FDIC Clarifies Bank Brokered Deposit Expectations and Requirements

Corporate / Financial Institutions Alert

January 15, 2015
Corporate / Financial Institutions Alert

The Federal Deposit Insurance Corporation (FDIC), has previously warned that brokered deposits often received from customers located far from the market area of the bank can lead to unsound or rapid expansion of loan and investment portfolios, and can result in imprudent high interest rates.

On January 5, 2015, the FDIC released a Financial Institution Letter (FIL) that specifically addressed and reiterated the FDIC's longstanding concerns related to an excessive amount of brokered deposits.

The new brokered deposit FIL guidance, comprised in part by a consolidation of prior guidance and interpretive letters, now appears as a series of "FAQ's", which present fifteen questions and answers regarding brokered deposits. Together, these questions and responses attempt to clarify what constitutes a brokered deposit, detail the scope of the "deposit broker" definition, remind banks of the regulatory restrictions on such deposits, and highlight reporting obligations.

Brokered deposits are defined under FDIC regulations as deposits that are obtained, directly or indirectly, “from or through the mediation or assistance of a deposit broker.” The FIL guidance reiterates the broad definition for the term “deposit broker" to include any person or entity engaged in the business of placing, or facilitating the placement of third party deposits with banks. 

Key points addressed under the FIL include the following:

Brokered deposits can be a valuable strategy for a bank. However, in light of the recent economic strain suffered by the banking industry, the FDIC continues to take an aggressive approach with regard to these forms of deposits and will likely take exception to any excessive reliance on brokered deposits as a safety and soundness concern. As a best practice, all banks should at minimum review the newly issued FIL and then analyze their own deposit accounts to ensure they meet FDIC brokered deposit expectations and reporting requirements. 

The newly issued FDIC FIL on Brokered Deposits may be obtained at: https://www.fdic.gov/news/news/financial/2015/fil15002.html 

For further information on this issue, please contact Michael D. MoreheadTim Sullivan or your regular Hinshaw attorney.

Tax advice disclosure: To ensure compliance with the Internal Service Regulations governing the issuance of advise on Federal Tax issues, we advise you that any tax advice in this communication (and any attachments) is not written with the intent that it be used, and cannot be used, to avoid penalties that may be imposed under the Internal Revenue Code.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.