used brokered deposits to quadruple its asset size
in a year. Although this institution was healthy at the outset of the year,
the brokered funds were used to invest in highly speculative commercial
loans at a pace that precluded the association from using adequate
underwriting procedures, so that it is now a problem for the FSLIC.27
The final rules included a definition of “deposit broker.” This definition was
almost identical to the definition later adopted by Congress in connection with the current
statutory restrictions on the acceptance of brokered deposits. The definition included two
primary components. First, the term “deposit broker” was broadly defined as:
[a]ny person engaged in the business of placing funds, or facilitating the
placement of funds, of third parties with insured banks [or ‘insured
institutions’ in the case of the FHLBB’s final rule] or the business of
placing funds with insured banks 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 bank
to use the proceeds of the account to fund a prearranged loan.28
Second, the definition included a list of nine exceptions (the same nine exceptions
that appear in the current statutory definition), including an exception for “an agent or
nominee whose primary purpose is not the placement of funds with depository
institutions.”29
In addition, the final rules provided that certain deposits accepted through “listing
services” would not be treated as brokered deposits
definition included a list of nine exceptions (the same nine exceptions
that appear in the current statutory definition), including an exception for “an agent or
nominee whose primary purpose is not the placement of funds with depository
institutions.”29
In addition, the final rules provided that certain deposits accepted through “listing
services” would not be treated as brokered deposits. The FDIC’s rule described these
deposits as follows:
26 Id. at 13005.
27 Id. at 13006.
28 Id. at 13010.
29 Id. at 13011.
11
(1) The person or entity listing the deposit is compensated only by means
of a subscription fee which is not calculated on the basis of the number or
dollar amount of deposits placed as the result of information provided by
such service; (2) the service provided is limited to the gathering and
transmission of information concerning the availability of deposits; and
(3) any funds to be invested in deposit accounts are remitted directly by
the depositor to the insured bank and not, directly or indirectly, through
the person or entity providing the listing service.30
Immediately after the promulgation of the regulations, a securities firm and the
Securities Industry Association brought a lawsuit against the FDIC and the FHLBB. The
plaintiffs asserted that the regulations were invalid. The United States Court of Appeals
for the District of Columbia Circuit agreed, finding that the adoption of the regulations
exceeded the agencies’ statutory authority.31 In reaching this conclusion, the court
largely relied upon section 3 of the FDI Act. At the time of the litigation, section 3
provided as follows:
[T]he term “insured deposit” means the net amount due to any depositor
… for deposits in an insured bank (after deducting offsets) less any part
thereof which is in excess of $100,000
the regulations
exceeded the agencies’ statutory authority.31 In reaching this conclusion, the court
largely relied upon section 3 of the FDI Act. At the time of the litigation, section 3
provided as follows:
[T]he term “insured deposit” means the net amount due to any depositor
… for deposits in an insured bank (after deducting offsets) less any part
thereof which is in excess of $100,000. Such net amount shall be
determined according to such regulations as the Board of Directors may
prescribe, and in determining the amount due to any depositor there shall
be added together all deposits in the bank maintained in the same capacity
and the same right for his benefit either in his own name or in the names
of others….32
The court described section 3 of the FDI Act (quoted above) as follows:
These provisions establish a clear and unequivocal mandate that the FDIC
shall insure each depositor’s deposits up to $100,000, determining the
amount of those deposits by adding together all accounts maintained for
the benefit of the depositor, whether or not in the depositor’s name. There
is no exception based upon the identity of the person opening, or
responsible for opening, the account.33
30 Id.
31 See FAIC Securities, Inc. v. United States, 768 F.2d 352 (D.C. Cir. 1985).
32 12 U.S.C. § 1813(m)(1) (1980 edition). This language concerning the aggregation of deposits owned by
a depositor “in the same capacity and the same right for the benefit of the depositor either in the name of
the depositor or in the name of any other person” now appears in section 11 of the FDI Act. See 12 U.S.C.
§ 1821(a)(1)(C).
33 768 F.2d at 361.
12
8 F.2d 352 (D.C. Cir. 1985).
32 12 U.S.C. § 1813(m)(1) (1980 edition). This language concerning the aggregation of deposits owned by
a depositor “in the same capacity and the same right for the benefit of the depositor either in the name of
the depositor or in the name of any other person” now appears in section 11 of the FDI Act. See 12 U.S.C.
§ 1821(a)(1)(C).
33 768 F.2d at 361.
12
On the basis of this statutory mandate, the court concluded that the FDIC could not deny
insurance coverage to depositors who place funds at banks through brokers. 34
This court decision ended the attempt by the FDIC and the FHLBB to control
brokered deposits through regulation. As discussed below, however, the controversy
over brokered deposits prompted action by Congress.
B.
The Financial Institutions Reform, Recovery, and Enforcement Act
Congress held several hearings on brokered deposits in 1984 and 1985. Congress
took no action, however, until the enactment of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA).
Through FIRREA, Congress amended the FDI Act by adding section 29. Unlike
the FDIC and FHLBB regulations, section 29 did not strip brokered deposits of “pass-
through” insurance coverage. Rather, section 29 prohibited the acceptance of brokered
deposits by “troubled” insured depository institutions, with “troubled institution” being
defined as “any insured depository institution which does not meet the minimum capital
requirements applicable with respect to such institution.”35 In other words, section 29
defined a “troubled institution” as an undercapitalized institution
age. Rather, section 29 prohibited the acceptance of brokered
deposits by “troubled” insured depository institutions, with “troubled institution” being
defined as “any insured depository institution which does not meet the minimum capital
requirements applicable with respect to such institution.”35 In other words, section 29
defined a “troubled institution” as an undercapitalized institution.
Specifically, section 29 provided as follows: “A troubled institution may not
accept funds obtained, directly or indirectly, by or through any deposit broker for deposit
into 1 [sic] or more deposit accounts.”36 Notwithstanding this general prohibition,
section 29 also provided that the FDIC could grant a waiver to a troubled bank “upon a
finding that the acceptance of such deposits does not constitute an unsafe or unsound
practice with respect to such institution.”37
Under this statutory rule (restricting the acceptance of deposits through “deposit
brokers”), the meaning of “deposit broker” is crucial. Section 29 defined that term as
follows:
34 The court did not discuss the FDIC’s authority under section 12(c) of the FDI Act, which provides (in its
current form) as follows:
Except as otherwise prescribed by the Board of Directors, neither the Corporation nor
such new depository institution or other insured depository institution [i.e., an assuming
bank] shall be required to recognize as the owner of any portion of a deposit appearing on
the records of the depository institution in default under a name other than that of the
claimant, any person whose name or interest as such owner is not disclosed on the
records of such depository institution in default as part owner of said deposit, if such
recognition would increase the aggregate amount of the insured deposits in such
depository institution in default.
12 U.S.C. § 1822(c).
35 FIRREA, Pub. L. No. 101-73, § 224, 103 Stat. 183 (1989).
36 Id.
37 Id.
13
claimant, any person whose name or interest as such owner is not disclosed on the
records of such depository institution in default as part owner of said deposit, if such
recognition would increase the aggregate amount of the insured deposits in such
depository institution in default.
12 U.S.C. § 1822(c).
35 FIRREA, Pub. L. No. 101-73, § 224, 103 Stat. 183 (1989).
36 Id.
37 Id.
13
(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; and (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.38
This broad definition included nine exceptions, including an exception for “an agent or
nominee whose primary purpose is not the placement of funds with depository
institutions.”39 Thus, in defining “deposit broker,” Congress simply borrowed the
definition of “deposit broker” in the invalidated FDIC and FHLBB regulations.
Congress did not explain the purpose of section 29 in any detail. The
Congressional report that accompanied the legislation merely provided the following
general description:
Any insured financial institution which does not meet the minimum capital
requirements applicable with respect to such institutions and is thus a
‘troubled’ institution may not accept funds obtained directly or indirectly
by or through any deposit broker for deposit into one or more accounts. A
troubled institution is also prohibited from soliciting deposits by offering
rates of interest which are significantly higher than the prevailing rates of
interest on deposits offered by other insured financial institutions ... in
such financial institution’s normal market area
ept funds obtained directly or indirectly
by or through any deposit broker for deposit into one or more accounts. A
troubled institution is also prohibited from soliciting deposits by offering
rates of interest which are significantly higher than the prevailing rates of
interest on deposits offered by other insured financial institutions ... in
such financial institution’s normal market area. This latter provision
prohibits the solicitation of deposits by in-house salaried employees
through so-called money desk operations.
The FDIC is also explicitly authorized to impose by regulation or rule
additional restrictions on the acceptance of brokered deposits by troubled
institutions. Explicitly providing such authority to the FDIC with regard
to troubled institutions is not meant to imply that the Corporation does not
already have the authority to regulate the use of brokered deposits by fully
capitalized and under capitalized institutions.
The provision authorizes the FDIC to waive the prohibition on the
acceptance of brokered deposits by troubled institutions, but only after a
case-by-case review of applications made by such institutions and then
only upon a finding that the acceptance of brokered deposits by a given
institution does not constitute an unsafe or unsound practice.
The conferees understand that there are situations where brokered deposits
are useful and needed particularly for liquidity purposes. Although the
provision requires a case-by-case application by a troubled institution for
38 Id.
39 Id.
14
tance of brokered deposits by a given
institution does not constitute an unsafe or unsound practice.
The conferees understand that there are situations where brokered deposits
are useful and needed particularly for liquidity purposes. Although the
provision requires a case-by-case application by a troubled institution for
38 Id.
39 Id.
14
waiver of the prohibition, the Corporation may indicate by rulemaking the
type or types of situations in which the Corporation would consider
granting a waiver consistent with the statute. The prohibition, however,
could only be waived by a finding that the use of brokered deposits by a
particular troubled institution does not constitute an unsafe or unsound
practice for it.40
Because Congress was concerned that “salaried employees” might perform the
same function as deposit brokers, the definition of “deposit broker” also included:
[A]ny insured depository institution, and any employee of any insured
depository institution, which engages, directly or indirectly, in the
solicitation of deposits by offering rates of interest (with respect to such
deposits) 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.
The effect of this provision was to prohibit a “troubled institution” without a waiver from
offering rates significantly higher than prevailing market rates.
