[Federal Register Volume 84, Number 25 (Wednesday, February 6, 2019)]
[Proposed Rules]
[Pages 2366-2400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28273]



[[Page 2365]]

Vol. 84

Wednesday,

No. 25

February 6, 2019

Part III





 Federal Deposit Insurance Corporation





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12 CFR Part 337





 Unsafe and Unsound Banking Practices: Brokered Deposits and Interest 
Rate Restrictions; Proposed Rule

Federal Register / Vol. 84 , No. 25 / Wednesday, February 6, 2019 / 
Proposed Rules

[[Page 2366]]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 337

RIN 3064-AE94


Unsafe and Unsound Banking Practices: Brokered Deposits and 
Interest Rate Restrictions

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Advance notice of proposed rulemaking and request for comment.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is 
undertaking a comprehensive review of the regulatory approach to 
brokered deposits and the interest rate caps applicable to banks that 
are less than well capitalized. Since the statutory brokered deposit 
restrictions were put in place in 1989, and amended in 1991, the 
financial services industry has seen significant changes in technology, 
business models, and products. In addition, changes to the economic 
environment have raised a number of issues relating to the interest 
rate restrictions. A key part of the FDIC's review is to seek public 
comment through this Advance Notice of Proposed Rulemaking (ANPR) on 
the impact of these changes. The FDIC will carefully consider comments 
received in response to this ANPR in determining what actions may be 
warranted.

DATES: Comments must be received by the FDIC no later than May 7, 2019.

ADDRESSES: You may submit comments on the notice of proposed rulemaking 
using any of the following methods:
    <bullet> Agency Website: http://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the agency 
website.
    <bullet> Email: <a href="/cdn-cgi/l/email-protection#fc9f9391919992888fbc9a98959fd29b938a"><span class="__cf_email__" data-cfemail="a5c6cac8c8c0cbd1d6e5c3c1ccc68bc2cad3">[email protected]</span></a>. Include RIN 3064-AE94 on the 
subject line of the message.
    <bullet> Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW, 
Washington, DC 20429.
    <bullet> Hand Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street NW Building (located on F 
Street) on business days between 7 a.m. and 5 p.m.
    <bullet> Public Inspection: All comments received, including any 
personal information provided, will be posted generally without change 
to http://www.fdic.gov/regulations/laws/federal.

FOR FURTHER INFORMATION CONTACT: Legal Division--Thomas Hearn, Counsel, 
(202) 898-6967; <a href="/cdn-cgi/l/email-protection#becad6d1d6dbdfccd0fed8dad7dd90d9d1c8"><span class="__cf_email__" data-cfemail="a0d4c8cfc8c5c1d2cee0c6c4c9c38ec7cfd6">[email protected]</span></a>; Vivek V. Khare, Counsel, (202) 898-
6847, <a href="/cdn-cgi/l/email-protection#1a6c71727b687f5a7c7e7379347d756c"><span class="__cf_email__" data-cfemail="3345585b5241567355575a501d545c45">[email protected]</span></a>; Division of Risk Management Supervision--Thomas 
F. Lyons, Chief, Policy and Program Development, (202) 898-6850, 
<a href="/cdn-cgi/l/email-protection#67130b1e0809142701030e0449000811"><span class="__cf_email__" data-cfemail="b6c2dacfd9d8c5f6d0d2dfd598d1d9c0">[email protected]</span></a>; Judy Gross, Senior Policy Analyst, (202) 898-7047, 
<a href="/cdn-cgi/l/email-protection#d3b9a6b4a1bca0a093b5b7bab0fdb4bca5"><span class="__cf_email__" data-cfemail="59332c3e2b362a2a193f3d303a773e362f">[email protected]</span></a>; Division of Insurance and Research--Ashley Mihalik, 
Chief, Banking and Regulatory Policy, (202) 898-3793, 
<a href="/cdn-cgi/l/email-protection#1f7e7276777e7376745f797b767c31787069"><span class="__cf_email__" data-cfemail="6405090d0c05080d0f2402000d074a030b12">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: 

I. Policy Objectives

    The policy objective of this ANPR is to obtain input from the 
public as the FDIC comprehensively reviews its brokered deposit and 
interest rate regulations in light of significant changes in 
technology, business models, the economic environment, and products 
since the regulations were adopted. The FDIC is inviting comment on all 
aspects of the brokered deposit and interest rate regulations.
    To facilitate comment, the remainder of this ANPR has been 
structured in the following manner: (II) Brokered Deposits and Interest 
Rate Restrictions, addressing (A) Current Law and Regulations, (B) 
History and Research, (C) Brokered Deposit Issues, (D) Interest Rate 
Issues; (III) Requests for Comment; and Appendices with additional 
background and descriptive statistics.

II. Brokered Deposits and Interest Rate Restrictions

    Brokered and high-rate deposits became a concern among bank 
regulators and Congress before any statutory restrictions were put in 
place. This concern arose because: (1) Such deposits could facilitate a 
bank's rapid growth in risky assets without adequate controls; (2) once 
problems arose, a problem bank could use such deposits to fund 
additional risky assets to attempt to ``grow out'' of its problems, a 
strategy that ultimately increased the losses to the deposit insurance 
fund when the institution failed; and (3) brokered and high-rate 
deposits were sometimes volatile because deposit brokers (on behalf of 
customers), or the customers themselves, were often drawn to high rates 
and were prone to leave the bank when they found a better rate or they 
became aware of problems at the bank.
    Before proceeding further, it should be noted that, historically, 
most institutions that use brokered and higher-rate deposits have done 
so in a prudent manner and appropriately measure, monitor, and control 
risks associated with brokered deposits. Moreover, well-capitalized 
institutions are not subject to restrictions on accepting brokered 
deposits or setting interest rates. Nonetheless, the FDIC also 
recognizes that institutions sometimes are concerned that the use of 
brokered deposits can have other regulatory consequences, such as 
implications for deposit insurance pricing in certain circumstances, or 
may be viewed negatively by investors or other stakeholders.

A. Current Law and Regulations

    Section 29 of the Federal Deposit Insurance Act (FDI Act), titled 
``Brokered Deposits,'' was originally added to the FDI Act by the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA). The law originally restricted troubled institutions (not 
meeting their minimum capital requirements at the time) from (1) 
accepting deposits from a deposit broker without a waiver and (2) 
soliciting deposits by offering rates of interest on deposits that were 
significantly higher than the prevailing rates of interest on deposits 
offered by other insured depository institutions (or ``IDIs'') having 
the same type of charter in such depository institution's normal market 
area.\1\
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    \1\ See Public Law 101-73, August 9, 1989, 103 Stat. 183.
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    Two years later, Congress enacted the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA), which added the Prompt 
Corrective Action (PCA) capital regime to the FDI Act and also amended 
the threshold for the brokered deposit and interest rate restrictions 
from a troubled institution to a bank falling below the ``well 
capitalized'' PCA level. At the same time, the FDIC was authorized to 
waive the brokered deposit restrictions for a bank that is adequately 
capitalized upon a finding that the acceptance of such deposits does 
not constitute an unsafe or unsound practice with respect to the 
institution.\2\ FDICIA did not authorize the FDIC to waive the brokered 
deposit restrictions for less than adequately capitalized institutions. 
Most recently, earlier this year, Section 29 of the FDI Act was amended 
as part of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act, to except a capped amount of certain reciprocal 
deposits from treatment as brokered deposits.\3\
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    \2\ See Public Law 102-242, December 19, 1991, 105 Stat. 2236.
    \3\ The statute was amended 1994 as part of the Riegle Community 
Development and Regulatory Improvement Act of 1994. The changes were 
generally technical to ensure that the interest rate restrictions 
under Section 29(g)(3) were consistent with the PCA framework, among 
other things. See Public Law 103-325, September 23, 1994, 108 Stat. 
2160.

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[[Page 2367]]

    Section 337.6 of the FDIC's Rules and Regulations implements and 
closely tracks the statutory text of Section 29, particularly with 
respect to the definition of ``deposit broker'' and its exceptions.\4\ 
Section 29 of the FDI Act does not directly define a ``brokered 
deposit,'' rather, it defines a ``deposit broker'' for purposes of the 
restrictions.\5\ Thus, the meaning of the term ``brokered deposit'' 
turns upon the definition of ``deposit broker.''
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    \4\ See 12 CFR 337.6. The FDIC issued two rulemakings related to 
the interest rate restrictions under this section. A discussion of 
those rulemakings, and the interest rate restrictions, is provided 
in Section (II)(B) of this ANPR.
    \5\ See 12 U.S.C. 1831f.
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    Section 29 and the FDIC's implementing regulation define the term 
``deposit broker'' to include:
    (1) 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; and
    (2) An agent or trustee who establishes a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan.
    This definition is subject to the following nine statutory 
exceptions:
    (1) An insured depository institution, with respect to funds placed 
with that depository institution;
    (2) An employee of an insured depository institution, with respect 
to funds placed with the employing depository institution; \6\
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    \6\ The term ``employee'' is defined as ``any employee (A) who 
is employed exclusively by the insured depository institution; (B) 
whose compensation is primarily in the form of salary; (C) who does 
not share such employee's compensation with a deposit broker; and 
(D) whose office space or place of business is used exclusively for 
the benefit of the insured depository institution which employs such 
individual.''
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    (3) A trust department of an insured depository institution, if the 
trust in question has not been established for the primary purpose of 
placing funds with insured depository institutions;
    (4) The trustee of a pension or other employee benefit plan, with 
respect to funds of the plan;
    (5) A person acting as a plan administrator or an investment 
adviser in connection with a pension plan or other employee benefit 
plan provided that that person is performing managerial functions with 
respect to the plan;
    (6) The trustee of a testamentary account;
    (7) The trustee of an irrevocable trust (other than one described 
in paragraph (1)(B)), as long as the trust in question has not been 
established for the primary purpose of placing funds with insured 
depository institutions;
    (8) A trustee or custodian of a pension or profit sharing plan 
qualified under section 401(d) or 430(a) of the Internal Revenue Code 
of 1986; or
    (9) An agent or nominee whose primary purpose is not the placement 
of funds with depository institutions.
    As listed above, the statute includes nine exceptions to the 
definition of ``deposit broker.'' The FDIC's regulations include the 
following tenth exception: ``An insured depository institution acting 
as an intermediary or agent of a U.S. government department or agency 
for a government sponsored minority or women-owned depository 
institution program (``MWODI'').\7\
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    \7\ See 12 CFR 337.6(a)(5)(J). The exception was adopted by the 
FDIC shortly after FDICIA was enacted in 1991, and the FDIC 
indicated in the preamble for the final rule that implemented the 
FDICIA revisions to section 29 that those revisions were not 
intended to apply to deposits placed by insured depository 
institutions assisting government departments and agencies in 
administration of MWODI deposit programs. See 57 FR 23933, 23040 
(1992).
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    In addition to restricting the acceptance of brokered deposits by 
less than well-capitalized IDIs, Section 29 of the FDI Act also 
prohibits such IDIs from paying rates that significantly exceed their 
normal market area or the national rate as established by the FDIC by 
regulation. This provision was intended to prohibit ``the solicitation 
of deposits by in-house salaried employees through so-called money-desk 
operations.'' \8\ More specifically, the provision addressed a concern 
that emerged during various legislative hearings that brokered deposit 
restrictions could easily be circumvented by in-house solicitation of 
high-rates.\9\ In implementing this legislative restriction, from 1989 
to 2009, the FDIC pegged the national rate to comparable Treasury rates 
in its regulation. However, the national rate calculation was changed 
in 2009, pursuant to a notice-and-comment rulemaking, when yields on 
Treasuries fell dramatically during the crisis, compressing the rate 
caps. The FDIC moved to a simple average of rates paid by all banks and 
branches that offer a specific product. This national rate data is 
provided to the FDIC by a data-gathering company and is published 
weekly on the FDIC's website. The history of the interest rate 
restrictions and its associated issues are discussed more fully in 
Section D.
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    \8\ See H.R. Conf. Rep. No. 101-222, 101st Cong., 1st Sess. 402 
(1989).
    \9\ See ``Problems of the Federal Savings and Loan Insurance 
Corporation: Hearings Before the Committee on Banking, Housing, and 
Urban Affairs of the United States Senate,'' (part II) 101st Cong., 
1st Sess. 230-231 (1989).
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B. History and Research

