Western Independent Banker - January/February 2009 - (Page 17)

By Susan Murphy The Regulatory Outlook for Brokered Deposits IN OCTOBER, THE FDIC proposed increasing insurance premiums to stem the f low out of the insurance fund. By the time of this publication, this will have been finalized. Two issues in the proposal beg for comment: increased premiums for brokered deposits and the definition of brokered versus non-brokered funds. The brokered definition has been problematic since the S&L crisis in 1989. Increased Premiums The FDIC is considering imposing additional premiums on institutions that hold a certain percentage of their assets in brokered deposits: “Generally speaking, the greater an institution’s asset growth and the greater its percentage of brokered deposits, the greater would be the increase in its initial base assessment rate.” What’s driving the FDIC in part is the belief that brokered deposits decrease the franchise value of a bank, which few would debate. The same is true for CDARS or FHLB advances. There is concern that brokered deposits might expose banks to risky funding. However, the FDIC said in its spring 2005 release: “If properly administered, such diversification of funding sources can benefit FDIC-insured institutions . . . many institutions have found that brokered deposits can be a more costDefinition of Brokered versus Non-Brokered Funds The FDIC is asking whether brokered deposits that consist of sweep balances should be excluded from the definition and whether “brokered” should exclude CDARS-type reciprocal deposit arrangements. Brokerage firms, for their part, might benefit if MMDA sweep accounts were separated from the “brokered” classification because MMDA is believed to be more than half of what is reported to the FDIC as brokered monies, thus avoiding the extra FDIC premium. From the standpoint of a bank’s funding strategy, MMDA is overnight money while CDs can be relied upon longer term. When liquidity is challenging, brokered CDs help offset the effects of irrational runs on institutions, providing a measure of stability. In addition, brokered CDs can be raised quickly in bulk for specific terms without cannibalizing existing core deposits CD specials, and without having to compete with local institutions offering high rate specials. If an institution is well capitalized, the brokered market is effective and price competitive, as are CDARS and FHLB Advances. A more transparent and even-handed definition would be uncollateralized non-core funding. effective deposit-gathering mechanism than building new branches.” Non-core funding plays an important role in funding, and in liquidity policies. Brokered CDs are useful for institutions’ contingent liability plans, acknowledged by the FDIC this past August, when it said in part that banks “should have realistic contingency funding plans that are responsive to changes in liquidity risk exposure.” In 2008, many examiners encouraged banks that had not previously tapped the brokered market to put brokered CD relationships in place for contingent liability purposes. This is something we have not seen in 24 years. Diversification of non-core funding sources is prudent: FHLB advances, brokered deposits, CDARS—these all play a responsible role in funding for all banks. By imposing a higher premium for non-collateralized non-core funding, the premiums would be far less onerous. Western Independent Banker January/February 2009 17

Table of Contents Feed for the Digital Edition of Western Independent Banker - January/February 2009

Western Independent Banker - January/February 2009 Contents A Message from the President & CEO Managin Liquidity and Funding During a Recession Staying Liquid in a Time of Regulatory Sea Change Managing Liquidity in a Volatile Rate Environment Regulatory Outlook for Brokered Deposits Deposit Growth and Branch Network Effectiveness Turbo Charging Account Acquisitions FDIC-Insured Sweep Accounts Creating a Contingency Funding Plan WIB Service Corporation Report WIB Calendar New Members Index of Advertisers advertiser.com

Western Independent Banker - January/February 2009

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