The legislative history of section 29, though not extensive, suggests that some
members of Congress may have been concerned about deposit volatility. In a report
produced by the House Committee on Banking, Finance and Urban Affairs in connection
with FIRREA, this concern was expressed as follows:
Many failed thrifts relied on volatile funding, such as brokered deposits
controlled by a few individuals, which could be quickly withdrawn,
paralyzing the institution
t some
members of Congress may have been concerned about deposit volatility. In a report
produced by the House Committee on Banking, Finance and Urban Affairs in connection
with FIRREA, this concern was expressed as follows:
Many failed thrifts relied on volatile funding, such as brokered deposits
controlled by a few individuals, which could be quickly withdrawn,
paralyzing the institution. At one failed thrift, Jumbo Certificates of
Deposit (usually deposits of $100,000 and over) made up 96 percent of
total deposits. At another failed thrift, brokered deposits grew from 14%
to 86% of all deposits in just one year. Because these funds are generally
more expensive to obtain they cut into the interest margin earned on
investments. Lower net interest margins encourage managers to take
greater risks in order to maintain adequate earnings. Higher risks are all
too often translated into higher failures.41
In summary, Congress through FIRREA prohibited “troubled institutions” from
obtaining deposits through “deposit brokers” unless the bank obtains a waiver from the
FDIC. Further, Congress provided that the term “deposit broker” includes the bank itself
(or its own employees) when offering high interest rates. In otherwise defining “deposit
broker,” Congress borrowed the definition previously used by the FDIC and the FHLBB.
40 H.R. Conf. Rep. No. 101-222 at 402-403 (1989), reprinted in 1989 U.S.C.C.A.N. 432, 441-42.
41 H.R. Rep. No. 101-54(I), reprinted in 1989 U.S.C.C.A.N. 86, 96.
15
elf
(or its own employees) when offering high interest rates. In otherwise defining “deposit
broker,” Congress borrowed the definition previously used by the FDIC and the FHLBB.
40 H.R. Conf. Rep. No. 101-222 at 402-403 (1989), reprinted in 1989 U.S.C.C.A.N. 432, 441-42.
41 H.R. Rep. No. 101-54(I), reprinted in 1989 U.S.C.C.A.N. 86, 96.
15
C.
The Federal Deposit Insurance Corporation Improvement Act
Following the enactment of FIRREA, Congress continued to study brokered
deposits and held several hearings on the subject.
Through the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), Congress made several amendments to section 29 of the FDI Act. One of
these amendments was to broaden the applicability of section 29 from “troubled
institutions” (i.e., undercapitalized banks) to any “insured depository institution that is
not well capitalized.” In other words, Congress extended the applicability of section 29
to adequately capitalized banks.42 Also, Congress stripped the FDIC of its authority to
grant waivers to undercapitalized banks but permitted the FDIC to grant waivers to
adequately capitalized banks.43
In regard to interest rates, Congress added a new subsection that prohibited an
insured bank with a waiver from paying an interest rate on brokered deposits that:
[S]ignificantly exceeds (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 Corporation, for deposits
accepted outside the institution’s normal market area.44
In the case of an undercapitalized bank (that cannot obtain a waiver), Congress provided
that the bank:
[S]hall not solicit deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured deposits
deposits
of comparable maturity, as established by the Corporation, for deposits
accepted outside the institution’s normal market area.44
In the case of an undercapitalized bank (that cannot obtain a waiver), Congress provided
that the bank:
[S]hall not solicit deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured deposits
(1) in such institution’s normal market area; or (2) in the market area in
which such deposits would otherwise be accepted.45
Finally, through a new section 29A of the FDI Act, Congress barred deposit
brokers from soliciting or placing deposits at insured banks unless the broker provided
written notification of this activity to the FDIC.46 Congress later repealed this section
through the Financial Regulatory Relief and Economic Efficiency Act of 2000.47
42 FDICIA, Pub. L. No. 102-242, § 301, 105 Stat. 2236 (1991).
43 Id.
44 Id.
45 Id.
46 Id.
47 See Pub. L. No. 106-569, § 1203. The FDIC explained the repeal of this section as follows: “In the past,
some deposit brokers have advertised themselves as ‘FDIC-registered.’ Such advertisements suggested that
the broker had been approved or examined by the FDIC. Such suggestions were incorrect. By repealing
section 29A, Congress intended to eliminate such inaccurate advertisements.” 66 Fed. Reg. 17621-01,
2001 WL 313746 (April 3, 2001).
16
repeal of this section as follows: “In the past,
some deposit brokers have advertised themselves as ‘FDIC-registered.’ Such advertisements suggested that
the broker had been approved or examined by the FDIC. Such suggestions were incorrect. By repealing
section 29A, Congress intended to eliminate such inaccurate advertisements.” 66 Fed. Reg. 17621-01,
2001 WL 313746 (April 3, 2001).
16
These provisions apparently represented a compromise between members of
Congress who wanted to tighten the restrictions on brokered deposits and those members
who believed that problems at banks were caused by the improper use of deposits, not by
the source of deposits. In any event, Congress through FDICIA strengthened the
prohibition against the acceptance of brokered deposits as follows: (1) by broadening the
scope of the prohibition to include adequately capitalized banks; and (2) by removing the
ability of the FDIC to grant waivers to undercapitalized banks.
Similarly, Congress amended the rules on interest rates but did not change those
rules in a fundamental manner. Before FDICIA, a “troubled institution” without a waiver
could not offer rates significantly higher than prevailing market rates; after FDICIA, even
with a waiver, a bank that was not well capitalized could not offer rates that significantly
exceeded the prevailing rate in the applicable market area (in some cases) or the “national
rate” established by the FDIC (in other cases).
Congress did not change the definition of “deposit broker” enacted in FIRREA.
D.
Section 337.6 of the FDIC’s Regulations
Following the enactment of FIRREA, the FDIC adopted an interim rule to
implement the statutory restrictions on the acceptance of brokered deposits that, to a large
extent, simply tracked the statute.48
Following the enactment of FDICIA, the FDIC revised its regulation. Again, in
regard to the basic rules on the acceptance of brokered deposits, the regulation tracked
the statute
ulations
Following the enactment of FIRREA, the FDIC adopted an interim rule to
implement the statutory restrictions on the acceptance of brokered deposits that, to a large
extent, simply tracked the statute.48
Following the enactment of FDICIA, the FDIC revised its regulation. Again, in
regard to the basic rules on the acceptance of brokered deposits, the regulation tracked
the statute. In regard to the interest rate restrictions, the FDIC added details such as a
definition of “national rate” and a definition of “market area.”49,50
More recently, in 2009, the FDIC amended its regulation by simplifying the
interest rate restrictions.51 The FDIC summarized the amended regulations as follows:
The FDIC is amending its regulations relating to the interest rate
restrictions that apply to insured depository institutions that are not well
capitalized. Under the amended regulations, such insured depository
institutions generally will be permitted to offer the “national rate” plus 75
basis points. The “national rate” will be defined, for deposits of similar
size and maturity, as a simple average of rates paid by all insured
depository institutions and branches for which data are available. For
those cases in which the FDIC determines that the national rate as
48 See 54 Fed. Reg. 51014 (December 12, 1989). The interim rule was codified at 12 C.F.R. § 337.6.
49 See 57 Fed. Reg. 23941 (June 5, 1992).
50 Also, in the list of exceptions to the definition of “deposit broker,” the FDIC added a tenth exception for
“[a]n 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 deposit program.” 12
C.F.R. § 337.6(a)(5)(ii)(J).
51 See 74 Fed. Reg. 27679 (June 11, 2009).
17
o, in the list of exceptions to the definition of “deposit broker,” the FDIC added a tenth exception for
“[a]n 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 deposit program.” 12
C.F.R. § 337.6(a)(5)(ii)(J).
51 See 74 Fed. Reg. 27679 (June 11, 2009).
17
published on the FDIC’s Web site does not represent the prevailing rate in
a particular market, as indicated by available evidence, the depository
institution will be permitted to offer the prevailing rate in that market plus
75 basis points.52
E.
FDIC Advisory Opinions
As discussed in the preceding sections, the definition of “deposit broker” has two
main parts. First, the definition broadly encompasses “any person engaged in the
business of placing deposits, or facilitating the placement of deposits, of third parties with
insured depository institutions . . . .”53 Second, the definition sets forth certain
exceptions.54
The definition of “deposit broker” is the subject of numerous FDIC advisory
opinions.55 In some of these opinions, the issue is whether a particular activity
constitutes “placing deposits, or facilitating the placement of deposits.” Other opinions
involve the applicability of one or more of the exceptions. In opinions of the latter type,
the most common issue is whether a particular party is “an agent or nominee whose
primary purpose is not the placement of funds with depository institutions” (the primary
purpose exception).56
Many of the FDIC’s advisory opinions fall into specific categories, which can be
described as follows:
Opinions involving the difference between deposit brokers and companies known
as “listing services,” which publish deposit interest rates offered by banks.
Opinions involving parties who provide marketing for banks, or who refer
potential depositors to banks
pose exception).56
Many of the FDIC’s advisory opinions fall into specific categories, which can be
described as follows:
Opinions involving the difference between deposit brokers and companies known
as “listing services,” which publish deposit interest rates offered by banks.
Opinions involving parties who provide marketing for banks, or who refer
potential depositors to banks.
Opinions involving securities firms or investment companies, including
companies that “sweep” or transfer idle customer funds into deposit accounts at
one or more banks.
Opinions involving the insurance coverage of brokered deposits, including
deposits placed for customers by an insured bank at other insured banks so that
each customer will receive total insurance coverage in excess of the $250,000
limit (i.e., up to $250,000 at each bank).
52 Id.
53 12 U.S.C. § 1831f(g)(1).
54 See 12 U.S.C. § 1831f(g)(2).
55 FDIC advisory opinions are available at http://fdic.gov/regulations/laws/rules/4000-50.html.
56 12 U.S.C. § 1831f(g)(2)(I).
18
These categories contain the most common issues on brokered deposits presented
to the FDIC. The next section describes each of these categories and related legal issues
in more detail. Also, the next section discusses an issue that the FDIC has not addressed
in its published advisory opinions: whether companies involved in the distribution of
prepaid products should be classified as deposit brokers.
IV.
Deposits and Their Legal Treatment
A.
Listing Services
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 financial institutions.
Depositors use listing services to find the best rate available for a given deposit type and,
in the case of a CD, term
ld be classified as deposit brokers.
IV.
Deposits and Their Legal Treatment
A.
Listing Services
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 financial institutions.
Depositors use listing services to find the best rate available for a given deposit type and,
in the case of a CD, term. In its simplest form, a newspaper advertisement listing one or
more institutions’ deposit rates is a listing service, but a more commonly thought of
listing service lists many depository institutions and their rates from highest to lowest.
Some are open to the public and can be found on the Internet. Other listing services are
closed to the public; in these services, depositors are typically financial institutions and
institutional investors. Some listing services derive income through subscription fees
paid by the institution listing their rates. Other listing services earn income by charging
the listing institution fees based on the volume of deposits placed. In the case of
newspapers, income for listing a bank’s deposit and rate comes in the form of
advertisement revenue.
In sum, a “listing service” is a company that compiles information about the
interest rates offered by banks on deposit products, especially CDs. A “deposit broker,”
on the other hand, is “any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured depository
institutions. . . .”57 A “listing service” is thus a compiler of information about deposits,
whereas a “deposit broker” is a facilitator in the placement of deposits.
