Given the role that funding plays in the success or failure of a bank, core and brokered deposits are an important issue to the Federal Deposit Insurance Corporation (FDIC). While the FDIC’s views on core and brokered deposits have long been a part of its supervisory programs, they were more recently incorporated into the deposit insurance assessment system.
Per Section 1506 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the FDIC was required to conduct a study of core and brokered deposits to evaluate the brokered deposit statute and determine whether the core and brokered deposit classification scheme used for supervision and assessment purposes can be improved.
As part of the study, Dodd-Frank required the FDIC to evaluate:
- The definition of core deposits for insurance assessment purposes
- Potential impact on the Deposit Insurance Fund of revising definitions of core and brokered deposits to better distinguish between the two
- Differences between core and brokered deposits and their role on the economy and banking sector
- Potential stimulating effect on local economies of redefining core deposits
- Competitive parity between large and community banks that could result from redefining core and brokered deposits
The study was delivered to Congress on July 18, 2011, and is available on the FDIC website.
Definitions
Core deposits are not defined by statute; rather, they are defined for analytical and examination purposes in the Uniform Bank Performance Report. 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. Core deposits are intended to include those deposits that are stable, cost less and reprice more slowly than other deposits when interest rates rise.
Brokered deposits are defined by Section 29 of the Federal Deposit Insurance Act, which defines a brokered deposit as a deposit accepted through a deposit broker. Section 29 also provides a detailed definition of a deposit broker as well as restrictions on interest rates and acceptance of brokered deposits.
FDIC Use of Core & Brokered Deposit Concepts
Examiners consider core and brokered deposits when evaluating liquidity management programs and assigning liquidity ratings at insured depository institutions. The FDIC’s Risk Management Manual of Examination Policies says the acceptance of brokered deposits by well-capitalized institutions is subject to the same considerations and concerns applicable to any other type of funding.
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. In accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management, examiners place an emphasis on bank risk management policies and practices; examiners assess whether management has properly identified, measured, monitored and controlled funding risks.
Study Conclusions
- Core Deposits
- Increasing core deposit levels is associated with a lower probability of bank failure and lower losses to the FDIC in the event of failure.
- There is no conclusive statistical evidence that any type of brokered deposit should be treated as core.
- Brokered Deposits
- Brokered deposits are correlated with behaviors increasing the risk of failure.
- On average, banks using brokered deposits typically use lower shares of core deposit funds than banks that do not and, as a result, face higher probability of default.
- Brokered deposits are an indicator of higher risk appetite.
- Banks using brokered deposits have higher growth and higher subsequent nonperforming loan ratios—both associated with higher probability of failure.
- Brokered deposits tend to increase the FDIC’s losses when a bank fails.
The FDIC has concluded the concept of a brokered deposit, as defined by Section 29, remains useful in evaluating and predicting bank performance and remains relevant to determining FDIC losses in the event a bank fails. The FDIC largely concluded Section 29 has prevented failing banks from increasing their brokered deposits, discouraged them from trying to grow out of trouble by taking on greater risk and limited FDIC losses in the event of failure.
Study Recommendations
- To alleviate any possible confusion about treatment of deposits for supervisory purposes, it may be useful for the FDIC to consolidate all of its liquidity guidance into a single financial institution letter.
- The FDIC may incorporate its analysis of deposit types into future refinements of the deposit insurance assessment system, but doing so would require additional and potentially extensive regulatory reporting as well as rulemaking.
For further information, please contact your BKD advisor.
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