Skip to main content

FDIC Regulation Can Cause a Liquidity Crunch for Smaller Banks

In a comment letter sent today to the FDIC, CSBS suggested changes to the regulatory treatment of brokered deposits and deposit interest cap methodology.

Brokered deposits can be a source of supplemental funding for banks in rural areas or markets that lack local deposits to meet community needs and are a critical credit to agriculture customers and small businesses. However, the FDIC has generally viewed brokered deposit waivers as increasing the risk to the Deposit Insurance Fund. 

State regulators have long been concerned that the current supervisory approach can cause a liquidity crunch for already struggling banks. If a bank falls under the prompt corrective action (PCA) framework, it is immediately prohibited from renewing or issuing brokered deposits. This creates an unnecessary strain on liquidity, destabilizes the institution and increases the risk to the Deposit insurance Fund.

If a bank triggers PCA by falling below “well capitalized,” state regulators recommend it should be able to reduce its brokered deposits over time. Rather than increasing the risk to the deposit insurance fund, a more gradual approach lowers the risk by placing the bank on a “glide path” for easing their dependence on brokered deposits. CSBS recommends that banks be allowed to develop a plan to unwind their brokered deposit positions over 12 to 24 months, which would avoid a liquidity crunch as the bank works to enhance capital and reduce its risk profile. 

CSBS also recommended changing how the national interest cap is determined to account for fluctuating interest rates. Under the current methodology, banks subject to rate restrictions are unable to reasonably compete for deposits. One option recommended by CSBS would generally allow for a higher rate cap in a falling rate environment, while another recommended alternative would allow for a higher rate cap in a rising rate environment.

The FDIC asked for feedback on its supervision of brokered deposits in an advanced notice of proposed rulemaking issued in December. 

Recent Blog Posts

Blog post
Molly Dillon, Vermont Department of Financial Regulation Deputy Commissioner of Banking, describes the process of making the state's nonbanking licensing laws more streamlined and easier to navigate for both regulators and industry.
Jul 10, 2019
Blog post
Community banks have until July 15 to participate in the 2019 CSBS National Survey of Community Banks
Jun 28, 2019
Blog post
CSBS Chairman and South Dakota Division of Banking Commissioner Bret Afdahl identifies leading CSBS priorities.
Jun 26, 2019
Blog post
Fintech consultants interview Margaret Liu on fintech regulation, the technologies state regulators use to oversee nonbank financial sectors, and the latest on Vision 2020
Jun 20, 2019
exit