April 29, 2011
The Honorable Sheila Bair
Chairman
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, D.C. 20429
Re: Study on Core Deposits and Brokered Deposits
Dear Chairman Bair:
The Independent Community Bankers of America1 (ICBA) welcomes the opportunity to
comment on the study that the FDIC is conducting on core and brokered deposits as
required under Section 1506 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”). Among other things, the Dodd-Frank Act
requires the FDIC to evaluate (1) the differences between core deposits and brokered
deposits and (2) the potential effect on the Deposit Insurance Fund and on local
economies of revising the definitions of brokered deposits and core deposits.
ICBA’s Position
ICBA commends the FDIC for holding the March 18th Roundtable discussion on this
important issue. We agree with many of the comments that community bankers made at
the Roundtable discussion.
For instance, we agree that the definitions of core and brokered deposits are outdated
because changes in technology have resulted in new and different ways that banks attract
deposits. The notion that most of a bank’s branch deposits are derived without the use of
some intermediary may have been true twenty years ago but is no longer realistic. No
longer are community bank deposit-taking efforts based solely on customers walking into
1
The Independent Community Bankers of America represents nearly 5,000 community banks of all sizes and charter
types throughout the United States and is dedicated exclusively to representing the interests of the community banking
industry and the communities and customers we serve. ICBA aggregates the power of its members to provide a voice
for community banking interests in Washington, resources to enhance community bank education and marketability,
and profitability options to help community banks compete in an ever changing marketplace.
With nearly 5,000 members, representing more than 20,000 locations nationwide and employing nearly 300,000
Americans, ICBA members hold $1 trillion in assets, $800 billion in deposits, and $700 billion in loans to consumers,
small businesses and the agricultural community. For more information, visit ICBA’s website at www.icba.org.
2
their offices and opening a checking or a savings account. Community banks are using all
sorts of information intermediaries to attract deposits including websites, advertisements,
and money managers. As a result of the currently broad definition of “deposit brokers”
and “brokered deposits”, many of these intermediaries are considered deposit brokers.
By placing limits on “brokered” deposits, the FDIC has hampered the ability of
community banks to raise deposits necessary to fund their operations and to support
lending in their communities.
As was discussed at the Roundtable discussion, many community banks use CDARS
(Certificate of Deposit Account Registry Service) which is a deposit placement service
offered by Promontory Interfinancial Network that allows banks to place their customers’
funds in FDIC-insured certificates of deposits at other banks and, at the same time,
receive an equal sum of funds from the customers of other banks in the CDARS Network.
Currently, CDARS are also considered “brokered” deposits by the FDIC and
consequently Risk Category II, III and IV community bank institutions have the potential
of paying higher DIF premiums because of CDARS deposits. Furthermore, community
banks that have been downgraded to “adequately capitalized” because of tough safety and
soundness exams are experiencing liquidity problems if they are using CDARS deposits,
since these banks must receive a waiver from the FDIC before they can continue
accepting “brokered deposits.”
ICBA believes that CDARS deposits should not be considered “brokered deposits” for a
number of reasons. First, they have a high reinvestment rate. According to Promontory,
the average reinvestment rate across the network has exceeded eighty-three percent.
Second, CDARS deposits are overwhelmingly gathered within each bank’s geographic
footprint through established customer relationships. Eighty percent of CDARS
placements are made by customers within 25 miles of a branch location of the
relationship institution. Many of ICBA’s members attest to the fact that CDARS allows
them to retain local deposits and maintain relationships with existing customers that want
the protection of FDIC insurance for all their deposits. Consequently, CDARS customers
are much less likely to move deposits to other institutions based on rate alone.
Third, each bank sets its own rates on its CDARS deposits that reflect that bank’s funding
needs and local market. As a result, depending on maturity, CDARS deposits are
gathered at a cost that is significantly less than the cost of traditional brokered deposits.
Finally, CDARS deposits are a stable source of funding for community banks and do not
present the same types of risks as other types of brokered deposits. In fact, it can be
argued that CDARS reciprocal deposits may reduce the FDIC’s exposure by helping
banks retain important, large dollar deposit accounts.
Brokered deposits can also be a valuable source of funding for community banks,
particularly for those banks in rural areas or markets which lack ample local deposits to
meet the legitimate credit needs of the community. ICBA believes that community banks
should not be unfairly penalized for using brokered deposits as long as adequate controls
are taken to limit the risks. For instance, brokered deposits should not be an institution’s
3
principal source of growth, nor should they cause the institution to grow at a rate
significantly higher than the bank’s market. Furthermore, we agree that regulatory
policies should encourage institutions to use brokered deposits to fund loans in the bank’s
market.
However, regulatory policy should not discourage the use of brokered deposits in all
situations. Although it is not relationship based money, it is funding which can be
successfully managed and can often be reliable in a stressed environment. For this
reason, banks that fall below “well capitalized” should be allowed to reduce their
brokered deposits over an extended period time. Too often, banking regulators
precipitate a liquidity crisis by requiring these institutions to immediately end their use of
brokered deposits. An immediate prohibition to renew or issue brokered deposits
(particularly CDARS deposits) destabilizes the institution and actually increases the risk
to the Deposit Insurance Fund.
As was suggested by FDIC staff at the Roundtable discussion, ICBA supports the FDIC
using a graduated scale for grading the variety of funding sources that appear on a bank’s
balance sheet rather than using the current distinctions of core vs. noncore funding or
brokered vs. non-brokered deposits. Such a graduated scheme for assessing the volatility
of different funding sources should ensure that community banks which have a need to
fund legitimate credit demands and have the ability to manage the risk can benefit from a
broad array of supplemental funding, including brokered deposits.
Conclusion
ICBA agrees with many of the points that were made by community bankers at the
March 18th Roundtable discussion, including the need for amending the definitions of
“deposit broker” and “brokered deposits.” As we have stated in a number of comment
letters to the FDIC, CDARS deposits should not be considered “brokered deposits”
because they are a stable source of funding for community banks and do not present the
same types of risks as other types of brokered deposits.
Furthermore, ICBA believes that community banks should not be unfairly penalized for
using brokered deposits as long as adequate controls are taken to limit the risks.
Brokered deposits can be successfully managed and can often be reliable in a stressed
environment. For this reason, banks that fall below “well capitalized” should be allowed
to reduce their brokered deposits over an extended period time and should not be subject
to an immediate prohibition on the renewal and issuance of brokered deposits.
ICBA also would support the FDIC using a graduated scale for grading the volatility of
funding sources. Such a scheme should ensure that community banks that have a need to
fund legitimate credit demands and have the ability to manage the risk can benefit from a
broad array of supplemental funding,
ICBA appreciates the opportunity to comment on the study that the FDIC is conducting
4
on core and brokered deposits as required under the Dodd-Frank Act. If you have any
questions about our letter, please do not hesitate to contact me at 202-659-8111 or
Chris.Cole@icba.org.
Sincerely,
/s/ Christopher Cole
Christopher Cole
Senior Vice President and Senior Regulatory Counsel