    As described in the FDIC's 1997 study of the banking and thrift 
crises of the 1980s and early 1990s, brokered CDs became increasingly 
used as funding sources, first by money center banks and then by 
regional and smaller institutions.\10\ Even as early as the 1970s, the 
FDIC noted concerns about brokered deposits, as stated in the FDIC's 
Division of Bank Supervision Manual--``The use of brokered deposits has 
been responsible for abuses in banking and has contributed to some bank 
failures, with consequent losses to the larger depositors, other 
creditors, and shareholders.'' \11\
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    \10\ History of the Eighties--Lessons for the Future, p. 119, 
Federal Deposit Insurance Corporation December 1997 https://www.fdic.gov/bank/historical/history/.
    \11\ FDIC, ``Division of Bank Supervision Manual,'' Section L, 
page 3, November 1, 1973.
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    However, the potential abuses associated with brokered deposits 
received relatively little attention until the failure of Penn Square 
Bank in 1982. This failure resulted in the largest bank payout of 
insured deposits in the history of the FDIC up until that time.\12\ 
Brokered deposits allowed the bank to grow rapidly from $30 million in 
assets in 1977 to $436 million in assets when it failed in 1982, with 
much of the growth in high risk loans to small oil and gas 
producers.\13\ In response to the rising use of brokered deposits and 
data suggesting negative consequences, in April 1984 the FDIC and the 
Federal Home Loan Bank Board (FHLBB) adopted a joint final rule 
restricting pass through deposit insurance for deposits obtained 
through a deposit broker.\14\ The agencies indicated that data showed 
that institutions used brokered deposits to pursue rapid growth in 
risky real estate-related lending without adequate controls and to 
increase risky lending after problems arose. In January 1985, the Court 
of Appeals for the District of Columbia Circuit ruled that the FDI Act 
did not permit the FDIC to eliminate pass-through deposit insurance for 
deposit brokers.\15\
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    \12\ History of the Eighties--Lessons for the Future, p. 119, 
Federal Deposit Insurance Corporation December 1997 https://www.fdic.gov/bank/historical/history/.
    \13\ See id; see also, Belly Up: The Collapse of the Penn Square 
Bank (1985), Chapter 9, Phillip L. Zweig.
    \14\ See 49 FR 13003 (April 2, 1984).
    \15\ FAIC Securities, Inc. v. United States, 768 F.2d 352 (D.C. 
Cir. 1985).

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[[Page 2368]]

    While the case was pending, and after the decision, Congressional 
hearings regarding brokered deposits were held between 1984 and 1988 
and, in 1989, as noted earlier, as part of FIRREA. Pursuant to these 
hearings, Congress imposed restrictions on brokered deposits for 
institutions that did not meet their minimum capital requirements and 
later tied the restrictions to the PCA framework in 1991 through 
FDICIA. Congress also imposed rate restrictions on institutions that 
were less than well capitalized out of concern that institutions would 
be able to circumvent brokered deposit restrictions by merely 
advertising or otherwise offering very high rates. Since enactment of 
Section 29, the FDIC has continued to study the role of brokered 
deposits in the performance of banks, their impact on safety and 
soundness, and the loss they impose on the Deposit Insurance Fund (DIF) 
when a bank fails.
Brokered Deposit Usage and Relevant Data
    From the 1960s up until 2000, brokered retail CDs and wholesale CDs 
were the main type of brokered deposits used in the banking system. 
Starting in the 1980s deposit listing services began generating 
deposits for IDIs by advertising CD rates on behalf of institutions. 
Beginning in 1999, broker-dealers first started to offer brokerage 
customers an automatic sweep of their customers' idle funds to IDIs.
    Beginning in 2003, a network was established through which banks 
could place customer funds in time deposits at other banks and receive 
time deposits in an equal amount of funds in return, such deposits 
being referred to as ``reciprocal deposits.'' Similar services evolved 
for money market deposit accounts (MMDAs).
    As of September 30, 2018, insured depository institutions held $986 
billion in brokered deposits, which amounted to 8.0 percent of the 
$12.3 trillion in industry domestic deposits. These brokered deposits 
were held by 2,221 insured depository institutions, representing 40.6 
percent of the 5,477 total number of insured depository institutions.
    Although 2,221 institutions held brokered deposits as of September 
30, 2018, a significant portion of these deposits are concentrated in a 
small number of institutions. One hundred institutions held 89.4 
percent, or $881 billion, of the $986 billion brokered deposits in the 
banking system, with five institutions accounting for 39.4 percent, or 
$389 billion, of all brokered deposits. The remaining 2,121 
institutions using brokered deposits account for the remaining $104 
billion in brokered deposits.
    Consistent with this concentration, among the 2,221 institutions 
holding brokered deposits as of September 30, 2018, the median holding 
was 4.7 percent of total domestic deposits, but 6 institutions held 
brokered deposits in excess of 90 percent of total domestic deposits; 
25 institutions held brokered deposits between 50 percent and 90 
percent of total domestic deposits; and 79 institutions held brokered 
deposits between 25 percent and 50 percent of total domestic deposits.

                                 Brokered Deposits Held by Insured Depository Institutions as of September 30, 2018 \16\
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                                                                             Number of
                                                           Total number     banks with    Total brokered  Share of total  Total domestic  Share of total
                    Asset size group                         of banks        brokered        deposits        brokered        deposits        domestic
                                                                             deposits       (billions)     deposits (%)                    deposits (%)
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Under $1 Billion........................................           4,704           1,656          $31.92             3.2         $988.05             8.0
$1-10 Billion...........................................             635             439           90.16             9.1        1,349.56            11.0
$10-50 Billion..........................................              97              89          171.87            17.4        1,605.40            13.0
Over $50 Billion........................................              41              37          691.78            70.2        8,378.84            68.0
                                                         -----------------------------------------------------------------------------------------------
    All Banks...........................................           5,477           2,221          985.73  ..............       12,321.84  ..............
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    The largest concentrations of brokered deposits can be 
characterized as 3 types of deposits: (1) Master Certificates of 
Deposits; (2) sweep deposits that are viewed as brokered; and (3) 
reciprocal deposits. Listing service deposits are also discussed below, 
but typically, are not reported as brokered.
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    \16\ Descriptive statistics detailing the historical holdings of 
brokered deposits by bank size and PCA capital classification status 
can be found in Appendix 1.
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Master Certificate of Deposits
    Information about brokered deposits that the FDIC collects from 
banks through the Call Report does not reflect certain elements of the 
structure of the brokered deposit market. However, industry 
participants have informed the FDIC that a sizable portion of reported 
brokered deposits are wholesale Master Certificate of Deposits. These 
instruments are held on the books of the issuing bank in the name of a 
subsidiary of Depository Trust Corporation (DTC) as custodian for 
deposit brokers who are often broker dealers. These broker dealers, in 
turn, issue retail CDs, typically in denominations of $1,000, under the 
Master Certificate of Deposit to their retail clients.
    The retail customers' ownership interests in the brokered retail 
CDs are reflected on the books of the deposit broker that issued them. 
These Master Certificates of Deposits are reported by banks on Call 
Report Schedule RC-E, Memoranda Item 1.c as deposits of $250,000 or 
less even though issued in the name of DTC for more than $250,000 to 
reflect the substance of the retail CDs issued under them. The FDIC, 
however, has no Call Report information about what portion of reported 
brokered deposits of $250,000 or less are Master Certificates of 
Deposits as described above. In the event of a failure, the deposit 
broker maintains records of the retail CDs held by its customers, and 
these records would be submitted to the FDIC in order to make payments 
on deposit insurance to the retail CD holders.
Sweep Deposits
    Third parties (including investment companies acting on behalf 
their clients) that sweep client funds into deposit accounts at IDIs 
are deposit brokers. As a result, the sweep deposits placed by these 
third parties are brokered deposits unless the third party meets one of 
the exceptions to the definition of ``deposit broker''. In 2005, FDIC 
staff issued an advisory opinion that took the view that a brokerage 
firm placing idle client funds into deposit accounts at its affiliate 
IDI, under certain circumstances, meets the ``primary

[[Page 2369]]