Of course, a particular company can be a “listing service” (compiling information
about deposits) as well as a “deposit broker” (facilitating the placement of deposits)
ent of deposits, of third parties with insured depository
institutions. . . .”57 A “listing service” is thus a compiler of information about deposits,
whereas a “deposit broker” is a facilitator in the placement of deposits.
Of course, 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 criteria for determining when a
“listing service” qualifies as a “deposit broker.” The development of these criteria began
in 1990 with Advisory Opinion No. 90-24 (June 12, 1990).58 That opinion involved “a
computerized rate listing service for jumbo CD issuers” that “link[ed] thousands of
potential buyers and sellers of CD’s together.” The service charged a monthly
subscription fee; it did not charge any transaction fees. Indeed, the service was not
57 12 U.S.C. § 1831f(g)(1)(A); 12 C.F.R. § 337.6(a)(5)(i)(A).
58 In a broad sense, the development of the FDIC’s criteria began in 1984 when the FDIC and the FHLB
adopted regulations that stripped brokered deposits of “pass-through” insurance coverage. See 49 Fed.
Reg. 13003 (April 2, 1984). Through litigation, these regulations were invalidated (as previously
discussed). See FAIC Securities, Inc. v. United States, 768 F.2d 352 (D.C. Cir. 1985). An obvious
similarity exists between the criteria used by the FDIC and FHLB and the criteria later set forth by the
FDIC through advisory opinions (as discussed in this section).
19
ge. See 49 Fed.
Reg. 13003 (April 2, 1984). Through litigation, these regulations were invalidated (as previously
discussed). See FAIC Securities, Inc. v. United States, 768 F.2d 352 (D.C. Cir. 1985). An obvious
similarity exists between the criteria used by the FDIC and FHLB and the criteria later set forth by the
FDIC through advisory opinions (as discussed in this section).
19
involved in any transactions. In determining that the listing service was not a deposit
broker, the FDIC reasoned as follows:
In our opinion, [the Company] is engaged in providing information on
current interest rates to its subscribers, be they individuals considering
whether to purchase jumbo CD’s, or depository institutions attempting to
set a competitive rate of interest for such CD’s. What [the Company]
facilitates is the decision of the would-be buyer whether (and from whom)
to buy a CD, or the decision of the depository institution as to what rate to
set; it is not facilitating the placement of deposits per se.
Subsequently, in Advisory Opinion No. 92-50 (July 24, 1992), the FDIC set forth
specific criteria to determine when a listing service qualifies as a deposit broker.
Through these criteria, the FDIC took the position that a listing service is not a deposit
broker if the service “is compensated only by means of subscription fees . . . and such
fees are not calculated on the basis of the number or dollar amount of deposits placed as
the result of information provided by the listing service.” That is, a listing service must
charge flat subscription fees; otherwise, the service is a deposit broker. Although the
FDIC did not articulate the rationale for this distinction, it is inferable: compensation
based on the amount of deposits placed through a listing service may create a motivation
on the part of the service to become involved in the placement of deposits. Indeed, such
compensation strongly suggests that the service is involved in some manner in placing
deposits
a deposit broker. Although the
FDIC did not articulate the rationale for this distinction, it is inferable: compensation
based on the amount of deposits placed through a listing service may create a motivation
on the part of the service to become involved in the placement of deposits. Indeed, such
compensation strongly suggests that the service is involved in some manner in placing
deposits. Therefore, the existence of such compensation will result in classifying the
listing service as a deposit broker.
The FDIC revised its criteria in 2002 through Advisory Opinion No. 02-04
(November 13, 2002). The FDIC made additional revisions through Advisory Opinion
No. 04-04 (July 28, 2004). In the latter opinion, the FDIC took the position that an
Internet listing service could provide a platform for executing trades (i.e., a platform that
enables parties to order the purchase or sale of CDs or other deposit products) without
becoming a deposit broker. The FDIC expressed this position as follows:
[T]hrough advances in technology, an Internet-based ‘listing service’ can
transmit messages (including trade confirmations) between depositors and
depository institutions so long as the Internet-based ‘listing service’ is a
passive mechanism for ‘posting’ rates and transmitting messages.
Under the FDIC’s revised criteria (as set forth in Advisory Opinion No. 04-04), a
listing service is not a deposit broker if the service satisfies each of the following
requirements:
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
20
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
20
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.
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.
At present, the FDIC applies these criteria to Internet companies that assist banks
in attracting deposits
toward particular institutions.
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.
At present, the FDIC applies these criteria to Internet companies that assist banks
in attracting deposits. Assuming these criteria are satisfied, the FDIC takes the position
that the Internet 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.
The FDIC’s treatment of listing services can be contrasted with the FDIC’s
treatment of entities that provide marketing for insured banks. The latter type of entity is
discussed below.
B.
Marketers
Some banks attempt to attract new depositors through advertising conducted by
other entities. In some cases, the entity is a nonprofit organization or “affinity group.” In
other cases, the entity is a commercial enterprise. In either case, the entity conducts
marketing on behalf of the bank or refers members or customers to the bank in exchange
for fees or commissions.
The FDIC has developed criteria for determining when these entities qualify as
deposit brokers. In the case of nonprofit affinity groups, the development of these criteria
began in 1992 with Advisory Opinion No. 92-79 (November 10, 1992). In that opinion,
21
he entity conducts
marketing on behalf of the bank or refers members or customers to the bank in exchange
for fees or commissions.
The FDIC has developed criteria for determining when these entities qualify as
deposit brokers. In the case of nonprofit affinity groups, the development of these criteria
began in 1992 with Advisory Opinion No. 92-79 (November 10, 1992). In that opinion,
21
the FDIC described the marketing arrangement between the bank and the affinity groups
as follows:
The associations endorse the bank’s credit and deposit products, cooperate
in marketing the products, sell advertising space in their publications to
the bank at standard rates, permit the bank to include deposit solicitations
in credit mailings and other direct mailings to association members, place
poster and brochure racks relating to the bank’s credit and deposit
products in association offices, and include information about the bank’s
products in new member kits.
In exchange for these marketing efforts, the affinity groups earned fees described
as follows:
Each association earns an incentive fee when an association member
maintains a credit or deposit relationship with the bank. The association
fee is calculated as a percentage of the average daily balances of deposits
maintained by the association’s members during the calculation period.
In this advisory opinion, the affinity groups did not accept deposits on behalf of
the bank or process deposit account applications for the bank. Nonetheless, the FDIC
determined that the affinity groups should be classified as deposit brokers. The FDIC
explained this determination as follows:
The fact that your company is never in possession of the investor’s
principal or interest, and never acts as trustee or agent for the investor,
does not exempt it from the FDI Act requirements applicable to deposit
brokers
tions for the bank. Nonetheless, the FDIC
determined that the affinity groups should be classified as deposit brokers. The FDIC
explained this determination as follows:
The fact that your company is never in possession of the investor’s
principal or interest, and never acts as trustee or agent for the investor,
does not exempt it from the FDI Act requirements applicable to deposit
brokers. The key test is whether your company may be said to be
‘engaged in the business of placing deposits, or facilitating the placement
of deposits, of third parties with insured depository institutions….’ In
other words, the FDI Act covers scenarios where the broker ‘facilitates the
placement’ of deposits, as well as scenarios where the broker places
deposits in its name as nominee or agent for others. In common usage, the
term ‘facilitate’ means ‘to free from difficulty or impediment; to make
easy or less difficult.’ The activities of the associations clearly make it
easier for the investor to place its deposits with the bank.
(Emphasis in the original.) The FDIC concluded as follows:
Even where the investor, after having been contacted by an association,
calls the bank directly to establish an account, the association would be
considered to be a deposit broker because it is ‘facilitating the placement’
of deposits; the broad definition of deposit broker used in the FDI Act
encompasses such ‘match-making’ or ‘finder’ activities.
This broad interpretation of the term “facilitating the placement of deposits” can
be contrasted with the more narrow interpretation applied by the FDIC in the case of
listing services. As discussed in the preceding section, the FDIC takes the position that
22
’
of deposits; the broad definition of deposit broker used in the FDI Act
encompasses such ‘match-making’ or ‘finder’ activities.
This broad interpretation of the term “facilitating the placement of deposits” can
be contrasted with the more narrow interpretation applied by the FDIC in the case of
listing services. As discussed in the preceding section, the FDIC takes the position that
22
some listing services do not “facilitate the placement of deposits” even when they
provide an Internet platform for the execution of trades. Of course, unlike the affinity
groups discussed in Advisory Opinion No. 92-79, these listing services do not attempt to
steer deposits into particular banks. Rather, they provide depositors with the means to
select a listed bank.
After issuing Advisory Opinion No. 92-79, the FDIC refined its position with
respect to affinity groups through Advisory Opinion No. 93-30 (June 15, 1993). In the
latter opinion, the FDIC described the activities of the affinity groups as follows:
[T]he Bank markets a significant portion of its deposits to Affinity Group
members. After identifying a suitable Affinity Group, the Bank seeks its
endorsement of the Bank and its credit and other products and, upon
entering into an endorsement agreement with the Affinity Group, markets
the Bank’s products to the Affinity Group’s members with such
endorsement. The Affinity Group signs a solicitation letter prepared by
the Bank and delivers a list of its members to whom the Bank sends
solicitations.
In exchange for these endorsements, the affinity groups earned “royalties” from the bank.
The FDIC described the activities of the affinity groups on behalf of the bank as
“passive and indirect.” In determining that the affinity groups were not “facilitating the
placement of deposits,” the FDIC relied upon seven factors described as follows:
ts members to whom the Bank sends
solicitations.
In exchange for these endorsements, the affinity groups earned “royalties” from the bank.
The FDIC described the activities of the affinity groups on behalf of the bank as
“passive and indirect.” In determining that the affinity groups were not “facilitating the
placement of deposits,” the FDIC relied upon seven factors described as follows:
(a) all of the Affinity Groups are non-financial institutions, and the vast
majority are non-profit organizations; (b) none of the Affinity Groups
directly markets the deposit products for the Bank; (c) Affinity Group
members who decide to place deposits with the Bank do so directly with
the Bank (the Affinity Groups do not receive funds from their members
for deposit with the Bank or otherwise process any member deposits); (d)
the Affinity Groups have exclusive relationships with the Bank and do not
endorse deposit products of other institutions; (e) most, but not all, of the
Affinity Groups receive royalties for endorsing the Bank’s deposit
products, the amount of which represent a small fraction … of the market
rates paid to others who are considered deposit brokers within the meaning
of section 29 of the FDI Act; (f) historically, as reported by the Bank, the
retention rate for endorsed money market accounts obtained from Affinity
Group members ranges from 80% to 85% and for certificates of deposits
from 60% to 75% and such accounts and deposits are regarded by the
Bank as core deposits of the Bank and are not used to replace core deposit
run-off; and (g) the Affinity Groups do not know which members have
made deposits with the Bank, nor do they keep any records of the
amounts, rates or maturities of the deposits.
