Good News for Banks Holding Reciprocal Deposits

By Mark Jacobsen

Recip Update Art

As many of you know, the Federal Deposit Insurance Corporation (FDIC) issued a Notice of Proposed Rulemaking (NPR) last summer that proposed changes in the deposit insurance assessment regulation for established small banks (those with assets of less than $10 billion). The changes would have resulted in higher assessments for banks that use reciprocal deposits. In part due to comments from Promontory Interfinancial Network and hundreds of banks, the FDIC staff has now altered its course. This is great news for banks that use reciprocal deposits obtained through services such as CDARS and ICS.

For established small banks in Risk Category 1 (those that are well capitalized and have a CAMELS composite rating of 1 or 2), the existing FDIC assessment regulation includes an adjusted brokered deposit ratio, which can increase a bank’s assessment rate when its brokered deposits exceed 10 percent of its domestic deposits and its asset growth rate is high. Under the existing regulation, reciprocal deposits are excluded from brokered deposits in calculating the ratio. As a result, in the current system, higher levels of reciprocal deposits do not increase the assessment.

The regulation that the FDIC proposed in last summer’s NPR would have replaced the adjusted brokered deposit ratio for established small banks in Risk Category 1 with a new ratio of core deposits to total assets. Under that NPR, reciprocal deposits would have been included in noncore deposits in calculating the ratio. By including them, the proposed regulation would have reversed current policy and effectively imposed the equivalent of a tax on reciprocal deposits that for many banks would have been as high as 11 to 13 basis points.

The FDIC received 484 comment letters on the summer 2015 NPR, of which 442 argued that reciprocal deposits should not be treated as brokered for assessment purposes and 40 maintained that reciprocal deposits should be treated as core for assessment purposes. On January 15, 2016, FDIC staff recommended a revised proposed regulation that dispenses with the previously proposed core deposits ratio; uses a brokered deposit ratio; and for Risk Category 1 banks, retains the current system’s exclusion of reciprocal deposits from brokered deposits for purposes of the ratio.

In concluding that reciprocal deposits at Risk Category 1 banks are properly treated as nonbrokered for assessment purposes, the FDIC staff, we believe, has acknowledged something many of you know well: that reciprocal deposits are not hot money.

It is important to note that the revised NPR is not yet final, with issuance and another 30-day comment period ahead. But the revised proposal is an important step in the right direction.

Thanks again for making your voices heard.