purpose'' exception.\17\ Thus, the deposits placed on behalf of their 
clients would not be brokered deposits.
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    \17\ See FDIC Advisory Opinion No. 05-02 (2005).
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    As of September 30, 2018, 28 insured depository institutions have 
indicated to the FDIC that they receive funds swept from an affiliated 
broker dealer under conditions that FDIC staff have indicated would 
support the affiliate being viewed as meeting the ``primary purpose'' 
exception to the ``deposit broker'' definition. Each of these insured 
depository institutions provides monthly reports to the FDIC of the 
monthly average of the swept funds as of month end. As of September 30, 
2018, these 28 insured depository institutions reported $724 billion as 
the average amount of funds swept from the institutions' affiliated 
broker dealers for September 2018.
    Thus, as of September 30, 2018, the reported brokered deposits of 
$986 billion, which includes brokered CDs and broker dealer sweeps to 
unaffiliated insured depository institutions, when combined with the 
average monthly balance of funds that broker dealers sweep to 
affiliated institutions for September of $724 billion result in a 
combined amount of $1.710 trillion, which represents 14 percent of the 
$12.3 trillion in industry domestic deposits for that date.
Reciprocal Deposits
    Reciprocal deposit arrangements are based upon a network of IDIs 
that place funds at other participating banks in order for depositors 
to receive insurance coverage for the entire amount of their deposits. 
Because reciprocal arrangements can be complex, and involve numerous 
banks, they are often managed by a third-party sponsor. As a result, 
all deposits placed through this arrangement have historically been 
viewed as brokered deposits.
    On May 24, 2018, the Economic Growth, Regulatory Reform, and 
Consumer Protection Act took effect, allowing certain banks to except a 
limited amount of reciprocal deposits (as defined by the Act) from 
brokered deposits. Under the reciprocal deposit exception, well-
capitalized and well-rated institutions are not required to treat such 
reciprocal deposits as brokered deposits up to the lesser of 20 percent 
of its total liabilities, or $5 billion. Institutions that are not both 
well capitalized and well rated may also exclude reciprocal deposits 
from their brokered deposits under certain circumstances.
    The immediate result of this Act has significantly reduced the 
percentage of reciprocal deposits that are classified as brokered 
deposits. As of March 30, 2018, the last reporting quarter before the 
Act took effect, reciprocal deposits of $48.5 billion were reported. As 
of June 30, 2018, the first quarter end after the Act took effect, 
brokered reciprocal deposits had fallen to $17.1 billion. As of 
September 30, 2018, brokered reciprocal deposits had fallen to $13.7 
billion. For banks with assets less than $1 billion, their percentage 
of reciprocal deposits as a percent of brokered deposits declined from 
33.7 percent on March 31, 2018, to 15.4 percent on June 30, 2018 and, 
11.5 percent on September 30, 2018.
Listing Service Deposits
    Deposits whose placement at insured depository institutions are 
facilitated, in a passive manner, by deposit listing services have not 
been reported as brokered deposits. However, since 2011, such deposits 
have been reported on banks' Call Reports. As of September 30, 2018, 
insured depository institutions reported holding $69.6 billion in 
listing service deposits that are not reported as brokered deposits, 
which amounted to 0.6 percent of industry domestic deposits. One 
quarter of insured depository institutions held non-brokered listing 
service deposits as of September 30, 2018.
    As of September 30, 2018, 22 institutions were not well capitalized 
for PCA purposes. Of these institutions, 13 institutions held non-
brokered listing service deposits, for which the ratio of non-brokered 
listing service deposits to domestic deposits was 3.6 percent, while 
the ratio for the 1,356 well-rated institutions holding such deposits 
was 2.9 percent. Among insured depository institutions with non-
brokered listing service deposits, the share of non-brokered listing 
service deposits to domestic deposits has declined from a median of 4.6 
percent on September 30, 2011 to 2.9 percent as of September 30, 2018.
FDIC Studies That Discuss Brokered Deposits
    In the wake of the recent financial crisis, the Dodd-Frank Act 
directed the FDIC to conduct a study of core and brokered deposits, 
which the FDIC completed in July 2011. Recently the FDIC updated its 
analysis with data through the end of 2017. The results of that 
analysis confirm the previous findings of the 2011 study and can be 
found in Appendix 2.
    The research provided in the study shows that higher brokered 
deposit use is associated with higher probability of bank failure and 
higher insurance fund loss rates. Banks with higher levels of brokered 
deposits are also, in general, more costly to the DIF when they fail. 
The study also found that, on average, brokered deposits are correlated 
with higher levels of asset growth, higher levels of nonperforming 
loans, and a lower proportion of core deposit funding. FDIC's study 
also describes the three characteristics of brokered deposits that have 
posed risk to the DIF:
    1. Rapid growth--the extent to which deposits can be gathered 
quickly and used imprudently to expand risky assets or investments.
    2. Volatility--the extent to which deposits might flee if the 
institution becomes troubled or the customer finds a more appealing 
interest rate or terms elsewhere. Volatility tends to be also be 
mitigated somewhat by deposit insurance, as insured depositors have 
less incentive to flee a problem situation.
    3. Franchise Value--the extent to which deposits will be attractive 
to the purchasers of failed banks, and therefore not contribute to 
losses to the DIF.
    In December 2017, the FDIC published Crisis and Response: An FDIC 
History, 2008-2013.\18\ The history shows that failures and downgrades 
were highly correlated with reliance on brokered deposits and other 
wholesale funding sources.\19\ Generally speaking, failures were more 
concentrated among banks that made relatively greater use of brokered 
deposits and other wholesale funding sources.
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    \18\ Federal Deposit Insurance Corp., Crisis and Response: An 
FDIC History, 2008-2013 (2017), available at: https://www.fdic.gov/bank/historical/crisis/crisis-complete.pdf.
    \19\ In addition to brokered deposits, wholesale funding 
includes federal funds purchased, securities sold under repurchase 
agreements, and other borrowed money.
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    The history noted that, although the use of brokered deposits and 
other wholesale funding sources within a sound liquidity management 
program is not in itself a risky practice, significant reliance on 
wholesale funds may reflect a decision that an institution has made to 
grow its business more aggressively. On the liability side, the history 
indicated that if the institution comes under stress, wholesale 
counterparties may be more apt to withdraw funding or demand additional 
collateral.
    In addition to these publications, the following reports prepared 
by the Inspectors General of the federal banking agencies have detailed 
how brokered deposits were sometimes used by failed banks in the most 
recent crisis. These reports include the following:

<bullet> Safety and Soundness: Analysis of Bank Failures Reviewed by 
the

[[Page 2370]]

Department of the Treasury Office of Inspector General, OIG-16-052, 
August 15, 2016
<bullet> Summary Analysis of Failed Bank Reviews, Board of Governors of 
the Federal Reserve System, Office of Inspector General, September 2011
<bullet> Follow Up Audit of FDIC Supervision Program Enhancements, FDIC 
Office of Inspector General, Report No. MLR-11-010, December 2011

    In these reports, brokered deposits were most commonly cited as a 
contributor to problems at troubled and failed institutions, largely by 
allowing institutions with concentrations in poorly underwritten and 
administered commercial real estate loans, including acquisition, 
construction, and development loans (ADC) or other risky assets, to 
grow rapidly. Institutions that failed were typically subject to the 
brokered deposit restrictions and interest rate restrictions before 
failure because their capital levels deteriorated to below well 
capitalized. However, for those institutions that failed and still had 
brokered deposits at the time of failure, either the acquirer did not 
want the brokered deposits or did not pay a premium for them, either of 
which increases the cost to the DIF.
Brokered Deposits in Bank Failures 2007-2017
    The FDIC and the DIF were significantly affected by the previous 
financial crisis between 2007 and 2017. During this time, excluding 
Washington Mutual, 530 banks failed and were placed in FDIC 
receivership and, as of December 31, 2017, the estimated loss to the 
DIF for these institutions is $74.4 billion.
    Based upon regulatory reporting data, 47 institutions that failed 
relied heavily on brokered deposits and caused losses to the DIF that 
triggered material loss reviews. These 47 institutions held total 
assets representing 13 percent of the $703.9 billion in aggregate total 
assets of the 530 failed institutions, but accounted for $28.4 billion 
in estimated losses to the DIF, representing 38 percent of the $74.4 
billion in all DIF estimated losses for that same period.\20\
---------------------------------------------------------------------------

    \20\ The estimated loss data is as of November 26, 2018, 
available at: https://www5.fdic.gov/hsob/hsobRpt.asp.
---------------------------------------------------------------------------

    For example, the largest of these 47 institutions was IndyMac Bank, 
F.S.B., which failed on July 11, 2008. As of December 31, 2017, the 
estimated loss to the DIF for IndyMac, is $12.3 billion, representing 
40 percent of IndyMac's $30.7 billion in total assets at failure and 
approximately 16.5 percent of the total $74.4 billion in estimated 
losses to the DIF from bank failures between 2007 and 2017. In its last 
Thrift Financial Report (``TFR'') filed prior to failure, as of March 
30, 2008, IndyMac reported brokered deposits of $5.5 billion, which 
represented 28.98 percent of the institution's $18.9 billion in total 
deposits.\21\ In its TFR filed for the 4th quarter of 2005, 
approximately 12 quarters before the institution failed, IndyMac 
reported $1.4 billion in brokered deposits, representing 18.4 percent 
of its then $7.4 billion in total deposits. This data suggests that 
IndyMac accelerated its use of brokered deposits as its problems 
mounted.\22\
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    \21\ Of the $5.4 billion in brokered deposits that IndyMac 
reported on it Call Report for March 31, 2008, 98.42 percent were in 
brokered certificates of deposits documented as master certificates 
of deposits issued in the name of CEDE & Co, a subsidiary of DTC, as 
sub-custodian for deposit brokers.
    \22\ See Safety and Soundness: Material Loss Review of IndyMac 
Bank, FSB, United States Department of Treasury, Office of Inspector 
General, February 26, 2009 https://www.treasury.gov/about/organizational-structure/ig/Documents/oig09032.pdf.
---------------------------------------------------------------------------

    Another, more pronounced, example is ANB Financial National 
Association (ANB Financial), which failed on May 9, 2008. As of 
November 26, 2018, the estimated loss to the DIF for ANB Financial is 
$1.029 billion, representing 54 percent of the institution's $1.89 
billion in total assets at failure. In its Call Report filed prior to 
failure, i.e., as of March 30, 2008, ANB Financial reported brokered 
deposits of $1.578 billion, which represented 86.96 percent of the 
institution's $1.815 billion in total deposits. In the Call Report 
filed for the 4th quarter of 2005, approximately 12 quarters before the 
institution failed, ANB Financial reported $256.8 million in brokered 
deposits, representing 50.46 percent of its then $508 million in total 
deposits.\23\ The brokered deposits remaining at failure for both 
IndyMac and ANB's brokered deposits were master CDs issued in the name 
of DTC as sub-custodian for deposit brokers, which were the primary 
source for the remaining brokered deposits at failure for most of the 
other 34 institutions referenced above.
---------------------------------------------------------------------------

    \23\ See Safety and Soundness: Material Loss Review of ANB 
Financial National Association, United States Department of 
Treasury, Office of Inspector General, November 28, 2008 https://www.treasury.gov/about/organizational-structure/ig/Documents/oig09013.pdf
---------------------------------------------------------------------------

Brokered Deposits and Assessments
    The FDIC has amended its assessment regulations to address the 
risks to the DIF associated with brokered deposits. For small banks 
(generally, IDIs with less than $10 billion in total assets), brokered 
deposits can increase a bank's assessment rate if the bank's ratio of 
brokered deposits to total assets exceeds 10 percent.\24\ The brokered 
deposit ratio is one of several financial measures used to determine 
assessment rates for small banks. For new small banks in Risk 
Categories II, III and IV, and large and highly complex institutions 
that are not well capitalized, or that are not CAMELS composite 1- or 
2-rated, brokered deposits can increase a bank's assessment rate 
through the brokered deposit adjustment.\25\ Under the adjustment, a 
bank's assessment will increase if its ratio of brokered deposits to 
domestic deposits is greater than 10 percent.
---------------------------------------------------------------------------

    \24\ For banks that are well capitalized and well rated, 
reciprocal deposits that are treated as brokered deposits are 
deducted from brokered deposits for purposes of the brokered deposit 
ratio. See 12 CFR 327.16(a).
    \25\ See 12 CFR 327.16(e)(3).
---------------------------------------------------------------------------

C. Brokered Deposit Issues

    As noted above, Section 29 does not explicitly define the term 
``brokered deposit.'' Restrictions on brokered deposits are tied to the 
statutory definition of ``deposit broker'' that Congress adopted in 
1989 as part of the legislative response to the bank and thrift crisis. 
That definition includes dealers in the brokered CD market, and broker 
dealers that sweep customer funds to unaffiliated insured depository 
institutions which, when combined, represent over 90% of reported 
brokered deposits according to industry sources as discussed more fully 
above. Therefore, based on those same sources, the interpretive issues 
tend to relate to a small segment of reported brokered deposits.
    Determining what constitutes a deposit broker, and thus a brokered 
deposit, is very fact-specific and requires a close review of the 
arrangement, the documents governing the arrangement, and the third 
party's remuneration, among other things. Given the wide, and evolving, 
variety of third-party arrangements, FDIC staff review them on a case-
by-case basis, applying the statutory provisions to the facts and 
circumstances presented. Staff interpretations are typically documented 
in Advisory Opinions.\26\ In addition, on June 30, 2016, the FDIC 
issued, after soliciting comment, an updated set of Frequently Asked 
Questions,\27\ that compiles information