On the basis of these factors, the FDIC found that the affinity groups were not deposit
brokers.
23
ts and deposits are regarded by the
Bank as core deposits of the Bank and are not used to replace core deposit
run-off; and (g) the Affinity Groups do not know which members have
made deposits with the Bank, nor do they keep any records of the
amounts, rates or maturities of the deposits.
On the basis of these factors, the FDIC found that the affinity groups were not deposit
brokers.
23
The FDIC cited the same factors in Advisory Opinion No. 93-31 (June 17, 1993),
Advisory Opinion No. 93-34 (June 24, 1993) and Advisory Opinion No. 93-71 (October
1, 1993). In the latter opinion, though the seven factors were mixed, the FDIC found that
certain “clubs” were “facilitating the placement of deposits” at a particular bank. In
reaching this conclusion, the FDIC relied upon the fact that the clubs were “permitting
the Bank to place posters and brochure racks in club offices and including information
and materials on Bank deposit products in new member packets....” Such activities, said
the FDIC, were “something other than ‘passive and indirect’ marketing activity....”
In the opinions discussed above, the most important factor used by the FDIC to
determine whether a particular affinity group is “facilitating the placement of deposits” at
a bank has been whether the affinity group is engaged in active marketing on behalf of
the bank. When the affinity group engages in active marketing, the FDIC has classified
the group as a deposit broker. In contrast, when the group’s activities are “passive and
indirect,” the FDIC has found that the group is not a deposit broker.
This treatment of nonprofit affinity groups has been similar to the FDIC’s
treatment of commercial or professional enterprises that provide marketing for banks.
For example, in Advisory Opinion No. 93-31 (June 17, 1993), the FDIC found that
certain accountants and lawyers acted as deposit brokers in referring clients to a
particular bank in exchange for commissions. On the other hand, in Advisory Opinion
No
nonprofit affinity groups has been similar to the FDIC’s
treatment of commercial or professional enterprises that provide marketing for banks.
For example, in Advisory Opinion No. 93-31 (June 17, 1993), the FDIC found that
certain accountants and lawyers acted as deposit brokers in referring clients to a
particular bank in exchange for commissions. On the other hand, in Advisory Opinion
No. 94-37 (July 19, 1994), the FDIC found that a bank’s own customers did not qualify
as deposit brokers in referring acquaintances to the bank in exchange for “bonuses” (in
the form of “an increased interest rate on either existing or future deposits in the Bank,
cash or merchandise”). In determining that the customers were not deposit brokers, the
FDIC relied upon the fact that “the cost of the incentive packages to the Bank [was]
relatively small.”
When a non-bank entity is affiliated with the bank, the FDIC has found that the
entity can be a deposit broker even if it collects no fees or commissions. For example, in
Advisory Opinion No. 94-15 (March 16, 1994), an investment company referred clients
to an affiliated bank for banking services. Though the company earned no commissions
for making such referrals, the FDIC found that the company was a deposit broker. The
FDIC explained this conclusion as follows:
[I]t is not unusual for deposit brokers to be compensated indirectly. For
example, a deposit broker could take a portion of the interest that
otherwise would be paid to the depositor. Alternatively, a deposit broker
could steer its customers to a parent holding company or affiliate and
derive compensation through a quid pro quo arrangement with the parent
or affiliate. If we exempted commercial enterprises from the statutory
restrictions whenever they arranged to be compensated indirectly, the
statutory restrictions could be easily circumvented.
Another significant opinion involving referrals is Advisory Opinion No. 95-9
(June 29, 1995)
holding company or affiliate and
derive compensation through a quid pro quo arrangement with the parent
or affiliate. If we exempted commercial enterprises from the statutory
restrictions whenever they arranged to be compensated indirectly, the
statutory restrictions could be easily circumvented.
Another significant opinion involving referrals is Advisory Opinion No. 95-9
(June 29, 1995). That opinion involved a proposed arrangement among the following
parties: (1) a bank; (2) a company that was a “wholesaler of insurance products”; and (3)
24
a group of “approximately 2,000 independent insurance agents.” Under the proposed
arrangement, the bank would purchase the “wholesaler of insurance products.” Further,
in order to “retain the goodwill” of the independent insurance agents, the bank would
implement a plan “in which the agents would be compensated for referring their
customers to the Bank for a variety of products and services (including trust, non-RESPA
loan, and deposit products).”
The FDIC concluded that the independent insurance agents, in referring
customers to the bank, would qualify as deposit brokers. In reaching this conclusion, the
FDIC distinguished the insurance agents from those affinity groups that do not qualify as
deposit brokers. The FDIC reasoned as follows:
The circumstances surrounding the involvement of the agents … differ
from those of affinity groups. In an affinity group, the Bank markets the
Bank’s products to the affinity group’s members. The Bank, not the
affinity group, conducts the marketing aimed at the affinity group
members and that in every case, solicitation materials instruct the
members to contact the Bank, not the affinity group. In the case at hand,
however, the agent works ‘to put the Bank and the customer together.’
The agent would conduct the marketing and would provide advertising
literature from the Bank to customers who might be interested in one of
the Bank’s products
t the affinity group
members and that in every case, solicitation materials instruct the
members to contact the Bank, not the affinity group. In the case at hand,
however, the agent works ‘to put the Bank and the customer together.’
The agent would conduct the marketing and would provide advertising
literature from the Bank to customers who might be interested in one of
the Bank’s products. Under those circumstances, the role of agents differs
from that of affinity groups, and consequently, they must be considered
deposit brokers for purposes of the Act.
In summary, whether an entity is a nonprofit affinity group or a non-bank
enterprise, the FDIC has found that the entity “facilitates the placement of deposits” by
conducting active marketing on behalf of a bank. Also, the FDIC has found that an entity
“facilitates the placement of deposits” by regularly referring members or customers to a
bank. As a result, unless the entity is covered by one of the exceptions to the definition
(one of which is discussed in the next section), the entity is a deposit broker.
C.
Investment Companies
A securities firm or investment company exists to invest money in stocks, bonds
and other investments including deposit accounts at banks on behalf of clients. Several
brokerage firms, for example, operate sweep programs in which brokerage customers are
given the opportunity to sweep (that is, transfer) their excess cash balances into an
uninsured money market fund or a bank deposit to provide additional yield and insurance
coverage on those funds. (At present, however, interest rates on sweeps from affiliates
are both absolutely and relatively low.) Funds move between the securities firm and the
bank account depending on the level of investment activity by the customer.
The sweep process varies among firms. In a common version, known as a
“waterfall,” customer funds are swept into a series of banks. The balances at each bank
are usually fully insured, although some amounts may be uninsured
es
are both absolutely and relatively low.) Funds move between the securities firm and the
bank account depending on the level of investment activity by the customer.
The sweep process varies among firms. In a common version, known as a
“waterfall,” customer funds are swept into a series of banks. The balances at each bank
are usually fully insured, although some amounts may be uninsured. The placement of
25
funds at each bank in the waterfall can be pro-rata or sequential, although sequential
placement is more common.
If, for example, a customer has $1.1 million dollars and is participating in a
program with a five bank waterfall, funds will be placed in each bank up to the insurance
limit beginning with Bank 1. In this example, assuming sequential placement, the
customer’s funds would be placed in each of the five different banks ($250,000 in the
first four banks and $100,000 in the last bank) and remain fully insured. If the waterfall
involved only four banks, the usual arrangement would place the excess $100,000 into
Bank 1 as uninsured funds. If placement was pro-rata, each of the five banks would
receive $220,000.
Generally speaking, a securities firm or investment company that places deposits
in a bank on behalf of a customer is a deposit broker.59 When the company provides its
clients with the option of investing in deposit accounts, the company does not merely
“facilitate the placement of deposits.” Rather, the company actually places deposits.
Consequently, in most cases, the company is a “deposit broker” as defined in the FDI
Act. Indeed, even when the investment company does not place the deposits but merely
refers its clients to an affiliated bank, the company could be a deposit broker.60
Of course, the company will not be a “deposit broker” if it is covered by one of
the exceptions to the definition. For example, in Advisory Opinion No
tly, in most cases, the company is a “deposit broker” as defined in the FDI
Act. Indeed, even when the investment company does not place the deposits but merely
refers its clients to an affiliated bank, the company could be a deposit broker.60
Of course, the company will not be a “deposit broker” if it is covered by one of
the exceptions to the definition. For example, in Advisory Opinion No. 94-39 (August
17, 1994), the FDIC found that a particular brokerage firm was covered by the “primary
purpose” exception. As previously discussed, the “primary purpose” exception applies to
“an agent or nominee whose primary purpose is not the placement of funds with
depository institutions.”61 In Advisory Opinion No. 94-39, the “primary purpose”
exception was applicable because the purpose of the brokerage firm – in placing client
funds at an insured bank – was to satisfy a reserve requirement enforced by the Securities
and Exchange Commission and not to provide the clients with a deposit-placing service.
The FDIC also applied the “primary purpose” exception in Advisory Opinion No.
05-02 (February 3, 2005). In that case, a brokerage firm operated a sweep program in
which idle client funds were swept into MMDAs at two affiliated banks. The FDIC
determined that the “primary purpose” of the program was not to provide the clients with
a deposit-placement service. Rather, the “primary purpose” was to facilitate the clients’
purchase and sale of securities. In making this determination, the FDIC relied upon the
following factors:
The funds were not swept into time deposit accounts.
The amount of swept funds did not exceed 10% of the total amount of program
assets handled by the brokerage firm on a monthly basis.
59 See generally FAIC Securities, Inc. v. United States, 768 F.2d 352 (D.C. Cir. 1985).
60 See, e.g., Advisory Opinion No. 94-15 (March 16, 1994).
61 12 U.S.C. § 1831f(g)(2)(I).
26
time deposit accounts.
The amount of swept funds did not exceed 10% of the total amount of program
assets handled by the brokerage firm on a monthly basis.
59 See generally FAIC Securities, Inc. v. United States, 768 F.2d 352 (D.C. Cir. 1985).
60 See, e.g., Advisory Opinion No. 94-15 (March 16, 1994).
61 12 U.S.C. § 1831f(g)(2)(I).
26
The fees in the program were “flat fees” (i.e., equal “per account” or “per
customer” fees representing payment for recordkeeping or administrative services
and not representing payment for placing deposits).
The FDIC has adopted these factors as conditions or requirements applicable to
any investment company that “sweeps” idle client funds into deposit accounts at affiliated
banks. If the requirements are satisfied, the company is not a deposit broker under the
“primary purpose” exception with respect to the “swept” funds. On the other hand, if the
requirements are not satisfied, the company is a deposit broker. To determine
compliance with the 10% limit, the FDIC requires the submission of monthly reports.
