By Lisa M. Goolik, J.D.
The Federal Deposit Insurance Corporation is continuing to hear from banks that are concerned with proposed changes to the way the FDIC assesses deposit insurance for small established banks. So far, the FDIC has heard from commenters concerned with: how the changes would impact community banks that are active construction lenders; the definition of “core deposits;” and the proposed treatment of reciprocal deposits under the “adjusted brokered deposit ratio.”
Change in methodology. In July, the FDIC published a proposed rule that would revise the methodology it uses to estimate the probability of failure for banks with less than $10 billion in assets that have been insured for at least five years. The FDIC would eliminate risk categories for small banks (other than new small banks and insured branches of foreign banks) and apply the model to all established small banks. The changes are intended to ensure that banks that take on greater risks will pay more for deposit insurance.
Weighted charge-offs. In a comment letter submitted last month, Carl Dodson, executive vice president and chief operating officer for John Marshall Bank, feared the weighted loan charge‐off rate in the proposed model would force community banks to reduce lending activity in the construction and C&I segments, “both of which are critical to a strong and growing economy.”
According to Dodson, the high charge‐off rates in the construction loan and C&I segments would create a very large “Loan Mix Index” for banks focusing on these two segments, which would result in higher deposit insurance assessment rate for these banks. As an example, Dodson noted that the proposed rule would increase the bank’s assessment rate from 5 basis points to over 6.5 basis points, which would increase its insurance premiums by 30 percent—to over $500,000 annually.
“Core deposits.” Paul C. Livermore, chief financial officer and executive vice president of The First National Bank in Sioux Falls, wrote to express his concerns regarding the proposed definition of “core deposits,” which is defined as “Domestic office deposits (excluding time deposits over the deposit insurance limit and the amount of brokered deposits below the standard maximum deposit insurance amount).”
In his letter, Livermore states that “there is no effective means for an issuer of brokered deposits [to know] whether or not those deposits are held by the beneficial owners in lots below the FDIC limit” because brokered deposits are typically issued in the form of a single master certificate held by Depository Trust Corp (DTC). DTC maintains records of the custodians, such as brokerage firms and trust companies, which hold the underlying lots on behalf of the end users. “Only if DTC provided the names of its custodian customers and they in turn provided the names of the beneficial holders on whose behalf they hold brokered CDs could a bank issuer actually know who the end investors are and in what block sizes they hold the deposits,” said Livermore.
Reciprocal deposits. A significant number of commenters have submitted letters challenging the proposed treatment of reciprocal deposits. Under the proposed methodology, reciprocal deposits would no longer be excluded from the “adjusted brokered deposit ratio.” As explained in a letter submitted by David C. Blackburn, chief financial officer for First United Bank, the inclusion of reciprocal deposits in the proposed assessment system “could result in assessment rates that are unnecessarily higher for banks that have reciprocal deposits on their balance sheets.”
However, the commenters argued, reciprocal deposits share more characteristics with traditional core deposits than brokered deposits. In particular, they noted that reciprocal deposits typically come from a bank’s long term local customers, and the bank sets the interest rates based on local market conditions. “Reciprocal deposits, therefore, do not present any of the concerns that traditional brokered deposits do: instability, risk of rapid asset growth, and high cost,” wrote Jay H. Lee, executive vice president of risk management for AimBank in Littlefield, Texas.
The commenters all suggested that the FDIC not only retain the current system’s exclusion of reciprocal deposits from the definition of “brokered” for assessment purposes, but also support legislation to explicitly exempt reciprocal deposits from the statutory definition of brokered deposit.
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