[[Page 2371]]

about the law, regulation, and FDIC staff interpretations in a single 
online location.
---------------------------------------------------------------------------

    \26\ FDIC Staff Advisory Opinions are available at: https://www.fdic.gov/regulations/laws/rules/index.html.
    \27\ See Identifying, Accepting, and Reporting Brokered 
Deposits: Frequently Asked Questions (rev. Jul 14, 2016). An initial 
set of Frequently Asked Questions was issued in January 2015, but 
without notice and comment at that time.
---------------------------------------------------------------------------

    The FDIC continues to receive inquiries, and in recent years, FDIC 
staff has been asked about the application of the ``deposit broker'' 
definition, and its statutory and regulatory exceptions, to new types 
of third parties that are involved in placing or facilitating the 
placement of third-party funds at IDIs. Many of these questions relate 
to advancements in technology, and new business practices and products 
that IDIs might utilize to offer services to customers and also to 
gather deposits. The inherent challenge often is to distinguish between 
third party service providers to the IDI and third parties that are 
engaged in the business of placing or facilitating the placement of 
deposits, albeit using updated technology.
    Generally, in determining whether deposits placed through these new 
deposit placement arrangements are brokered, staff has looked to 
precedents involving the definition of ``deposit broker'' and has 
attempted to consistently apply that analysis to these new products. If 
a third party is placing funds on behalf of itself, the funds are not 
brokered. If a third party is in the business of either (1) placing 
funds, or (2) facilitating the placement of funds--of another third-
party (such as its customers)--then it meets the definition of 
``deposit broker'' and the deposits are brokered, unless an exception 
applies.
    Below is a discussion of a few of the most typical issues for which 
questions have arisen, organized in the context of the definitions and 
exceptions.
    The FDI Act defines ``deposit broker'' to mean:
    (A) 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; \28\ and
---------------------------------------------------------------------------

    \28\ The second phrase in FDI Act section 29(g)(1)(A) provides 
that a ``deposit broker'' includes, ``any person engaged in . . . 
the business of placing deposits with insured depository 
institutions for the purpose of selling interests in those deposits 
to third parties.'' This clause appears to reference the practice 
involving master certificates of deposits issued to deposit brokers 
who, in turn, issue retail CDs in denominations of $1,000 to their 
retail customers. Industry participants have previously informed the 
FDIC that the practice of issuing master certificates of deposit 
from which smaller retail CDs are issued dates back to the early 
1980s. 12 U.S.C. 1831f(g)(1)(A).
    In a 1983 advanced notice of proposed rulemaking that preceded 
the 1984 final rule, the FDIC and FHLBB described the underlying 
market practice:
    CD Participations. Some brokers engage in the practice of 
``participating certificates of deposit to their customers. Under 
this arrangement a broker-dealer purchases a certificate of deposit 
issued by an insured institution and sells interests in it to 
customers. Upon sale of the participations in the deposit to its 
customer, the broker so informs the issuing institution and requests 
that the deposits be registered in its own name as nominee for 
others. The broker's records, in turn, reflect the ownership 
interest of each customer in the deposit. A CD participation program 
results in a ``flow-through'' of insurance coverage to each owner of 
the deposit. The ownership interest of each participant in the 
deposit is added to the individually owned deposits held by the 
participant at the same institution and the total is insured to a 
maximum of $100,000, provided the proper recordkeeping requirements 
are maintained.
     48 FR 50339 (November 1, 1983).
---------------------------------------------------------------------------

    (B) an agent or trustee who establishes a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan.'' \29\
---------------------------------------------------------------------------

    \29\ 12 U.S.C. 1831f(g)(1); 12 CFR 337.6(a)(5(i). As stated 
above, section 29(g)(1)(B) provides that ``deposit broker'' 
includes: ``An agent or trustee who establishes a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan.'' The preamble to the 1984 FDIC/FHLBB final rule, provided 
background as to what this language was intended to address:
    Certificates of deposit held in trust for bondholders under 
``loans-to-lenders'' or industrial development bond (``IDB'') 
programs are covered by the final rule. These programs entail a 
transaction where the proceeds of an IDB issuance are placed with an 
insured institution, in exchange for a certificate of deposit, to 
fund a designated project. Because of the trust arrangement 
involved, under the Agencies' current insurance coverage rules each 
bondholder owns an insured interest in the deposit up to $100,000 
and the deposit, therefore, may be fully insured by either the FDIC 
or the FSLIC.
     49 FR 13003, 13010 (April 2, 1984).
---------------------------------------------------------------------------

1. Engaged in the Business of Placing Deposits or Facilitating the 
Placement of Deposits
    The first phrase of FDI Act section 29(g)(1)(A), defines a deposit 
broker as, ``any person engaged in the business of placing deposits, or 
facilitating the placement of deposits, of third parties with insured 
depository institutions.'' \30\ In evaluating whether certain third 
parties comport with the statutory definition of ``deposit broker,'' 
and being ``engaged in the business of placing deposits, or 
facilitating the placement of deposits,'' staff at the FDIC reviews 
every arrangement on a case-by-case basis considering the following 
factors:
---------------------------------------------------------------------------

    \30\ 12 U.S.C. 1831f(g)(1)(A).
---------------------------------------------------------------------------

    [cir] Whether the third party receives fees from the insured 
depository institution that are based (in whole or in part) on the 
amount of deposits or the number of deposit accounts.
    [cir] Whether the fees can be justified as compensation for 
administrative services (such as recordkeeping) or other work performed 
by the third party for the insured depository institution (as opposed 
to compensation for bringing deposits to the insured depository 
institution).
    [cir] Whether the third party's deposit placement activities, if 
any, is directed at the general public as opposed to being directed at 
members (or ``affinity groups'') or clients.
    [cir] Whether there is a formal or contractual agreement between 
the insured depository institution and the third party (e.g., referring 
or marketing entity) to place or steer deposits to certain insured 
depository institutions.
    [cir] Whether the third party is given access to the depositor's 
account, or will continue to be involved in the relationship between 
the depositor and the insured depository institution.
2. Exclusions From the ``Deposit Broker'' Definition
    The statutory ``deposit broker'' definition excludes the following:
    (A) An insured depository institution, with respect to funds placed 
with that depository institution;
    (B) An employee of an insured depository institution, with respect 
to funds placed with the employing depository institution;
    (C) A trust department of an insured depository institution, if the 
trust in question has not been established for the primary purpose of 
placing funds with insured depository institutions;
    (D) The trustee of a pension or other employee benefit plan, with 
respect to funds of the plan;
    (E) A person acting as a plan administrator or an investment 
adviser in connection with a pension plan or other employee benefit 
plan provided that that person is performing managerial functions with 
respect to the plan;
    (F) The trustee of a testamentary account;
    (G) The trustee of an irrevocable trust (other than one described 
in paragraph (1)(B)), as long as the trust in question has not been 
established for the primary purpose of placing funds with insured 
depository institutions;
    (H) A trustee or custodian of a pension or profit-sharing plan 
qualified under section 401(d) or 403(a) of Title 26; or
    (I) An agent or nominee whose primary purpose is not the placement 
of funds with depository institutions.\31\
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 1831f(g)(2).
---------------------------------------------------------------------------

    In 1992, the FDIC incorporated in its regulations the list of 
statutory exceptions to the ``deposit broker''

[[Page 2372]]

definition and added as an additional exception, ``an insured 
depository institution acting as an intermediary or agent of a U.S. 
government department or agency for a government sponsored minority or 
women-owned depository institution.'' \32\
---------------------------------------------------------------------------

    \32\ 12 CFR 337.6(a)(5)(ii)(J). As provided earlier, the FDIC 
added this exception in response to comments submitted in response 
to a 1992 notice of proposed regulation.
---------------------------------------------------------------------------

(a) IDI Exception
    The statute provides an exception for an IDI with respect to funds 
placed with that IDI. Staff notes that based on the plain language of 
the statute, staff has consistently applied this exception strictly to 
the IDI itself and not to separately incorporated legal entities such 
as subsidiaries or other affiliates. One challenging issue relates to 
wholly-owned subsidiaries that place deposits under an exclusive 
relationship with the parent IDI. With regard to wholly-owned 
subsidiaries, for some purposes the subsidiary is treated as part of 
the parent IDI (e.g., certain financial reporting); whereas for other 
purposes--such as under the Bank Merger Act and for receivership 
purposes--they are treated separately.
(b) Employee Exception
    Section 29(g)(2)(B) of the FDI Act provides that ``deposit broker'' 
does not include ``an employee of an insured depository institution, 
with respect to funds placed with the employing depository 
institution'' (employee exception). The employee exception recognizes 
that banks are corporate entities that operate through the natural 
persons they employ.
    To address concerns that the employee exception could be used to 
evade the deposit broker definition, the term ``employee'' is defined 
for purposes of section 29, as any employee:
    1. Who is employed exclusively by the insured depository 
institution;
    2. Whose compensation is primarily in the form of a salary;
    3. Who does not share such employee's compensation with a deposit 
broker;
    4. Whose office space or place of business is used exclusively for 
the benefit of the insured depository institution which employs such 
individual.\33\
---------------------------------------------------------------------------

    \33\ 12 U.S.C. 1831f(g)(4).
---------------------------------------------------------------------------

    Particularly after the passage of the Gramm-Leach-Bliley Act and 
the permissibility of additional relationships among affiliated 
entities, FDIC staff has dealt with an increase in questions about IDI 
employees who also have some form of contractual relationship with a 
third party, usually an affiliate of the IDI. In addition, FDIC staff 
has informally addressed questions related to the use of premises that 
are shared by the IDI and an affiliate.
(c) Pension or Other Employee Benefit Plans
    Section 29(g)(2)(D) and (E) exclude from the deposit broker 
definition, trustees of pension and other employee benefit plans with 
respect to funds in the plan, and administrators or investment advisors 
provided that the person is performing managerial functions with 
respect to the plan.\34\ Section 29(g)(2)(H) excludes a trustee or 
custodian of a pension or profit-sharing plan under sections 401(d) or 
403(a) of the Internal Revenue Code.\35\
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 1831f(g)(2)(D) and (E).
    \35\ 12 U.S.C. 1831f(g)(2)(H).
---------------------------------------------------------------------------

    Individual retirement accounts (IRAs) are retirement accounts set 
up outside of a pension plan or employee benefit plan and thus are not 
expressly covered by these exceptions. Certain non-retirement savings 
plans are also granted tax-favored status under the Internal Revenue 
Code, such as 529 savings plans for higher education tuition and health 
savings accounts but are not expressly covered by the exception. If a 
bank's trust department serves as the trustee or custodian of such 
plans, and the trust has not been established for the primary purpose 
of placing funds with IDIs, the plans' deposits would not be treated as 
brokered deposits because of the exception for trust departments. FDIC 
staff has received a number of questions about this exception.
(d) Primary Purpose Exception
    The primary purpose exception applies to ``an agent or nominee 
whose primary purpose is not the placement of funds with depository 
institutions.'' \36\ In particular, the primary purpose exception 
applies to a third party when that third party is acting as agent/
nominee for the depositor. Staff's evaluation of a third party's 
primary purpose in placing deposits has been in the context of that 
particular agent/principal relationship.
---------------------------------------------------------------------------

    \36\ 12 U.S.C. 1831f(g)(2)(I).
---------------------------------------------------------------------------