Regardless of whether the deposits in a particular sweep program qualify as
brokered deposits, the sponsor usually attempts to structure the program so that the
deposits are eligible for “pass-through” or “per client” insurance coverage. Below, the
insurance coverage of brokered deposits is discussed in detail.
D.
Pass-Through Arrangements
Under the FDIC’s insurance regulations, “[f]unds owned by a principal or
principals and deposited into one or more deposit accounts in the name of an agent,
custodian or nominee, shall be insured to the same extent as if deposited in the name of
the principal(s).”62 The insurance coverage “passes through” the agent or custodian to
the actual owners. Thus, funds belonging to each owner are aggregated with any other
funds held by the same owner in the same ownership capacity at the insured bank and
insured up to the $250,000 limit
me of an agent,
custodian or nominee, shall be insured to the same extent as if deposited in the name of
the principal(s).”62 The insurance coverage “passes through” the agent or custodian to
the actual owners. Thus, funds belonging to each owner are aggregated with any other
funds held by the same owner in the same ownership capacity at the insured bank and
insured up to the $250,000 limit.
“Pass-through” insurance coverage as described above is not available unless
certain requirements are satisfied. First, the account records of the bank must disclose the
agency relationship among the parties.63 Second, the identities and interests of the actual
owners must be ascertainable either from the account records of the bank or records
maintained by the agent or other party.64 Third, the agency or custodial relationship must
be genuine. Through this relationship, the deposits at the FDIC-insured bank must
belong to the purported owners and not to the purported agent or custodian.65
The third requirement above is not satisfied when the purported owner of a
deposit enters into a creditor/debtor relationship (as opposed to a principal/agent
relationship) with the purported custodian of the deposit. For example, the FDIC has
taken the position that the third requirement is not satisfied when an investor in a
brokered deposit program possesses a pro rata interest in a pool of deposits as opposed to
possessing interests in specific deposits. The FDIC has also taken the position that an
agency relationship does not exist when the broker or purported agent changes the terms
62 12 C.F.R. § 330.7(a).
63 See 12 C.F.R. § 330.5(b)(1).
64 See 12 C.F.R. § 330.5(b)(2).
65 See 12 C.F.R. § 330.3(h); 12 C.F.R. § 330.5(a)(1).
27
opposed to
possessing interests in specific deposits. The FDIC has also taken the position that an
agency relationship does not exist when the broker or purported agent changes the terms
62 12 C.F.R. § 330.7(a).
63 See 12 C.F.R. § 330.5(b)(1).
64 See 12 C.F.R. § 330.5(b)(2).
65 See 12 C.F.R. § 330.3(h); 12 C.F.R. § 330.5(a)(1).
27
of the deposit contract offered by the insured depository bank. In Advisory Opinion No.
02-02 (May 20, 2002), the FDIC explained this point as follows:
Some would-be deposit brokers enter into debtor/creditor relationships
with their customers -- as opposed to agency relationships -- by changing
the terms of the CD issued by the insured depository institution. For
example, in purporting to sell interests in a particular CD, a broker might
offer an interest rate and a maturity date that do not match the interest rate
and maturity date of the CD. By changing the terms, the broker assumes
independent debt obligations. By accepting these changed terms, the
customer takes an ownership interest in a claim against the broker instead
of an ownership interest in the CD. Consequently, the CD will not be
insurable on a “pass-through” basis to the customers.
The rules above apply to deposit accounts held by deposit brokers, which can
include banks. A bank acts as a deposit broker when it places a depositor’s funds with
other banks in order to obtain full insurance coverage for the depositor.
In 2010, the FDIC issued guidance on the requirements necessary for deposit
insurance to “pass-through” the holder of the account (the bank acting as agent) to the
owners of the funds (the depositor as principal).66
E.
Bank Networks
In some cases, banks have participated in networks established for the purpose of
sharing deposits
to obtain full insurance coverage for the depositor.
In 2010, the FDIC issued guidance on the requirements necessary for deposit
insurance to “pass-through” the holder of the account (the bank acting as agent) to the
owners of the funds (the depositor as principal).66
E.
Bank Networks
In some cases, banks have participated in networks established for the purpose of
sharing deposits. In such a network, a participating bank places funds at other
participating banks through the network in order for its customer to receive full insurance
coverage.67 The structure of deposit placement networks can be uncomplicated or
complex and can be established between either affiliated or nonaffiliated institutions. In
the simplest arrangement, the bank places their customer’s funds in excess of the deposit
insurance limits into other depository institutions. For example, if a customer deposits $1
million into his or her institution, the customer’s bank maintains the deposit insurance
limit—$250,000—and places the excess of $750,000 at three other institutions in insured
$250,000 increments.
66 See Financial Institution Letter 29-2010 (June 7, 2010) with attached “Guidance on Deposit Placement
and Collection Activities.”
67 The transferring bank may receive an equal amount in exchange for the transferred funds from the other
bank.
28
Structure of deposit placement activities
Customer
Simple…
Relationship
Bank (Agent)
Bank
A
Bank
B
Bank
C
$1,000,000
$250,000
$250,000
$250,000
$250,000
In more complex arrangements, the customer’s bank may be part of a deposit
placement network that is managed by a third party network sponsor. As was the case in
the example above, institutions join the network to facilitate the placement and receiving
of funds in excess of the deposit insurance limit
ip
Bank (Agent)
Bank
A
Bank
B
Bank
C
$1,000,000
$250,000
$250,000
$250,000
$250,000
In more complex arrangements, the customer’s bank may be part of a deposit
placement network that is managed by a third party network sponsor. As was the case in
the example above, institutions join the network to facilitate the placement and receiving
of funds in excess of the deposit insurance limit. In this situation, when the customer
deposits $1 million, the customer’s bank sends the uninsured portion to a settlement
bank, which then places the funds at other banks within the network at the direction of
the network sponsor.
29
Structure of deposit placement activities
Customer
More complicated….
Relationship
Bank (Agent)
Bank
A
Bank
B
Bank
C
$1,000,000
$250,000
$250,000
$250,000
$250,000
Settlement Bank
$750,000
Third Party
Network Sponsor
At its most complex level, the network sponsor is facilitating the placement of
millions of dollars in excess funds for all of the banks in the network. The settlement
bank may be sending and receiving multiple deposits. Often times, these are established
through reciprocal arrangements, in which institutions within the network are both
sending and receiving identical amounts simultaneously (reciprocal deposits). This
reciprocal agreement allows the bank to maintain the same amount of funds they had
when the customer made their initial deposit while ensuring that deposits well in excess
of the $250,000 deposit limit are fully insured. The size of the deposit to be placed is
only limited by the number of institutions in the network that are willing and able to
accept the deposit multiplied by the $250,000 insured deposit limit, resulting in
maximum individual deposit levels in the tens of millions of dollars.
30
initial deposit while ensuring that deposits well in excess
of the $250,000 deposit limit are fully insured. The size of the deposit to be placed is
only limited by the number of institutions in the network that are willing and able to
accept the deposit multiplied by the $250,000 insured deposit limit, resulting in
maximum individual deposit levels in the tens of millions of dollars.
30
Structure of deposit placement activities
Customer
Most complex…
Relationship
Bank (Agent)
Bank
A
Bank
B
Bank
C
$1,000,000
$250,000
$250,000
$250,000
$250,000
Settlement Bank
$750,000
Third Party
Network Sponsor
$750,000
D
E
F
250
250
250
In Advisory Opinion No. 03-03 (July 29, 2003), the FDIC found that the deposits
in such a network would be insured on a “pass-through” basis (assuming satisfaction of
the FDIC’s requirements).
The FDIC in Advisory Opinion No. 03-03 did not address whether the banks in
the network (or the network owner) qualified as deposit brokers. No dispute existed as to
the status of the banks because: (1) the banks admittedly placed deposits belonging to
others (their customers) at other banks; and (2) the stated purpose of the banks in making
these deposit placements was to obtain increased deposit insurance coverage for their
customers. Thus, the banks satisfied the broad basic definition of “deposit broker.”
Moreover, the banks were not covered by the “primary purpose” exception. Hence, the
deposits were brokered deposits.
F.
Prepaid Products
In General Counsel’s Opinion No. 8, the FDIC took the position that the funds
underlying stored value cards and other types of prepaid products qualify as insurable
“deposits” whenever the funds have been placed at an insured bank.68 The FDIC also
took the position that the deposits may or may not be insurable to the cardholders,
depending upon the circumstances
osits.
F.
Prepaid Products
In General Counsel’s Opinion No. 8, the FDIC took the position that the funds
underlying stored value cards and other types of prepaid products qualify as insurable
“deposits” whenever the funds have been placed at an insured bank.68 The FDIC also
took the position that the deposits may or may not be insurable to the cardholders,
depending upon the circumstances. In some cases, the deposits will be insurable not to
the cardholders but to the company that places the funds at the bank (before selling or
distributing the cards).
68 73 Fed. Reg. 67155 (November 13, 2008).
31
In this opinion, the FDIC did not address the question of whether the deposits
underlying stored value cards or other prepaid products qualify as brokered deposits.
Indeed, no published advisory opinion addresses this issue. It appears, however, that
some of these deposits may qualify as brokered deposits while others may not.
For example, a particular program might be structured so that a bank sells prepaid
cards directly to the cardholders (without the involvement of retail stores or any other
intermediaries). In the absence of a third-party agent or custodian, the deposits held by
the bank (to be accessed by the cardholders when they use their cards at merchant point-
of-sale terminals) would not qualify as brokered deposits. In this situation, the bank
presumably would maintain records as to the identities and interests of the cardholders so
that the deposits would be eligible for “per cardholder” insurance coverage. Indeed, the
bank could maintain a separate account for each cardholder.
A different program might be structured so that a separate company (not the bank)
sells or distributes cards to the cardholders
n this situation, the bank
presumably would maintain records as to the identities and interests of the cardholders so
that the deposits would be eligible for “per cardholder” insurance coverage. Indeed, the
bank could maintain a separate account for each cardholder.
A different program might be structured so that a separate company (not the bank)
sells or distributes cards to the cardholders. Further, the program might be structured so
that the company places its own corporate funds (not the cardholders’ funds) at the bank
(again, to be accessed by the cardholders when they use their cards at merchant point-of-
sale terminals). In this situation, in the absence of a third party, the deposits would not
qualify as brokered deposits. Of course, the deposits also would not be eligible for “pass-
through” insurance coverage to the cardholders.
Finally, a program might be structured so that a card distributor (not the bank)
acts as an agent or custodian for the cardholders in placing or holding deposits at a bank.
Such deposits would be eligible for “pass-through” insurance coverage (assuming the
satisfaction of the FDIC’s requirements for “pass-through” coverage), but the deposits
also would qualify as brokered deposits unless the agent is covered by one of the
exceptions to the definition of “deposit broker” (such as the “primary purpose”
exception).
In summary, the deposits underlying prepaid products may or may not qualify as
brokered deposits, depending upon the structure of the program.
