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4000 - Advisory Opinions
Interest Rate Restrictions Imposed Through the Brokered Deposit
Law
FDIC--95--24
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
{{2-29-96 p.4949}}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.
(Emphasis added.)
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.
(Emphasis added.)
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
{{2-29-96 p.4950}}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
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