    In interpreting what it means for a third-party agent to act 
pursuant to a ``primary purpose,'' staff has generally analyzed whether 
placing--or facilitating the placement--of deposits of its customers/
clients when acting as agent for those customers/clients, is for a 
substantial purpose other than to provide (1) deposit insurance, or (2) 
a deposit-placement service. In analyzing this principle, staff has 
considered whether the deposit-placement activity is incidental to some 
other purpose.
    In determining whether a deposit-placement activity is incidental 
to some other purpose, staff reviews the reason or intent of the third 
party when acting as agent or nominee in placing the deposits, as well 
as other factors which might indicate whether the third party agent is 
incentivized to place deposits at the IDI. Factors that staff has 
considered include the existence and structure of fee arrangements and 
of any programmatic relationship between the third party and the 
insured depository institution.
    <bullet> Fees:
    [cir] Whether the entity placing deposits receives fees from the 
insured depository institution that are based (directly or indirectly) 
on the amount of deposits or the number of deposit accounts opened.
    [cir] Whether the fees can be justified as compensation for 
recordkeeping or other work performed by the third party for the IDI 
(as opposed to compensation for bringing deposits to the IDI).
    <bullet> Programmatic relationship:
    [cir] Whether there is a formal or contractual agreement between 
IDIs and the placing/referring entity to place or steer deposits to 
certain IDIs.
    Importantly, when interpreting the applicability of the primary 
purpose exception, staff analyzes the deposit placement arrangement, 
including the underlying agreements, between the third party agent, the 
depositor, and the IDI to determine the primary purpose of the agent. 
The exception applies to agents or nominees, which by definition, act 
on behalf of principals. When acting in that capacity, the third party 
agent/nominee is limited to the principal's goals and objectives. Staff 
does not solely rely upon the business purpose of the third party 
involved. Staff has not considered the size of the third party or the 
amount or percentage of revenue that the deposit-placement activity 
generates.
Primary Purpose Exception for Affiliated Sweeps
    Beginning in 1999, the FDIC became aware of broker dealers offering 
their brokerage customers an automatic sweep program by which 
customers' idle funds were swept to affiliated insured depository 
institutions.
    In 2005, the FDIC's General Counsel issued a staff opinion 
indicating FDIC staff view that, when certain conditions are observed, 
the primary purpose of a broker dealer in sweeping customer funds into 
deposit accounts at its affiliated IDI is to facilitate the

[[Page 2373]]

customers' purchase and sale of securities. Among the conditions are 
that funds are not swept to a time deposit account and do not exceed 10 
percent of the total assets handled by the affiliated broker dealer. 
The insured depository institution is permitted to pay fees to the 
affiliated broker dealer but the fees must be flat fees (i.e., per 
account or per customer fees) representing payment for recordkeeping or 
administrative services and not for the placement of deposits. The fee 
arrangements must satisfy Section 23B of the Federal Reserve Act.\37\
---------------------------------------------------------------------------

    \37\ See 12 U.S.C. 371c-1.
---------------------------------------------------------------------------

(e) Other Issues
    Deposit Listing Services. Deposit listing services come in 
different forms, but all connect those seeking to place a deposit with 
those seeking a deposit by listing the deposit rates of IDIs. 
Depositors use listing services to find the best rate available for a 
given deposit type and, in the case of a CD, a term. Since the statute 
was first enacted, staff has distinguished between a company that 
compiles information about interest rates in passive manner versus a 
deposit broker that is in the business of placing or facilitating the 
placement of deposits. A particular company can advertise itself as a 
listing service as well as meet the definition of a ``deposit broker.'' 
In recognition of this possibility, staff at the FDIC developed 
criteria for analyzing whether a ``listing service'' acts as a 
``deposit broker.'' \38\
---------------------------------------------------------------------------

    \38\ See generally, FDIC Staff Adv. Op. Nos. 90-24 (June 12, 
1990); 92-50 (July 24, 1992); 02-04 (November 13, 2002).
---------------------------------------------------------------------------

    In 2004 FDIC staff provided criteria to assist the industry in 
analyzing whether a deposit listing services would be viewed as a 
deposit broker. In particular, staff advisory opinions indicate that a 
listing service is not viewed as a deposit broker if it meets the 
following criteria:
    (1) The person or entity providing the listing service is 
compensated solely by means of subscription fees (i.e., the fees paid 
by subscribers as payment for their opportunity to see the rates 
gathered by the listing service) and/or listing fees (i.e., the fees 
paid by depository institutions as payment for their opportunity to 
list or ``post'' their rates). The listing service does not require a 
depository institution to pay for other services offered by the listing 
service or its affiliates as a condition precedent to being listed;
    (2) The fees paid by depository institutions are flat fees: They 
are not calculated on the basis of the number or dollar amount of 
deposits accepted by the depository institution as a result of the 
listing or ``posting'' of the depository institution's rates;
    (3) In exchange for these fees, the listing service performs no 
services except: (A) The gathering and transmission of information 
concerning the availability of deposits; and/or (B) the transmission of 
messages between depositors and depository institutions (including 
purchase orders and trade confirmations). In publishing or displaying 
information about depository institutions, the listing service must not 
attempt to steer funds toward particular institutions (except that the 
listing service may rank institutions according to interest rates and 
also may exclude institutions that do not pay the listing fee). 
Similarly, in any communications with depositors or potential 
depositors, the listing service must not attempt to steer funds toward 
particular institutions; and
    (4) The listing service is not involved in placing deposits. Any 
funds to be invested in deposit accounts are remitted directly by the 
depositor to the insured depository institution and not, directly or 
indirectly, by or through the listing service.\39\
---------------------------------------------------------------------------

    \39\ See FDIC Staff Advisory Opinion 04-04.
---------------------------------------------------------------------------

    In 2004, when staff last provided its views on listing services, 
listing services had already evolved into internet exchange platforms 
with automated order entry and confirmation services. At the time, 
however, listing service sites did not provide any advice to 
prospective depositors, and there was only a flat subscription fee paid 
by both the banks and those seeking to view the posted rates. Today, 
the FDIC has observed that certain listing service websites provide 
additional services. For example, based upon information gathered from 
bankers interested in participating in listing services, the FDIC notes 
that some listing services appear to:
    [cir] Offer advice to banks on liability and funds management and 
regulatory compliance screening for subscribing banks.
    [cir] Send customer information (on behalf of the prospective 
depositors) directly to the banks that are listing rates.
    [cir] Charge a fee to banks based upon the asset size of the bank, 
rather than a flat subscription fee.
    [cir] Post rates of ``featured'' or ``preferred'' vendors at the 
very top of its rate board.
    The FDIC notes the ambiguity over how these new listing service 
features could be applied in light of the 2004 criteria. The features 
above seem to indicate that some listing services are no longer acting 
in a passive capacity but are instead steering deposits to particular 
institutions or are otherwise providing services that meet the 
definition of ``deposit broker.''
    Accounting or related software products that contemplate the bank 
using the same software. Some companies provide accounting and other 
administrative support via software services to clients. These 
companies, on behalf of their clients, place deposits at either one or 
a group of preferred banks. Because the companies place deposits at 
IDIs, the software companies meet the definition of ``deposit broker'' 
(unless they meet one of the exceptions). The primary purpose exception 
applies to an agent or nominee whose primary purpose is not the 
placement of funds with depository institutions. Banks who receive 
deposits from software companies argue that the primary purpose of the 
software companies is to provide accounting services (e.g., bankruptcy 
management) and the placement of deposits is incidental to this 
purpose. In analyzing whether a particular arrangement meets the 
primary purpose arrangement, as noted above, staff currently reviews 
whether the placement (of third party funds) is for a substantial 
purpose other than to provide (1) deposit insurance, or (2) a deposit-
placement service. In previous cases that staff reviewed relating to 
accounting software products, staff has not distinguished between 
providing integrated accounting software and providing access to a 
deposit account that offers core banking functions (such as daily cash 
management). Moreover, in the previous arrangements that staff has 
reviewed, there is typically a contractual volume based fee being paid 
by the bank to the software company based upon the volume of deposits 
being placed. As a result, staff has viewed that the software companies 
are incentivized to place funds of prospective depositors at preferred 
banks because of the fees that the placement generates.
    Prepaid cards. Some companies operate general purpose prepaid card 
programs, in which prepaid cards are sold to members of the public 
through the assistance of a prepaid card company or a program manager. 
After collecting funds from the cardholders, sometimes at retail stores 
or directly from the card company, funds are placed into a custodial 
deposit account at an insured depository institution (sometimes with 
``pass-through'' deposit insurance coverage). The funds may be accessed 
by the cardholders through the

[[Page 2374]]

use of their cards. In regard to this scenario, staff at the FDIC has 
taken the position that the prepaid card company or the program manager 
likely qualifies as a ``deposit broker'' because it is a third party 
that is in the business of facilitating the placement of customer 
deposits at an insured depository institution. Some have argued that a 
particular prepaid card arrangement is covered by the ``primary purpose 
exception''--specifically, that the ``primary purpose'' of a prepaid 
card company (in establishing deposit accounts at an insured depository 
institution) is not to provide the cardholders with a deposit-placement 
service, but to enable the cardholders to make purchases through the 
interbank payment system. Staff at the FDIC has not distinguished 
between (1) acting with the purpose of placing deposits for other 
parties, and (2) acting with the purpose of enabling other parties to 
use deposits to make purchases. When funds are placed into demand 
deposit accounts (as in the case of custodial accounts used by prepaid 
card companies), the deposits will be available for withdrawals or 
transfers or spending. Thus, prepaid card companies have not been 
viewed as meeting the ``primary purpose'' exception.
    Software applications for personal use that involve funds being 
placed at an insured depository institution. Some applications provide 
customers the opportunity to link their existing bank accounts (and 
other accounts, such as credit cards, and 401k)--with software 
applications--in an effort to provide efficiencies in budgeting, bill-
paying, and opening up a new deposit account. In some cases, the 
application aggregates customer information based upon available 
account balances and spending patterns and provides that information to 
depository institutions to assist in targeting certain customers with 
financial products. Once the customer is targeted with a financial 
product, the customer may be transferred to the bank to open up the 
deposit account or the application may assist in transferring customer 
information to the bank for purposes of establishing the deposit 
account. The software provider may receive compensation from the 
financial institution based upon the referral. FDIC staff has received 
inquiries about whether various arrangements between software 
applications and IDIs should be viewed as brokered.