V.
FDIC Use of the Core and Brokered Deposits Concepts
A.
Supervision
Core and brokered deposits play a role in bank supervision. Examiners consider
the presence of core and brokered deposits when evaluating liquidity management
programs and assigning liquidity ratings at insured depository institutions
ot qualify as
brokered deposits, depending upon the structure of the program.
V.
FDIC Use of the Core and Brokered Deposits Concepts
A.
Supervision
Core and brokered deposits play a role in bank supervision. Examiners consider
the presence of core and brokered deposits when evaluating liquidity management
programs and assigning liquidity ratings at insured depository institutions. Core deposits
have historically been categorized as stable, less costly deposits obtained from local
customers that maintain a relationship with the institution, while brokered deposits are
considered volatile, interest rate sensitive deposits from customers in search of yield.
However, examiners do not necessarily view the presence of any certain source of
funding as inherently bad. The FDIC’s Risk Management Manual of Examination
Policies states that the acceptance of brokered deposits by well-capitalized institutions is
subject to the same considerations and concerns applicable to any other type of funding.
32
These concerns relate to volume, availability, cost, volatility, maturities, and how the use
of such funding fits into the bank’s overall liability and liquidity management plans.
Furthermore, there should be no particular stigma attached to the acceptance of brokered
deposits per se and the proper use of such deposits should not be discouraged.69
In accordance with the Interagency Guidance on Funding and Liquidity Risk
Management, examiners place an emphasis on the bank’s risk management policies and
practices. Examiners assess whether management has properly identified, measured,
monitored and controlled funding risks. Other considerations include funding
diversification, cost, stability, contingency funding, and growth.
In addition to the current level and prospective sources of liquidity and funds
management practices, the liquidity rating is assigned in the context of other financial
factors
Examiners assess whether management has properly identified, measured,
monitored and controlled funding risks. Other considerations include funding
diversification, cost, stability, contingency funding, and growth.
In addition to the current level and prospective sources of liquidity and funds
management practices, the liquidity rating is assigned in the context of other financial
factors. Banks with strong capital positions and earnings are likely to be able to easily
fund ongoing operations and have no trouble raising liquidity for unforeseen events.
Conversely, banks with low levels of capital, weak earnings, or asset deterioration, may
find financing to be more expensive or borrowing lines reduced.
Numerous industry commenters indicated that supervisors should adopt a more
formal “spectrum” approach based upon deposit characteristics, perhaps to replace the
brokered deposit statute and the core deposit concept. As discussed above, through the
supervisory process, examiners already consider deposit characteristics when assessing
an institution’s liquidity position. To develop a formal approach—to replace the statute,
or change the supervisory approach or assessment system—would require that banks
undertake considerably more tracking and reporting of deposits. The costs of doing so
would appear to outweigh the potential benefits.
B.
Assessments
The FDIC’s risk-based deposit insurance assessment system takes core and
brokered deposits into account in three ways when determining assessment rates.
Core deposits ratio
The assessment rate of a bank whose assets are $10 billion or greater generally
depends upon its CAMELS component ratings and on several financial ratios, including
its ratio of core deposits to total liabilities. The core deposits ratio is defined as total
domestic deposits excluding brokered deposits and uninsured non-brokered time deposits
divided by total liabilities
Core deposits ratio
The assessment rate of a bank whose assets are $10 billion or greater generally
depends upon its CAMELS component ratings and on several financial ratios, including
its ratio of core deposits to total liabilities. The core deposits ratio is defined as total
domestic deposits excluding brokered deposits and uninsured non-brokered time deposits
divided by total liabilities. The FDIC includes the core deposits ratio because it is one of
the measures most relevant to assessing a large bank’s ability to withstand funding
related stress and has been found to be statistically significant in predicting a large bank’s
long-term performance.
69 http://fdic.gov/regulations/safety/manual/section6-1.html#liabilities.
33
The adjusted brokered deposit ratio
The assessment rate of a small bank (generally, one whose assets are less than $10
billion) that is well capitalized and well managed (that is, its composite CAMELS rating
is 1 or 2) depends upon its CAMELS component ratings and on several financial ratios,
including an adjusted brokered deposit ratio. A bank’s assessment rate will increase if its
total gross assets were more than 40 percent greater than they were four years previously,
after adjusting for mergers and acquisitions, and its brokered deposits make up more than
10 percent of its domestic deposits. Reciprocal deposits are excluded from brokered
deposits for purposes of making this calculation, but sweeps, referrals from affiliates and
all other brokered deposits are included.
The brokered deposit adjustment
The assessment rate of a bank that is less than well capitalized or that is less than
well managed (that is, its composite CAMELS rating is 3, 4 or 5) increases by up to 10
basis points if its ratio of brokered deposits to domestic deposits is greater than 10
percent. This brokered deposit adjustment takes into account all brokered deposits,
including sweeps and reciprocal deposits.
VI
nt
The assessment rate of a bank that is less than well capitalized or that is less than
well managed (that is, its composite CAMELS rating is 3, 4 or 5) increases by up to 10
basis points if its ratio of brokered deposits to domestic deposits is greater than 10
percent. This brokered deposit adjustment takes into account all brokered deposits,
including sweeps and reciprocal deposits.
VI.
Studies and Analyses
A.
Material Loss Reviews
Brokered deposits can be a valuable funding source when banks manage them
well and use them to grow prudently. However, “the use of brokered deposits by
problem banks has often been associated with abuses and contributed to failures with
consequent losses to the deposit insurance funds. They can represent a consistent and
heavy funding source to support unsound or rapid expansion of loan and investment
portfolios.”70
The Offices of the Inspector Generals (OIGs) for the FDIC, the Office of the
Comptroller of the Currency (OCC) and Federal Reserve have identified some of these
abuses in MLRs of failed depository banks.71 A review of over 20 MLRs and the OIGs’
Semiannual Reports to Congress reveal several common themes among banks that failed
in 2008, 2009, and 2010.
Many failed banks operated with an aggressive growth strategy, typically by
increasing higher risk assets that were extremely vulnerable to market or
70 The FDIC’s Manual of Examination Policies.
71 When the DIF incurs a material loss, section 38(k) of the FDI Act requires the Inspector General of the
primary regulator of the failed financial bank that caused the loss to conduct a material loss review to
ascertain why the bank’s problems resulted in the loss to the DIF and to make recommendations for
preventing future losses. Until passage of Dodd-Frank, a loss was defined to be material if it exceeded the
greater of $25,000,000 or 2 percent of the bank’s total assets at the time the FDIC was appointed receiver
the failed financial bank that caused the loss to conduct a material loss review to
ascertain why the bank’s problems resulted in the loss to the DIF and to make recommendations for
preventing future losses. Until passage of Dodd-Frank, a loss was defined to be material if it exceeded the
greater of $25,000,000 or 2 percent of the bank’s total assets at the time the FDIC was appointed receiver.
Dodd-Frank amended section 38(k) by increasing the materiality threshold from $25 million to $200
million in losses for failures that occur from January 1, 2010 through December 31, 2011.
34
economic downturns. In most cases, the higher risk asset concentrations were
CRE loans, predominantly acquisition development and construction (ADC) and
land loans. Examples of other higher risk assets included: private label
mortgage-backed securities, non-traditional mortgages (including option
adjustable rate mortgages), high loan to value home equity loans, and sub-prime
auto loans.
Banks often failed to expand credit risk management systems in line with their
increasing size and complexity, resulting in systems insufficient to identify,
monitor, and appropriately manage asset concentrations.
Because local deposits were unable to support their rate of asset growth, many
banks turned to noncore funding, particularly brokered deposits and Federal
Home Loan Bank (FHLB) borrowings. Other noncore sources included Internet
CDs and federal funds purchased.
When the downturn in real estate and overall economic conditions led to losses
in riskier assets, the resulting drop in capital ratios or implementation of
enforcement actions resulted in banks becoming less than well capitalized for
PCA purposes, triggering restrictions on brokered deposits. Lines of credit (at,
for example, the FHLB and Federal Reserve Bank) and access to federal funds
purchased were reduced or eliminated in response to the bank’s deteriorating
financial condition
ets, the resulting drop in capital ratios or implementation of
enforcement actions resulted in banks becoming less than well capitalized for
PCA purposes, triggering restrictions on brokered deposits. Lines of credit (at,
for example, the FHLB and Federal Reserve Bank) and access to federal funds
purchased were reduced or eliminated in response to the bank’s deteriorating
financial condition.
For those banks most reliant on noncore funding, a liquidity crisis developed and
accelerated failure. For those with liquidity, operating losses eventually wiped
out capital.
In most instances, the MLRs that the FDIC reviewed identified concentrations in
high-risk assets and losses on those assets as the major factor that led to failures.
Although many of the MLRs mentioned reliance on noncore funding, particularly
brokered deposits and FHLB borrowings, as a cause of failure, the MLRs rarely stated
that failure was the direct result of this reliance. However, without brokered deposits and
FHLB borrowings, many of the banks that grew rapidly could probably not have done so.
Appendix X contains specific findings from MLRs and OIG Semiannual Reports
to Congress.
B.
Studies of Core and Brokered Deposits
In connection with this study, the FDIC undertook several statistical analyses of
core and brokered deposits and conducted a literature review of academic studies on core
and brokered deposits.72 A summary of the FDIC’s analyses and the literature review
follow.
72 Appendix C contains descriptive statistics on the use of core and brokered deposits.
35
with this study, the FDIC undertook several statistical analyses of
core and brokered deposits and conducted a literature review of academic studies on core
and brokered deposits.72 A summary of the FDIC’s analyses and the literature review
follow.
72 Appendix C contains descriptive statistics on the use of core and brokered deposits.
35
Core deposits
Multiple studies use core deposits as a proxy for franchise value, as these deposits
provide a safe, liquid source of funding for institutions. The studies define core deposits
in slightly different ways. For example, studies that focus on the duration and franchise
value of core deposits tend to include in their definition demand deposits, NOW
accounts, savings deposits, and MMDAs. These studies typically do not include time
deposits and instead focus on valuing deposits with no stated maturity. Studies that focus
on the relationship between core deposits and losses at failed banks include core deposits
based on the UBPR definition or based on the accounts’ insured status.
