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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. 

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