4000 - Advisory Opinions
Interest Rate Restrictions Imposed Through the Brokered Deposit Law
April 26, 1995
Valerie J. Best, Counsel
Thank you for your letter concerning the interest rate restrictions imposed through the brokered deposit law. Your comments were very instructive.
Your depository institution was well capitalized and thus could accept deposits placed with your institution by agents on behalf of third parties (i.e., brokered deposits) notwithstanding the limitations imposed by the brokered deposit statute (12 U.S.C. 1831f). Further, because your institution was well capitalized, it could offer significantly higher rates of interest notwithstanding the interest rate limitations prescribed by the brokered deposit statute.
Even though your institution was authorized to accept brokered deposits and set significantly higher rates of interest without restriction, you expressed concern that your institution was obligated to report such deposits as brokered deposits on your institution's Reports of Condition and Income ("Call Reports"). More specifically, you stated:
Because of the lack of regulatory enforcement by the other regulatory agencies, the Bank's competitors can offer "CD specials" well beyond the 75 basis point ceiling for reporting brokered deposits, without having to comply with the regulation, and without having to raise rates wholesale. Thus forcing the Bank to comply with the reporting requirements of [12 C.F.R. 337.6] in order to compete with their product. By doing so the Bank can compete, but only after being adversely impacted by the requirement to disclose any deposits gained from such products as brokered deposits.
You will be pleased to know that, at the suggestion of the FDIC and others, the law has been revised to relieve well capitalized banks and savings associations of the burden of reporting, as brokered deposits, deposits on which they pay significantly higher interest rates. Previously, the law provided:
(3) Inclusion of depository institutions engaging in certain activities. [T]he term "deposit broker" includes any insured depository institution, and any employee of any insured depository institution, which engages, directly or indirectly, in the solicitation of deposits by offering rates of interest with respect to such deposits which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area.
As amended, the law now provides:
(3) Inclusion of depository institutions engaging in certain activities. Notwithstanding paragraph (2), the term "deposit broker" includes any insured depository institution that is not well capitalized (as defined in section 38), and any employee of such institution, which engages, directly or indirectly, in the solicitation of deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions in such depository institution's normal market area.
12 U.S.C. 1831f (emphasis added).
The Federal Financial Institutions Examination Council ("FFIEC") recently issued "Supplemental Instructions" (copy enclosed) for Call Report date March 31, 1995, advising institutions of this change. The Supplemental Instructions provide, in part:
Therefore, deposits accepted, renewed, or rolled over by a well capitalized institution on or after September 23, 1994 . . . in connection with this form of deposit solicitation [i.e., significantly higher interest rates] need not be reported as brokered deposits in Schedule RC-E, "Deposit Liabilities." Any deposit accepted, renewed, or rolled over by a well capitalized institution before September 23, 1994, in connection with this form of deposit solicitation should continue to be reported as a brokered deposit as long as the deposit remains outstanding under the terms in effect before September 23, 1994.
As a result of this change in the Call Report Instructions, any deposit accepted, renewed, or rolled over by your institution after September 23, 1994, in connection with this form of deposit solicitation, need not be reported as a brokered deposit, provided that your institution is well capitalized at the time the deposit is accepted, renewed, or rolled over. Prior to the adoption of this change, we advised that depository institutions should continue to abide by the Call Report Instructions until such time as the Call Report Instructions were revised to reflect the change in the law. Staff was not authorized to waive the requirements set forth in the Call Report Instructions until such time as the FFIEC took formal action.1
In any event, I understand that your Bank was not cited for a violation of 12 C.F.R. 337.6. Rather, our concern was that insured depository institutions abide by the Call Report Instructions. (I understand that the examination of your Bank was as of June 30, 1994.)
You expressed concern that the presence of brokered deposits on a financial institution's Call Report may create a negative connotation. However, the FDIC generally takes the position that
[T]he prudent use of brokered deposits within legal requirements is entirely acceptable. Brokered deposits should be treated and assessed as any other funding alternative having its own special advantages and disadvantages. Furthermore, the acceptance of brokered deposits should not be grounds for criticism per se by virtue of the nature or origin of such deposits without considering the manner in which they are used and the impact of such use on the institution's overall condition and operations.
You asked that we reevaluate the Treasury rate in light of the current rates offered by financial institutions. You also asked that the FDIC reevaluate the interpolation method of calculating the 75 basis point break in light of the widespread implementation of "CD specials." As explained above, your institution is no longer required to report such high-rate deposits accepted, renewed, or rolled over after September 23, 1994, as brokered deposits on its Call Report, provided that your institution is well capitalized at the time any such deposit is accepted, renewed, or rolled over. Nonetheless, I am sure that we shall refer to your comments often as we continue to implement the statute and as we periodically reevaluate the regulations.
Again, thank you for taking the time to share your thoughts with us. Please call me at (202) 898-3812 if I can be of further assistance in this or any other matter. You may also contact the FDIC Kansas City Regional Office at (816) 234-8149 for assistance.
1 All depository institutions, including well capitalized institutions, that accept deposits from "any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties," must continue to report such deposits as brokered deposits in the Call Reports--regardless of the interest rate paid. The law governing such third-party deposits has not been changed. Go back to Text