In calculating the duration of core deposits, most studies must make assumptions
about interest rate sensitivity, effective maturity, and retention rates, including when and
to what degree a bank responds to changes in market interest rates. After making these
assumptions, these studies estimate durations for core deposits as ranging from 6 to 15
months for money market deposit accounts, one to two years for transaction accounts, 7
years for NOW accounts, and 3 years for savings accounts.73 One study, using actual
retention rates from 5 institutions, found longer durations for each of these types of
accounts.74
Probability of Failure: Studies on core deposits at failed banks tend to focus on
loss given default rather than probability of default
ney market deposit accounts, one to two years for transaction accounts, 7
years for NOW accounts, and 3 years for savings accounts.73 One study, using actual
retention rates from 5 institutions, found longer durations for each of these types of
accounts.74
Probability of Failure: Studies on core deposits at failed banks tend to focus on
loss given default rather than probability of default. An internal FDIC study, however,
examines the relationship between core deposits and the probability of bank failure from
1988 to 2011.75 (See Appendix B.) This research shows that, with a high degree of
statistical confidence, core deposits, defined as total domestic deposits less large time
deposits and fully insured brokered deposits,76 are associated with a lower probability of
default over a three-year horizon. Core deposits may reduce a bank’s probability of
failure because they typically provide a bank with a stable and relatively cost-effective
source of funds and are a direct indication of a bank’s valuable customer relationships,
which determine, in part, the economic value of a bank’s franchise. FDIC research also
73 See, e.g.,David Hutchison and George Pennacchi, “Measuring Rents and Interest Rate Risk in Imperfect
Financial Markets,” Journal of Financial and Quantitative Analysis,” (September 1996): 399-417; David
Hutchison, “Value and Duration in Retail Financial Markets: The Economics of Bank Deposits,” (2005);
and James M. O’Brien, “Estimating the Value and Interest Rate Risk of Interest-Bearing Transactions
Deposits,” (working paper no. 2000-53, Division of Research and Statistics, Board of Governors of the
Federal Reserve System, November 2000); David M. Ellis and James V. Jordan, “The Evaluation of Credit
Union Non-Maturity Deposits,” National Economic Research Associates, (study prepared for the National
Credit Union Administration, September 10, 2001), http://www.nera.com/extImage/4918.pdf.
74 Richard G
working paper no. 2000-53, Division of Research and Statistics, Board of Governors of the
Federal Reserve System, November 2000); David M. Ellis and James V. Jordan, “The Evaluation of Credit
Union Non-Maturity Deposits,” National Economic Research Associates, (study prepared for the National
Credit Union Administration, September 10, 2001), http://www.nera.com/extImage/4918.pdf.
74 Richard G. Sheehan, “Valuing Core Deposits,” (April 2004),
http://www.nd.edu/~finance/020601/news/Sheehan%20Paper%202.pdf.
75 Internal FDIC research does not include in its sample failed thrift institutions supervised by the FHLBB
that were resolved by the FSLIC. FHLBB supervised thrifts (insured by FSLIC) received regulatory
forbearance, were allowed to operate with lower net worth and were closed under rules and procedures that
differ significantly from the 1991 FDICIA prompt corrective action rules that apply over much of the
sample period. As a result, analysis using this data may be misleading.
76 This definition is approximately equivalent to the current UBPR definition.
36
finds that higher core deposits are associated with more conservative lending practices
and are associated with lower levels of nonperforming loans three years later.77
Loss Given Failure: All studies consistently find that core deposits decrease losses
to the FDIC.78 Internal FDIC research finds that core deposits reduce the FDIC’s loss
rates at failed banks. These lower loss rates can be explained by the fact that core
deposits enhance franchise value and are associated with more conservative lending
practices
f nonperforming loans three years later.77
Loss Given Failure: All studies consistently find that core deposits decrease losses
to the FDIC.78 Internal FDIC research finds that core deposits reduce the FDIC’s loss
rates at failed banks. These lower loss rates can be explained by the fact that core
deposits enhance franchise value and are associated with more conservative lending
practices. Bennett and Unal (2010) find that core deposits, defined as the total amount of
domestic deposits less the amount of time deposits exceeding the deposit insurance
coverage limit, lead to a lower net loss on assets.79 Osterberg and Thomson (1995) also
show that resolution costs decrease with higher core deposits, defined as domestic
deposits under the deposit insurance coverage limit.80 James (1991) finds the same result
while measuring losses from 1985 through 1988 in a different way and shows that core
deposits increase the premium paid for failed institutions.81, 82
Other Studies: A few papers examine the relationship between core deposits and
lending and find that core deposits can be beneficial to banks in the face of exogenous
shocks. Cornett, et al. (2010) find that, between the beginning of 2006 and the second
quarter of 2009, core deposits, defined as transaction deposits plus other insured funds,
helped banks sustain lending.83 Berlin and Mester (1999) find that from 1977 through
1989, banks funded more heavily with core deposits, defined as those under the deposit
insurance limit, were able to insulate borrowers from credit shocks by providing smaller
increases in loan markups compared to banks with lower levels of core deposits.84, 85 In
77 To test the relationship between loan performance and balance sheet variables, the analyses define
nonperforming loans in two different ways, both adjusting for mergers
urance limit, were able to insulate borrowers from credit shocks by providing smaller
increases in loan markups compared to banks with lower levels of core deposits.84, 85 In
77 To test the relationship between loan performance and balance sheet variables, the analyses define
nonperforming loans in two different ways, both adjusting for mergers. In the first definition,
nonperforming loans include loans past due 90 days or more, nonaccrual loans, and other real estate owned.
In the second definition, nonperforming loans include loans past due 90 days or more and nonaccrual loans
only. Core deposits retain their significant negative association with better loan performance under both
definitions. In contrast, brokered deposits are significantly positively associated with poorer loan
performance under both nonperforming loan definitions.
78 Wherever time deposits are included in the definition of core deposits, these amounts could contain
brokered deposits, including reciprocal deposits.
79 Rosalind L. Bennett and Haluk Unal, “The Cost Effectiveness of the Private-Sector Reorganization of
Failed Banks,” (working paper, no. 2009-11, Federal Deposit Insurance Corporation, January 2011).
80 William P. Osterberg and James B. Thomson, “Underlying Determinants of Closed-Bank Resolution
Costs,” in The Causes and Costs of Depository Institution Failures, ed. Allin F. Cottrel, Michael S. Lawlor,
and John H. Wood, Kluwer Academic Press (1995): 75-92.
81 Christopher James, “The Losses Realized in Bank Failures,” The Journal of Finance, vol. 46, no. 4,
(September 1991): 1223-1242.
82 James measures losses as the difference between the book value of a bank’s assets at the time of its
closure and the value of the assets in an FDIC receivership or the value of the assets to an acquirer.
83 Marcia Millon Cornett, Jamie John McNutt, Philip E
92.
81 Christopher James, “The Losses Realized in Bank Failures,” The Journal of Finance, vol. 46, no. 4,
(September 1991): 1223-1242.
82 James measures losses as the difference between the book value of a bank’s assets at the time of its
closure and the value of the assets in an FDIC receivership or the value of the assets to an acquirer.
83 Marcia Millon Cornett, Jamie John McNutt, Philip E. Strahan, and Hassan Tehranian, “Liquidity Risk
Management and Credit Supply in the Financial Crisis,” Journal of Financial Economics, vol. 101, no. 2
(August 2011): 297-312.
84 Mitchell Berlin and Loretta J. Mester, “Deposits and Relationship Lending,” Review of Financial Studies,
vol. 12, no. 3 (Fall 1999): 579-607.
37
this way, a bank’s use of core deposits, the authors argue, helps the bank form long
lasting lending relationships.
Conclusion: The evidence from statistical analyses unequivocally shows that, all
else equal, core deposits reduce the probability that a bank will fail and reduce the losses
to the FDIC in the event of failure.
Brokered deposits
Probability of failure
Findings: On average, failing and failed banks are more likely to have brokered
deposits than other banks. (See Chart 1.) Internal FDIC research finds that increasing
use of brokered deposits, as defined by the statute, results in a higher estimated
probability of failure over a three-year horizon. The effect of brokered deposits on the
probability of failure is economically as well as statistically significant
failing and failed banks are more likely to have brokered
deposits than other banks. (See Chart 1.) Internal FDIC research finds that increasing
use of brokered deposits, as defined by the statute, results in a higher estimated
probability of failure over a three-year horizon. The effect of brokered deposits on the
probability of failure is economically as well as statistically significant. (See Appendix
B.)
Chart 1
Percentage of Failed Banks Reporting Brokered Deposits
In the Quarters before Failure
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
13
12
11
10
9
8
7
6
5
4
3
2
1
Assets > $10 Billion (9 Institutions)
Assets $1 Billion - $10 Billion (47 Institutions)
Assets < $1 Billion (269 Institutions)
Percentage of All Institutions Reporting Brokered Deposits, 12/06 - 12/09
Quarters Before Failure
12/31/06
12/31/09
85 The authors exclude from their sample banks that failed or merged during the reporting period, in order
to prevent banks that engaged in excessively risk investment strategies that ultimately led to failure from
driving their results.
38
For the most recent crisis, internal FDIC analysis also supports the finding that
brokered deposits net of reciprocal deposits are positively correlated with probability of
failure over a two-year horizon. Data on reciprocal deposits are only available for a
limited period (June 2009-December 2010).
Bennett and Unal (2010) analyze the effect of brokered deposits on resolution
outcomes, namely, whether a failed institution is more likely to undergo a private-sector
reorganization or an FDIC liquidation.86 They find that high levels of brokered deposits
one quarter prior to failure from 1986 through 2007 increase the likelihood of an FDIC
liquidation compared to a private-sector reorganization
ett and Unal (2010) analyze the effect of brokered deposits on resolution
outcomes, namely, whether a failed institution is more likely to undergo a private-sector
reorganization or an FDIC liquidation.86 They find that high levels of brokered deposits
one quarter prior to failure from 1986 through 2007 increase the likelihood of an FDIC
liquidation compared to a private-sector reorganization.
Substitute for Core Deposits: As several industry analyses have noted, brokered
deposits do not themselves cause failure; they are merely correlated with or facilitate
behaviors that do cause failure. The FDIC examined the means by which brokered
deposits increase an institution’s probability of failure. The FDIC’s research finds that,
on average, brokered deposits are used primarily as a substitute for core deposit funding.
As discussed above, banks with a higher share of core deposit funding experience a lower
probability of default. Because banks that use brokered deposits on average substitute
brokered deposits for core deposits, on average, banks that use brokered deposits face an
elevated probability of default. If a bank substitutes brokered deposits for equity, the
effect on a bank’s projected probability of default is much larger than for a core deposit
substitution, but the data suggest that this substitution has been historically less common.
The FDIC’s research also shows that when brokered deposits are used as a substitute for
other (noncore) bank deposits and other bank liabilities, brokered deposits do not have a
statistically measureable effect on the probability of bank failure, provided the bank’s
leverage ratio, asset growth and nonperforming loan rate remain unchanged.
Risk Appetite: The use of brokered deposits may also be a general indicator of a
higher risk appetite on the part of bank management, which may be reflected in the assets
the bank purchases
lities, brokered deposits do not have a
statistically measureable effect on the probability of bank failure, provided the bank’s
leverage ratio, asset growth and nonperforming loan rate remain unchanged.