D. Interest Rate Restrictions

    As noted earlier, the purpose of Section 29 generally is to limit 
the acceptance or solicitation of certain deposits by insured 
depository institutions that are not well capitalized. This purpose is 
promoted through two means: (1) The prohibition against the acceptance 
of brokered deposits by depository institutions that are less than well 
capitalized (as described above); and (2) certain restrictions on the 
interest rates that may be paid by such institutions. In enacting 
section 29, Congress added the interest rate restrictions to prevent 
institutions from avoiding the prohibition against the acceptance of 
brokered deposits by soliciting deposits internally through ``money 
desk operations.'' Congress viewed the gathering of deposits by weaker 
institutions through either third-party brokers or ``money desk 
operations'' as potentially an unsafe or unsound practice.\40\ The FDIC 
has simplified the application of these restrictions through two 
rulemakings.
---------------------------------------------------------------------------

    \40\ See H.R. Conf. Rep. No. 101-222 at 402-403 (1989), 
reprinted in 1989 U.S.C.C.A.N. 432, 441-42.
---------------------------------------------------------------------------

    Under Section 29, well-capitalized institutions can pay any rate of 
interest on any deposit. However, the statute imposes different 
interest rate restrictions on different categories of insured 
depository institutions that are less than well capitalized. These 
categories are (1) adequately-capitalized institutions with waivers to 
accept brokered deposits (including reciprocal deposits excluded from 
being considered brokered deposits); \41\ (2) adequately-capitalized 
institutions without waivers to accept brokered deposits; \42\ and (3) 
undercapitalized institutions.\43\ The statutory restrictions for each 
category are described in detail below.
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 1831f(e).
    \42\ 12 U.S.C. 1831f(g)(3).
    \43\ 12 U.S.C. 1831f(h).
---------------------------------------------------------------------------

    Adequately-capitalized institutions with waivers to accept brokered 
deposits. Institutions in this category may not pay a rate of interest 
on deposits that ``significantly exceeds'' the following: ``(1) The 
rate paid on deposits of similar maturity in such institution's normal 
market area for deposits accepted in the institution's normal market 
area; or (2) the national rate paid on deposits of comparable maturity, 
as established by the [FDIC], for deposits accepted outside the 
institution's normal market area.'' \44\
---------------------------------------------------------------------------

    \44\ 12 U.S.C. 1831f(e).
---------------------------------------------------------------------------

    Adequately capitalized institutions without waivers to accept 
brokered deposits. In this category, institutions may not offer rates 
that ``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.'' \45\ For institutions in 
this category, the statute restricts interest rates in an indirect 
manner. Rather than simply setting forth an interest rate restriction 
for adequately capitalized institutions without waivers, as noted 
previously, the statute defines the term ``deposit broker'' to include 
``any insured depository institution that is not well capitalized . . . 
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.'' \46\ In other words, the depository institution itself is a 
``deposit broker'' if it offers rates significantly higher than the 
prevailing rates in its own ``normal market area.'' Without a waiver, 
the institution cannot accept deposits from a ``deposit broker.'' Thus, 
the institution cannot accept these deposits from itself. In this 
indirect manner, the statute prohibits institutions in this category 
from offering rates significantly higher than the prevailing rates in 
the institution's ``normal market area.''
---------------------------------------------------------------------------

    \45\ 12 U.S.C. 1831f(g)(3).
    \46\ Id.
---------------------------------------------------------------------------

    Undercapitalized institutions. In this category, institutions may 
not offer rates ``that are significantly higher than the prevailing 
rates of interest on insured deposits (1) in such institution's normal 
market areas; or (2) in the market area in which such deposits would 
otherwise be accepted.'' \47\
---------------------------------------------------------------------------

    \47\ 12 U.S.C. 1831f(h).
---------------------------------------------------------------------------

Rulemakings Related to Section 29's Interest Rate Restrictions
    The FDIC has implemented the interest rate restrictions under 
section 29 of the FDI Act through two rulemakings.\48\ Although the 
statute, as noted above, sets forth a basic framework, it does not 
provide certain key details, such as definitions for the terms--
``national rate,'' ``significantly exceeds,'' ``significantly higher,'' 
and ``market area.'' As a result, in 1992, the FDIC defined these key 
terms before updating the ``national rate'' and clarifying the rate 
restrictions again in 2009.
---------------------------------------------------------------------------

    \48\ See 57 FR 23933 (1992); 74 FR 26516 (2009).
---------------------------------------------------------------------------

    ``Significantly Exceeds.'' Through Section 337.6, the FDIC has 
provided that a rate of interest ``significantly exceeds'' another 
rate, or is ``significantly higher'' than another rate, if the first 
rate exceeds the second rate

[[Page 2375]]

by more than 75 basis points.\49\ In adopting this standard, the FDIC 
offered the following explanation: ``Based upon the FDIC's experience 
with the brokered deposit prohibitions to date, it is believed that 
this number will allow insured depository institutions subject to the 
interest rate ceilings . . . to compete for funds within markets, and 
yet constrain their ability to attract funds by paying rates 
significantly higher than prevailing rates.'' \50\ This interpretation 
of the statute has remained unchanged since the 1992 rulemaking.
---------------------------------------------------------------------------

    \49\ See 12 CFR 337.6(b)(2)(ii), (b)(3)(ii) and (b)(4). See 
also, 55 FR 39135 (1990) (FDIC's final rule that took the view that 
``significantly exceeds'' means more than 50 basis points. At the 
time, this was believed to be a reasonable compromise between the 
need to permit troubled institutions to compete on a reasonable 
basis in their market area and yet prevent such institutions from 
bidding excessively for an increased share of market-area deposits 
by paying excessive rates).
    \50\ 57 FR at 23939.
---------------------------------------------------------------------------

    ``Market Area.'' In Section 337.6, prior to the adoption of the 
2009 final rule, the term ``market area'' was defined as follows: ``A 
market area is any readily defined geographical area in which the rates 
offered by an one insured depository institution soliciting deposits in 
that area may affect the rates offered by other insured depository 
institutions in the same area.'' \51\ At the time, the FDIC reasoned 
that the market area will be determined on a case-by-case basis, based 
on the evident or likely impact of a depository institution's 
solicitation of deposits in a particular area, taking into account the 
means and media used and volume and sources of deposits resulting from 
such solicitation.\52\
---------------------------------------------------------------------------

    \51\ See 57 FR 23933 (1992) and 74 FR 26516 (2009).
    \52\ Id.
---------------------------------------------------------------------------

    The ``National Rate.'' In Section 337.6, as part of the 1992 
rulemaking, the ``national rate'' was defined as follows: ``(1) 120 
percent of the current yield on similar maturity U.S. Treasury 
obligations; or (2) In the case of any deposit at least half of which 
is uninsured, 130 percent of such applicable yield.'' \53\ In defining 
the ``national rate'' in this manner, the FDIC understood that the 
spread between Treasury securities and depository institution deposits 
can fluctuate substantially over time but relied upon the fact that 
such a definition is ``objective and simple to administer.'' \54\ By 
using percentages (120 percent or 130 percent of the yield on U.S. 
Treasury obligations) instead of a fixed number of basis points, the 
FDIC hoped to ``allow for greater flexibility should the spread to 
Treasury securities widen in a rising interest rate environment.'' In 
deciding not to rely on published deposit rates, the FDIC offered the 
following explanation: ``The FDIC believes this approach would not be 
timely because data on market rates must be available on a 
substantially current basis to achieve the intended purpose of this 
provision and permit institutions to avoid violations. At this time, 
the FDIC has determined not to tie the national rate to a private 
publication. The FDIC has not been able to establish that such 
published rates sufficiently cover the markets for deposits of 
different sizes and maturities.'' \55\
---------------------------------------------------------------------------

    \53\ 12 CFR 337.6(b)(2)(ii)(B).
    \54\ 57 FR 23933, 23938 (June 5, 1992).
    \55\ Id. at 23939.
---------------------------------------------------------------------------

2009 Rulemaking on the Interest Rate Restrictions
    For many years, the 1992 definition of ``national rate'' functioned 
well because rates on Treasury obligations tracked closely with rates 
on deposits. By 2009, however, the rates on certain Treasury 
obligations were low compared to deposit rates. Consequently, the 
``national rate'' as defined in the FDIC's regulations became 
artificially low. By setting a low rate, the FDIC's regulations 
required some insured depository institutions to offer unreasonably low 
rates on some deposits, thereby restricting access even to market-rate 
funding.
    As part of the 2009 rulemaking, the FDIC addressed two issues that 
developed after the 1992 rulemaking: (1) The obsolescence of the FDIC's 
1992 definition of the ``national rate''; and (2) the difficulty 
experienced by insured depository institutions and examiners in 
determining prevailing rates in its ``market areas.''
    In response to the first problem, the FDIC redefined the ``national 
rate'' as ``a simple average of rates paid by all insured depository 
institutions and branches for which data are available.'' As noted in 
the 2009 rulemaking, the updated ``national rate'' methodology 
represented an objective average and the exclusion of certain branches 
or offices was viewed by the FDIC, at the time, as contrary to 
providing a meaningful restriction on insured depository institutions 
that are not well capitalized.\56\
---------------------------------------------------------------------------

    \56\ See 74 FR 26516 (2009).
---------------------------------------------------------------------------

    In response to the second problem, the FDIC created a presumption 
that the prevailing rate in any market would be the national rate (as 
defined above). An insured depository institution could rebut this 
presumption by presenting evidence to the FDIC that the prevailing rate 
in a particular market is higher than the national rate. If the FDIC 
agreed with this evidence, the institution would be permitted to pay as 
much as 75 basis points above the local prevailing rate. In evaluating 
this evidence, the FDIC may use segmented market rate information (for 
example, evidence by State, county or MSA). Also, the FDIC may consider 
evidence as to the rates offered by credit unions but only if the 
insured depository institution competes directly with the credit unions 
in the particular market. Finally, the FDIC may consider evidence that 
the rates on certain deposit products differ from the rates on other 
products. For example, in a particular market, the rates on NOW 
accounts might differ from the rates on MMDAs. NOW accounts might be 
distinguished from MMDAs because the two types of accounts are subject 
to different legal requirements.\57\
---------------------------------------------------------------------------

    \57\ 12 CFR 337.6(f).
---------------------------------------------------------------------------

    Ultimately, the 2009 rulemaking simplified the approach of applying 
the rate restrictions and, importantly, has provided community banking 
institutions, that may not compete in the national deposit marketplace 
(e.g., listing services), the ability to offer competitive deposit 
rates in its local market area.
Additional Interest Rate Issues
    Since the FDIC's adoption of the 2009 rulemaking, federal funds 
rates stayed at historically low levels and only recently have begun to 
rise. In addition, institutions also have created new products that do 
not fit into the posted national rates and rate caps.
    Calculation of rates. Since the crisis that began in 2008, the 
``national rate'' has been relatively low due to the low interest rate 
environment. Moreover, because the national rate is an average for all 
banks and branches, the largest banks with large numbers of branches 
have had a disproportional effect on average interest rates. Even as 
other interest rates have begun to rise, the average has stayed low as 
the largest banks have been slow to increase interest rates on 
deposits.

[[Page 2376]]

[GRAPHIC] [TIFF OMITTED] TP06FE19.011

    New products. The FDIC has recently seen an increase in promotional 
deposit products and products with special features. These products and 
promotions are generally not compatible with the standard products 
included in the FDIC's published weekly national rate caps. An example 
of a product with a special feature is one that provides a one-time 
cash payment for opening up a deposit account or provides airline miles 
or other bonuses with specific deposit products. Such deposit products 
may have common maturities (or be demand accounts) and as a result they 
may be included as part of the ``national rate'' calculation without 
acknowledgement of the up-front payment or other bonus received in 
place of interest paid on the deposit.
    Special features. Some institutions are also offering deposit 
products with special features that may raise questions about how the 
rate cap should apply. Below are examples of three types of deposit 
products with special features:
    [cir] Step up rates. Certain deposit products have variable rate 
features that allow the interest rate to increase before the deposit 
matures. With these products, particularly time deposits with longer 
maturities, the institution could fall to less than well capitalized 
during the term of the deposit. As a result, and as the FDIC has seen 
in the past, an institution could pay a rate that exceeds the interest 
rate restrictions after the downgrade.
    [cir] Atypical maturities. Unusual maturity periods (for example, 
13 or 15 months instead of 12 or 18 months) make it difficult to 
compare with either national rates or prevailing local rates.
    [cir] Exceptionally long maturities for time deposits combined with 
penalty-free early withdrawal. In some cases, institutions have 
structured deposit products with exceptionally long maturities in order 
to extrapolate exceptionally high interest rates for the deposits 
coupled with withdrawal rights that are significantly shorter than the 
term of the deposit maturity (e.g., 7 day penalty period on a 5 year 
certificate of deposit).

