Brokered deposit rules need an update

Some large banks are offering potential customers $300 or more to open an account with them. These types of incentives disadvantage smaller players, said FDIC Chair Jelena McWilliams, who spoke in February at a conference hosted by the Wisconsin Bankers Association.

“Community banks can’t compete with that,” McWilliams said. Community banks “like to say they can offer $600 worth of customer service or relationship-based banking, but they are not going to offer $600.” This kind of competition, in addition to other factors, is driving deposit flows toward the nation’s largest banks, away from community banks. “People are calling it a war on deposits,” McWilliams said.

Community bankers need all the tools available to them to attract deposits, and that is why the rules surrounding brokered deposits should be loosened. Brokered deposits currently trigger heightened regulatory scrutiny, but in my view that scrutiny is largely unwarranted. In a digital world, it is becoming increasingly difficult to define a “brokered” deposit in the first place.

McWilliams gets it. Her comments about deposit incentives were spurred by a question about brokered deposits. In late December, the FDIC issued an advance notice of proposed rulemaking seeking comments “on all aspects of the brokered deposit.”

McWilliams noted many of the rules on brokered deposits are 20 years old or older. “Twenty years ago you couldn’t collect deposits on the internet, you couldn’t offer a checking account on the internet,” she said. “Seeing what a brokered deposit is in this environment and not a 20-year-old environment would be useful for us.”

The notice was published in the Federal Register on Feb. 6, which means comments are due May 6.