Risk Appetite: The use of brokered deposits may also be a general indicator of a
higher risk appetite on the part of bank management, which may be reflected in the assets
the bank purchases. The FDIC examined the relationship between brokered deposits and
loan performance and found that brokered deposits are correlated with higher
nonperforming loan ratios three years later, controlling for lagged asset growth, interest
expense, loan concentration ratios, core deposits and equity.87 On average, banks that
use brokered deposits have higher nonperforming loan ratios than banks that do not u
brokered deposits, and the more a bank relies on brokered deposits, the higher its
nonperforming loan ratio three years later. The association between brokered deposits
and higher nonperforming loan ratios suggests that institutions that are willing to use
riskier funding sources are also willing to invest in higher risk loans. This suggestion is
confirmed by the finding that higher nonperforming loan ratios are correlated with a
higher probability of failure within the next three years. In addition, as discussed above,
FDIC research finds that banks with greater use of brokered deposits have lower core
se
86 A private-sector reorganization is defined as one where 25 percent or more assets are purchased by an
acquiring bank. The authors argue that percentages of this size preserve the link between the loans and
deposits.
87 See footnote 77.
39
d above,
FDIC research finds that banks with greater use of brokered deposits have lower core
se
86 A private-sector reorganization is defined as one where 25 percent or more assets are purchased by an
acquiring bank. The authors argue that percentages of this size preserve the link between the loans and
deposits.
87 See footnote 77.
39
deposit-to-asset ratios. This implicit shift in a bank’s liability structure contributes to the
increase in the bank’s fragility and greater likelihood of failure.
Loan Concentrations: FDIC research discussed above also controls for loan
concentrations; these concentrations include CRE, C&D, commercial and industrial
(C&I), and consumer loans, which separately increase an institution’s probability of
failure. Several other studies also find that brokered deposits increase the probability of
failure even after controlling for loan concentrations. Cole and White (2010) find that
brokered deposit levels in the three years prior to 2009 increase an institution’s
probability of being technically insolvent in 2009, even when controlling for loan
concentrations, including 1-4 family mortgages, multifamily mortgages, C&D, non-farm
non-residential mortgages, C&I, and consumer loans as a portion of total assets.88,89
Using data from the third quarter of 2008 through the third quarter of 2010, Blinder and
Shastri (2011) include commercial and CRE loans as possible indicators of failure and
also find that brokered deposits (net of reciprocal deposits) increase an institution’s
likelihood of failure.90 Flannery (2011) finds that replacing core deposits with brokered
deposit funding tends to raise an institution’s default probability three years later for
banks that failed between 2008 and 2010, even when controlling for concentrations in
CRE, C&D, C&I, and other loans.91
Growth: Because commenters argued that brokered deposits can lead to growth
and because the FDIC has observed that several failed banks w
nds that replacing core deposits with brokered
deposit funding tends to raise an institution’s default probability three years later for
banks that failed between 2008 and 2010, even when controlling for concentrations in
CRE, C&D, C&I, and other loans.91
Growth: Because commenters argued that brokered deposits can lead to growth
and because the FDIC has observed that several failed banks with significant amounts of
brokered deposits had also grown rapidly, the FDIC examined the relationship between
brokered deposits and growth. FDIC research finds that brokered deposits, measured as
88 Rebel A. Cole and Lawrence J. White, “Déjà Vu All Over Again: The Causes of U.S. Commercial Bank
Failures This Time Around,” Journal of Financial Services Research (Forthcoming), (DRAFT December 1,
2010).
89 The authors define a “technically” insolvent bank as one whose equity and loan loss reserves total less
than half of the value of its nonperforming assets. These banks are included in anticipation of future failure
after the paper was written. There were 148 “technically” insolvent banks at the end of 2009. Of the 74
commercial banks that failed during the first half of 2010, 57 were counted by the authors as “technically”
insolvent in 2009. In addition, the authors include 117 actual commercial bank failures from 2009. A total
of 126 commercial banks failed in 2009, but it is not clear why the authors only cite 117 failures. The
authors include commercial banks and not thrifts because, in their view, thrifts operate under a different
charter and are usually focused in directions that are different from those of commercial banks. The
authors also separate their sample into those banks that failed and those defined as “technically” insolvent
that did not fail in 2009. When looking at only those banks that failed, the results for brokered deposits do
not hold
thrifts because, in their view, thrifts operate under a different
charter and are usually focused in directions that are different from those of commercial banks. The
authors also separate their sample into those banks that failed and those defined as “technically” insolvent
that did not fail in 2009. When looking at only those banks that failed, the results for brokered deposits do
not hold. The results for only those banks defined as “technically” insolvent were the same as the results
for the whole sample.
90 Alan Blinder and Arun Shastri, Promontory Interfinancial Network, “Estimated Effects of CDARS
Reciprocal Deposits on the Likelihood of Bank Failure,” (attachment, comment letter from Promontory
Interfinancial Network on the FDIC Notice of Proposed Rulemaking, RIN 3064-AD66, Assessments, Large
Bank Pricing, Assessment Base and Rates, January 3, 2011).
91 Mark Flannery, “Data Driven Deposit Insurance Assessments,” (attachment, comment letter from
Promontory Interfinancial Network on the Core and Brokered Deposit Study, May 1, 2011) and Mark
Flannery, “Data Driven Deposit Insurance Assessments: Further Results,” (attachment, comment letter
from Promontory Interfinancial Network on the Core and Brokered Deposit Study, June 23, 2011)
(collectively, “Flannery (2011)”).
40
the three year average ratio of brokered deposits to assets, are significantly correlated
with higher three-year asset growth rates from 1989 through 2009. This research also
finds that average growth rates increase as banks fund a larger share of assets with
brokered deposits.92 FDIC research also finds that asset growth over the past one, two,
and three years is correlated with a higher probability of failure within the next three
years
to assets, are significantly correlated
with higher three-year asset growth rates from 1989 through 2009. This research also
finds that average growth rates increase as banks fund a larger share of assets with
brokered deposits.92 FDIC research also finds that asset growth over the past one, two,
and three years is correlated with a higher probability of failure within the next three
years.
The correlation between brokered deposits and asset growth is also evidenced in
Benston (1986): savings and loan associations in 1983 and 1984 with growth rates over
the previous year above 50 percent obtained a higher proportion of their funding from
brokered deposits (20 percent) compared to slower-growing institutions (those with
growth rates between 25 and 50 percent), which only obtained 8 percent of their increase
in liabilities from brokered deposits.93
Other Studies: As discussed above, Flannery (2011) finds that replacing core
deposits with brokered deposit funding tends to raise an institution’s default probability
three years later after controlling for loan concentrations and asset growth. He argues,
however, that this finding is the result of the correlation between brokered deposits and
other risky behavior and that higher funding costs are actually more predictive of bank
failure than are brokered deposit levels. Similarly, Rossi (2011) argues that brokered
deposits do not lead to growth, but that brokered deposit demand is merely a result of a
bank’s decision to grow assets and its choice of funding.94, 95
Benston (1986) finds no relationship between brokered deposits, as a percent of
earning assets, and failure within one year. Benston does find some evidence that very
substantial one-year increases in brokered deposits are associated with failure
s do not lead to growth, but that brokered deposit demand is merely a result of a
bank’s decision to grow assets and its choice of funding.94, 95
Benston (1986) finds no relationship between brokered deposits, as a percent of
earning assets, and failure within one year. Benston does find some evidence that very
substantial one-year increases in brokered deposits are associated with failure. However,
he states that “because great increases in brokered deposits and total liabilities (growth)
tend to be coincident, it is not possible to say which is causally related to failure.”
However, his findings are based on the experience of savings and loan associations from
1981-1985 only, and the data may be less than ideal due to issues related to FSLIC
resolutions.96
92 Modeling the relationship between brokered deposits and bank growth rates is complex since both
variables are bank management choices. The analysis finds that banks using brokered deposits often
exhibit higher 3-year growth rates, which is likely a result of a series of choices made by bank management
that drive both a bank’s growth rate and its use of brokered deposits.
93 George J. Benston, “An Analysis of the Causes of Savings and Loan Association Failures,” The
Monograph Series in Finance and Economics, Monograph 1985-4/5, Salomon Brothers Center for the
Study of Financial Institutions, (1985).
94 Clifford V. Rossi, “Decomposing the Impact of Brokered Deposits on Bank Failure: Theory and
Practice,” (study prepared for the Anthony T. Cluff Fund, September 9, 2010),
http://www.fsround.org/publications/pdfs/2011/brokereddepositsreport_rev.pdf.
95 The paper assumes that asset growth drives brokered deposit growth without properly testing for the
direction of this causality. In addition, the model used in the analysis does not take into account the fact
that a bank makes its asset and liability choices simultaneously
thony T. Cluff Fund, September 9, 2010),
http://www.fsround.org/publications/pdfs/2011/brokereddepositsreport_rev.pdf.
95 The paper assumes that asset growth drives brokered deposit growth without properly testing for the
direction of this causality. In addition, the model used in the analysis does not take into account the fact
that a bank makes its asset and liability choices simultaneously. The paper thus suffers from endogeneity
problems, calling its conclusions into question.
96 See footnote 75.
41
Conclusion: On balance, data confirm the observations in the MLRs that shares of
brokered deposit funding used at failed institutions were significantly higher than at non-
failed institutions during both the crisis of the 1980s and early 1990s and the current
crisis. The FDIC’s research (and that of others) finds that in both crisis periods, even
controlling for other possible risk factors, brokered deposits are correlated with a higher
probability of failure. Brokered deposits typically are used as a substitute for core
deposit funding. They are also associated with higher levels of asset growth and higher
subsequent nonperforming loan rates, indicating that the use of brokered deposits often
facilitates growth in high risk lending. Brokered deposits are thus an indicator of a
heightened risk of failure.
Loss given default
Findings: Internal FDIC research shows that higher levels of brokered deposits
increase DIF loss rates when institutions fail, even when controlling for bank size and
loan performance. For the most recent crisis, internal FDIC research finds that brokered
deposits net of reciprocal deposits are positively correlated with higher loss given default.
FDIC research also finds that loss rates are substantially higher in 2007, 2008,
2009, and 2010 than they were in the crisis of the 1980s and early 1990s. Against this
backdrop of higher loss rates, brokered deposit use has increased substantially since the
earlier crisis as well
finds that brokered
deposits net of reciprocal deposits are positively correlated with higher loss given default.
FDIC research also finds that loss rates are substantially higher in 2007, 2008,
2009, and 2010 than they were in the crisis of the 1980s and early 1990s. Against this
backdrop of higher loss rates, brokered deposit use has increased substantially since the
earlier crisis as well. The mean value of the brokered deposits to assets ratio for the
period 1986 through 1992 was 0.504 percent. In contrast, that ratio was 3.816 percent for
the period 2008 through 2010.
For the most recent crisis, the analysis showed a positive association between the
brokered deposits to assets ratio and the loss given failure rate. The FDIC finds that
failed banks with higher brokered deposits to asse
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