The
While this may be useful, regulators should also consider another strategy if they want to address the nagging problem of uninsured deposits and improve bank stability in 2024 and beyond. Principally, they should reconsider their assumptions and definitions governing core and brokered deposits.
It’s important to first understand why uninsured deposit concentrations played such a critical role in last year’s bank failures.
The problem is primarily one of competition. The top ten banks in the country
As their loan portfolios in those sectors grow, however, so too does the need for
The story with the smaller banks is not that different. Nearly
While their strategies might be to continue to diversify into different segments, it can take years for this to develop to the point where it can be diversified enough. In the interim, these and other banks like them continue to pose greater risks than depositors and regulators may realize.
In today’s banking environment, depositors should be paying attention to where their cash sits and focus on safety. Regulators, meanwhile, should consider revisiting
The FDIC has historically
In the absence of a clear primary purpose exception, many banks feel forced to classify a significant number of deposits as brokered, despite the fact that they have been proven to be very stable, long-term and consistently replaced when withdrawn. A recent
This stickiness is particularly true when it comes to third-party agents who provide a highly specialized service to certain industry verticals, where the byproduct is deposits. Imagine, for instance, a third-party fund administrator specializing in Opportunity Zone funds. These funds are typically used for large construction projects that last several years, with recurring and new funds coming in all the time. Overall, these deposits are stable, as it would be very hard to move them given the risks associated with Opportunity Zone reporting requirements. Yet if the fund administrator was the third party, the bank might be tempted to classify them as brokered deposits to avoid any risk. The same would be true of a company that helps law firms manage their client trust accounts, or a firm that may do impact measurement and reporting based on where deposits are held.
Such specialization helps the client meet their needs and the bank administer an operationally complex offering. Classifying these stable, incremental deposits as core might also enable banks to be less dependent on driving deposits from their borrowers in return for loans — behavior which significantly contributes to the concentration risk that creates uninsured deposits.
Surely, reexamining these rules will cause added complexity. Right now, it’s easy for the regulator to simply see a third-party agent and give the deposit a red flag. Additional tests would need to be added — for example, evaluating how the third party is paid — but doing so would ultimately make it easier for banks, and improve stability of the system as a whole.