(Bloomberg) -- The Federal Deposit Insurance Corp. unveiled a measure to strengthen regulation of US banks’ brokered deposits, the government’s latest response to last year’s industry turmoil.
Known as hot money, the funds collected by brokers surged past $1 trillion in 2023 — a year that saw three of the four largest bank failures in US history. The influx helped lenders compensate for some of the hundreds of billions of deposits that rushed out their doors.
Regulators have long been concerned about brokered deposits because troubled banks sometimes use them as a quick fix to bolster their books. But the deposits are often expensive, due to interest rates that can exceed 5%, and they tend to attract customers who don’t stick around if the bank comes under stress. The FDIC has said that banks that rely heavily on brokered deposits can be more costly to its Deposit Insurance Fund when they fail.
The FDIC voted 3-2 to propose the measure during a meeting Tuesday. The plan would label more intermediaries as deposit brokers, closing a gap created through a 2020 rule change that allowed banks that aren’t well-capitalized to skirt a ban against receiving these funds. Chair Martin Gruenberg, then a board director, had opposed that change, calling it an “end-run” around the prohibition.
“More recent events have also underscored the uncertain nature of third-party funding arrangements,” Gruenberg said in a statement Tuesday. “Experience has shown they can be highly unstable, with either the third party or the underlying customers moving funds based on market conditions or other factors.”
Vice Chairman Travis Hill opposed the new measure, saying it goes too far in addressing issues that he says aren’t crucial.
“The deposit landscape has become too complex to continually decide which arrangements are brokered and which are not in a fair and risk-sensitive way,” Hill said in a statement. “And I am generally skeptical of sweeping rules that cut banks off from certain types of funding as their condition deteriorates, as is the case with brokered deposits.”
The public and companies will be able to weigh in before the changes take effect.
Also on Tuesday, the board voted to unveil a plan aimed at better scrutinizing investors, including private equity firms and asset managers that want to acquire larger stakes in bank holding companies.
Jonathan McKernan, an FDIC director, initially offered but later withdrew a related proposal that would have directed the agency’s staff to order a review of existing agreements on passive investments for some large asset managers.
(Updates with context of proposals beginning in the final paragraph.)
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