III. Request for Comments

    The FDIC seeks comment on all aspects of its regulatory approach to 
brokered deposits and interest rate restrictions, and in particular the 
following:
    [cir] Are there ways the FDIC can improve its implementation of 
Section 29 of the FDI Act while continuing to protect the safety and 
soundness of the banking system? If so, how?

Brokered Deposits

    [cir] Are there types of deposits that are currently considered 
brokered that should not be considered brokered? If so, please explain 
why.
    [cir] Are there types of deposits that are currently not considered 
brokered that should be considered brokered? If so, please explain why.
    [cir] Are there specific changes that have occurred in the 
financial services industry since the brokered deposits regulation was 
adopted that the FDIC should be cognizant of as it reviews the 
regulation? If so, please explain.
    [cir] Do institutions currently have sufficient clarity regarding 
who is or is not a deposit broker and what is or is not a brokered 
deposit? Are there ways the FDIC can provide additional clarity through 
updates to the brokered deposits regulation, consistent with the 
statute and the policy considerations described above?
    [cir] Are there areas where changes might be warranted but could 
not be effectuated under the current statute? Are there any statutory 
changes that warrant consideration from Congress?
    [cir] Should the FDIC make changes to the Call Report instructions 
so that the agency can gather more granular information about types of 
brokered deposits?
    [cir] In general, the FDIC welcomes any additional data or market 
information related to brokered deposits, particularly related to those 
types of brokered deposits that are not specifically reported by 
institutions in their Call Reports (e.g., Master Certificates of 
Deposits held in the name

[[Page 2377]]

of DTC and deposits placed through unaffiliated sweep programs).
Interest Rate Restrictions
    [cir] Are there alternatives that the FDIC should consider in 
addressing Section 29's interest rate restrictions for less than well 
capitalized institutions?
    [cir] Should the methodology used to calculate the ``national 
rate'' be changed? If so, how?
    [cir] Should there remain a presumption that the prevailing rate in 
any ``market area'' is the national rate? If not, how should the FDIC 
define the ``normal market area''?
    [cir] Should the amount of the rate cap, currently 75 basis points 
over either the national rate or the prevailing market rate, be 
revised? If so, how?
    [cir] How should deposits with promotional or special features be 
treated with respect to the national rate or the prevailing market 
rate?
    [cir] How should the rates offered by internet-based or electronic 
commerce-based institutions be calculated?

Appendix 1

Descriptive Statistics on Core and Brokered Deposits

Core Deposits

    Core deposits are not defined by statute. Rather, they are defined 
for analytical and examination purposes in the Uniform Bank Performance 
Report (UBPR). Through 2010, the Federal Financial Institutions 
Examination Council (FFIEC) defined ``core deposits'' to include all 
demand and savings deposits, including money market deposit, NOW and 
ATS accounts, other savings deposits, and time deposits in amounts 
under $100,000.\58\ Under this definition, core deposits were 
equivalent to total domestic deposits less time deposits over $100,000 
and included insured brokered deposits. As of March 31, 2011, the 
definition was revised to reflect the permanent increase to FDIC 
deposit insurance coverage from $100,000 to $250,000 and to exclude 
insured brokered deposits from core deposits. This revision defines 
core deposits as the sum of demand deposits, all NOW and ATS accounts, 
MMDAs, other savings deposits and time deposits under $250,000, minus 
all brokered deposits under $250,000. For periods before March 2011, 
the definition was revised to the sum of demand deposits, all NOW and 
ATS accounts, MMDAs, other savings deposits and time deposits under 
$100,000, minus all brokered deposits under $100,000.
---------------------------------------------------------------------------

    \58\ An automatic transfer service account is a deposit or 
account of an individual or sole proprietorship on which the 
depository bank has reserved the right to require at least seven 
days' written notice prior to withdrawal or transfer of any funds in 
the account and from which, pursuant to written agreement arranged 
in advance between the reporting bank and the depositor, withdrawals 
may be made automatically through payment to the depository bank 
itself or through transfer of credit to a demand deposit or other 
account in order to cover checks or drafts drawn upon the bank or to 
maintain a specified balance in, or to make periodic transfers to, 
such other accounts.
---------------------------------------------------------------------------

    Historically, reliance on core deposits has varied by bank size. 
Banks with less than $1 billion in total assets generally have had the 
heaviest reliance on core deposits, and banks with $50 billion or more 
in total assets have had the least reliance on core deposits. Since 
2010, the ratio of core deposits to total assets has changed less for 
smaller banks than it has for larger banks. At year-end 2010, core 
deposits equaled 75 percent of total assets at banks with less than $1 
billion in assets, but only 47 percent for banks with $50 billion or 
more in total assets. By the third quarter of 2018, core deposits 
equaled 76 percent of total assets at banks with less than $1 billion 
in assets and 58 percent of at banks with $50 billion or more in total 
assets (See Chart 1.)
---------------------------------------------------------------------------

    \59\ Through 2010 core deposits include insured brokered 
deposits. Beginning in 2011, brokered deposits are excluded from 
core deposits.
[GRAPHIC] [TIFF OMITTED] TP06FE19.012

    Through mid-year 2009, almost all core deposits at community banks 
were estimated to be insured, but, at the end of third quarter 2009, 
when banks began reporting insured deposits at the then temporary 
insurance limit of $250,000, estimated insured deposits were greater 
than core deposits. Estimated insured deposits represented a smaller 
share of core deposits at the largest banks, as a result of their 
holdings of large uninsured demand deposits. At

[[Page 2378]]

September 30, 2010, for banks with assets over $50 billion, estimated 
insured deposits represented only 69 percent of core deposits, but, at 
March 31, 2011, after the coverage of all noninterest bearing 
transaction accounts over $250,000 was established temporarily under 
the Dodd-Frank Act, estimated insured deposits rose to 84 percent. (See 
Chart 2.)
---------------------------------------------------------------------------

    \60\ Through 2010 core deposits include insured brokered 
deposits. Beginning in 2011, brokered deposits are excluded from 
core deposits.
[GRAPHIC] [TIFF OMITTED] TP06FE19.013


    Note: From October 14, 2008 to December 31, 2010, domestic non-
interest bearing transaction accounts were guaranteed in full under 
the Transaction Account Guarantee Program (TAG), part of the FDIC's 
Temporary Liquidity Guarantee Program (TLGP). From December 31, 2010 
to December 31, 2012, the Dodd-Frank Act provided temporary 
unlimited deposit insurance coverage for non-interest bearing 
transaction accounts. These programs account for the observed shifts 
up and down in the Estimated Insured Deposits as a Share of ``Core'' 
---------------------------------------------------------------------------
Deposits shown in the chart during these periods.

    Effective with the March 31, 2011, UBPR, the FFIEC revised the 
definition of core deposits to take into account the increase in the 
deposit insurance limit to $250,000 under Dodd-Frank. The new 
definition includes time deposits up to $250,000 but excludes brokered 
deposits of any denomination. Using Call Report and Thrift Financial 
Report (TFR) data as of March 31, 2011, the new definition of core 
deposits added $24.9 billion (or 0.3 percent) to core deposits. 
However, the increase in core deposits, as the result of the new 
definition, occurred almost exclusively at smaller banks and thrifts, 
since the decrease in core deposits due to exclusion of brokered 
deposits tended to be less than the increase in core deposits due to 
inclusion of time deposits within the new threshold of up to $250,000. 
Core deposits at banks and thrifts with assets under $10 billion 
increased by $143.2 billion under the new definition, but core deposits 
at banks with assets of at least $10 billion declined by $118.3 
billion. Large credit card banks and specialty lenders with affiliated 
brokerage firms were among those banks with the largest decline in core 
deposits as a result of the revised definition.

Brokered Deposits

    FDIC-insured banks report total brokered deposits and the amount of 
brokered deposits under the insurance limit on their Call Reports and 
TFRs.

[[Page 2379]]

Before 2010, brokered deposits were reported as insured, as any 
deposits, up to the $100,000 threshold. Beginning March 31, 2010, the 
threshold for reporting insured brokered deposits on Call Reports and 
TFRs was increased to $250,000.\61\ Insured depository institutions 
also began reporting total reciprocal brokered deposits in their June 
30, 2009, Call Reports and TFRs. The Economic Growth, Regulatory 
Reform, and Consumer Protection Act, enacted on May 24, 2018, allows 
certain banks to except a limited amount of reciprocal deposits from 
brokered deposits.
---------------------------------------------------------------------------

    \61\ Certain brokered retirement accounts are included in 
insured brokered deposits.
---------------------------------------------------------------------------

    As of September 30, 2018, brokered deposits totaled $985.7 billion. 
Fewer than half of all FDIC-insured banks (2,221 banks, or 40.6 
percent) reported brokered deposits on their September 30, 2018, Call 
Reports. As of this date, brokered deposits made up 8.0 percent of 
industry domestic deposits, in contrast to second quarter 2009 when 
banks began reporting total reciprocal brokered deposits, brokered 
deposits accounted for 10.1 percent of industry domestic deposits.

                                       Brokered Deposits Held by Insured Depository Banks as of September 30, 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Number of
                                                           Total number     banks with    Total brokered  Share of total  Total domestic  Share of total
                    Asset size group                         of banks        brokered        deposits        brokered        deposits        domestic
                                                                             deposits       (billions)     deposits (%)                    deposits (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Under $1 Billion........................................           4,704           1,656          $31.92             3.2         $988.05             8.0
$1-10 Billion...........................................             635             439           90.16             9.1        1,349.56            11.0
$10-50 Billion..........................................              97              89          171.87            17.4        1,605.40            13.0
Over $50 Billion........................................              41              37          691.78            70.2        8,378.84            68.0
                                                         -----------------------------------------------------------------------------------------------
    All Banks...........................................           5,477           2,221          985.73  ..............       12,321.84  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Brokered deposits typically make up a lower share of deposit 
funding for small banks compared to banks with $10 billion or more in 
assets. In aggregate, banks with assets between $10 billion and $50 
billion reported brokered deposits equal to 10.7 percent of their 
domestic deposits as of September 30, 2018, the highest of any asset 
cohort group, while banks with assets under $1 billion reported 
brokered deposits equal to just 3.2 percent of domestic deposits. (See 
Chart 3.)
[GRAPHIC] [TIFF OMITTED] TP06FE19.014



[[Page 2380]]


    Note: The reversal of growth in the use of brokered deposits 
occurring between 2009 and 2012 is likely the joint result of the 
dramatic decline in interest rates occurring over that period, 
coupled with significant new restrictions on the use of brokered 
deposits by banks classified as adequately and undercapitalized.

    At the end of the third quarter of 2018, insured brokered deposits 
made up more than 82.5 percent of total brokered deposits at all banks. 
Insured brokered deposits as a percent of all brokered deposits was 
highest at banks with assets of $50 billion or less. In aggregate, 
insured brokered deposits made up 93.7 percent of total brokered 
deposits at banks with assets between $1-10 billion, as compared to 
79.5 percent at banks with assets greater than $50 billion. (See Chart 
4.)
[GRAPHIC] [TIFF OMITTED] TP06FE19.015

    Section 29 of the Federal Deposit Insurance Act (FDI Act) sets 
forth restrictions on the acceptance of brokered deposits that also 
appear in the FDIC's regulations.\62\ Under Section 29, banks are 
restricted from accepting, renewing, or rolling over brokered deposits 
if they are less than well capitalized. This restriction may be waived 
for adequately capitalized banks. Undercapitalized institutions are not 
allowed to receive new brokered deposits and must follow an FDIC-
approved plan to remove them from their books over time. After rising 
to a peak in mid-2009, the use of brokered deposits as a share of 
domestic deposits declined for both adequately capitalized banks and 
well capitalized banks. As of September 30, 2018, of the 5,477 insured 
depository institutions, 99.6 percent were well capitalized, while 0.2 
percent were rated as adequately capitalized. Of those rated as 
adequately capitalized, roughly half held brokered deposits. (See Chart 
5.) \63\
---------------------------------------------------------------------------

    \62\ See 12 U.S.C. 1831f; 12 CFR 337.6.
    \63\ Please note that the data and chart are based only on 
capital ratio thresholds used for PCA. However, an IDI that 
otherwise meets the ratio threshold requirements for the well 
capitalized PCA category: (1) Will be classified as an adequately 
capitalized if it is subject to a written agreement, order, capital 
directive, or prompt corrective action directive to meet and 
maintain a specific capital level for any capital measure; and (2) 
may be reclassified as adequately capitalized, if, following notice 
and an opportunity for hearing, the bank is determined to be unsafe 
or unsound or has failed to correct a less-than-satisfactory rating 
for asset quality, management, earnings, or liquidity. See 12 CFR 
6.4(c)(1)(v) and (e), 12 CFR 208.43(b)(1)(v) and (c), and 12 CFR 
324.403(b)(1)(v) and (d).

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[[Page 2381]]

[GRAPHIC] [TIFF OMITTED] TP06FE19.016

Brokered Deposits during the 2007-2017 Financial Crisis

    During the financial crisis and the years that followed, from the 
beginning of 2007 through the end of 2017, the Deposit Insurance Fund 
(DIF) incurred $74.4 billion in losses as of December 31, 2016. During 
this period, excluding Washington Mutual, 530 banks failed and were 
placed in FDIC receivership.
    Typically, as institutions get closer to failure, their capital 
level declines and they are no longer able to accept, renew, or roll 
over brokered deposits, so levels of brokered deposits at failure are 
usually low. Nevertheless, of the 530 failed banks, twelve, 
approximately 2.3 percent, held a majority (50% or greater) as brokered 
deposits; 280 or approximately 52.8 percent, held less than 1% of their 
total deposits as brokered deposits.\64\ (See Chart 6.)
---------------------------------------------------------------------------

    \64\ The largest concentrations of brokered deposits can be 
characterized as 3 types of deposits: 1) Master Certificates of 
Deposits; 2) sweep deposits that are viewed as brokered; and 3) 
reciprocal deposits. Listing service deposits are also discussed 
below, but typically, are not reported as brokered. Master 
Certificates of Deposits are held on the books of the issuing bank 
in the name of a subsidiary of Depository Trust Corporation (DTC) as 
custodian for deposit brokers who are often broker dealers. These 
broker dealers, in turn, issue retail CDs, typically in 
denominations of $1,000, under the Master Certificate of Deposit to 
their retail clients.
    \65\ Banks that used reciprocal deposits are not included in 
Non-DTC CD Brokered Deposits unless they also held other non-DTC CD 
brokered deposits. While all reciprocal deposits were brokered 
deposits between 2007 and 2017, since May 24, 2018, a significant 
portion of reciprocal deposits are excepted from brokered deposits.

                                                     Chart 6
                             Brokered Deposits at 530 Failed Institutions, 2007-2017
----------------------------------------------------------------------------------------------------------------
                                                                   Number failed
                                   Number failed                   institutions                    Number failed
 Brokered deposits as % of total   institutions        % of          w/non-DTC         % of        institutions
            deposits               w/DTC-titled    Institutions       titled       institutions     w/internet
                                   brokered CDs                      brokered                        deposits
                                                                   deposits \65\
----------------------------------------------------------------------------------------------------------------
90-100..........................               1            0.19               0            0.00               1
80-89...........................               2            0.38               0            0.00               1
70-79...........................               3            0.57               0            0.00               2
60-69...........................               0            0.00               0            0.00               8
50-59...........................               6            1.13               1            0.19               8
40-49...........................               8            1.51               1            0.19              16
30-39...........................              17            3.21               0            0.00              31
20-29...........................              30            5.66               3            0.57              46
10-19...........................              53           10.00              20            3.77              57
5-9.............................              56           10.57              33            6.23              47
1-4.............................              74           13.96              77           14.53              55
0-1.............................               8            1.51             184           34.72              27
0...............................             272           51.32             211           39.81             231
----------------------------------------------------------------------------------------------------------------


[[Page 2382]]

Reciprocal Deposits

    A reciprocal deposit is an arrangement based upon a network of 
banks that place funds at other participating banks in order for 
depositors to receive insurance coverage for the entire amount of their 
deposits. In these arrangements, institutions within the network are 
both sending and receiving identical amounts of deposits 
simultaneously. As a result of this arrangement, the institutions 
themselves (along with the network sponsors) are ``in the business of 
placing deposits, or facilitating the placement of deposits, of third 
parties with insured depository institutions,'' and the involvement of 
deposit brokers within the reciprocal network means the deposits are 
brokered deposits. Since banks first reported reciprocal deposits on 
the Call Report in June 2009, reciprocal deposits as a share of total 
brokered deposits increased greatly, primarily among small banks. For 
banks with assets less than $1 billion, reciprocal deposits as a 
percent of total brokered deposits rose from 16.4 percent on June 30, 
2009, to a peak of 33.7 percent on March 31, 2018.
    The Economic Growth, Regulatory Reform, and Consumer Protection 
Act, enacted on May 24, 2018, allows certain banks to except a limited 
amount of reciprocal deposits from brokered deposits. The immediate 
result of this Act has been to dramatically reduce the percent of 
reciprocal deposits that are classified as brokered deposits. For 
example, for banks with assets less than $1 billion, reciprocal 
deposits as a share of brokered deposits declined from 33.7 percent on 
March 31, 2018, to 11.5 percent on September 30, 2018. (See Chart 7.)
    For the largest banks, those with assets greater than $50 billion, 
reciprocal deposits as a share of total brokered deposits has remained 
relatively low, accounting for 0.1 percent of total brokered deposits 
as of June 30, 2018.
[GRAPHIC] [TIFF OMITTED] TP06FE19.017

Listing Services

    A ``listing service'' is a company that compiles information about 
the interest rates offered by banks on deposit products, especially 
CDs. A particular company can be a ``listing service'' (compiling 
information about deposits) as well as a ``deposit broker'' 
(facilitating the placement of deposits). In recognition of this 
possibility, the FDIC has set forth specific criteria to determine when 
a listing service qualifies as a deposit broker.\66\
---------------------------------------------------------------------------

    \66\ For the specific criteria to determine when a listing 
service qualifies as a deposit broker see Advisory Opinion No. 90-24 
(June 12, 1990). Advisory Opinion No. 92-50 (July 24, 1992). The 
criteria were subsequently updated in Advisory Opinion No. 02-04 
(November 13, 2002) and Advisory Opinion No. 04-04 (July 28, 2004). 
Assuming these criteria are satisfied, the FDIC takes the position 
that a company is not ``facilitating the placement of deposits,'' 
and is therefore not a deposit broker, even if the company provides 
a platform for the execution of trades. Consequently, the deposits 
themselves are not classified as brokered deposits.
---------------------------------------------------------------------------

    The FDIC began collecting data on non-brokered, or ``passive,'' 
listing service deposits in the first quarter of 2011. As of September 
30, 2018, a total of 1,369 banks reported a positive balance for non-
brokered listing service deposits. In aggregate, these banks held 
approximately $69.6 billion in listing service deposits, which 
represented 0.6 percent of total domestic deposits. (See Chart 8.)
    Listing service deposits made up a higher share of domestic 
deposits at smaller banks. On average from 2011 to the third quarter of 
2018, non-brokered listing service deposits represented 1.3 percent of 
domestic deposits at banks with less than $10 billion in total assets, 
compared to 0.9 percent of domestic deposits at banks with $10 billion 
to $50 billion in total assets. (See Chart 8.)

[[Page 2383]]

[GRAPHIC] [TIFF OMITTED] TP06FE19.018

    Banks that are less than well capitalized are subject to 
restrictions on accepting, renewing, or rolling over brokered deposits, 
and historically some of these banks have turned to listing service 
deposits as an alternate source of founding. (See Chart 9.)
[GRAPHIC] [TIFF OMITTED] TP06FE19.019

    Listing service deposits, however, may only provide funding to less 
than well capitalized banks to the extent that such a bank can offer 
rates high enough to attract deposits. A low interest rate environment, 
such as the one during and after the financial crisis, enabled less 
than well-capitalized banks to list high rate deposits and attracts 
funding. As interest rates have been rising in recent years, these 
banks are less likely to be able to use listing service deposits as an 
alternate source of funding to brokered deposits. From 2010 through 
most of 2015, rates were low enough

[[Page 2384]]

that weekly average rates on 1-year CDs fell below the FDIC rate cap. 
Thus, for most banks during that time, the FDIC rate cap was not a 
binding constraint in attracting funding and banks were more likely to 
be able to offer high rates via listing services to attract deposits. 
Since 2016, average market rates have exceeded the FDIC rate cap.

Appendix 2

Statistical Analysis

    The analysis summarized in this appendix uses data from FDIC's 
Failure Transaction Database, Call Reports/TFRs, and supervisory CAMELS 
ratings.

Failure Probability Models

    The sample used for analysis includes banks and thrifts that failed 
between 1988 and 2017. These banks were insured by the Bank Insurance 
Fund (BIF), Savings Association Insurance Fund (SAIF), and DIF. The 
data exclude thrifts resolved by FSLIC or the Resolution Trust 
Corporation (RTC). It is well documented that FHLBB supervised thrifts 
(insured by FSLIC) received regulatory forbearance and were allowed to 
operate with lower net worth and were closed under procedures that 
differ significantly from the 1991 FDICIA prompt corrective action 
rules that apply over much of the sample period. Moreover, the analysis 
excludes any bank or thrift that received open bank assistance. The 
sample includes 1,403 failures which consist of 1,267 bank failures 
between 1988 and 2017 and 136 thrift failures between 1989 and 
2017.\67\ In the remaining sections, ``banks'' is used to refer to both 
banks and thrifts.
---------------------------------------------------------------------------

    \67\ Thrift institutions refer to those with institution classes 
of Stock and Mutual Savings Banks, Savings Banks and Savings and 
Loans, and State Stock Savings and Loans.
---------------------------------------------------------------------------

    The failure prediction models have a three-year failure prediction 
horizon. The models use bank data at year-end to predict the 
probability of the bank failing in the next three years. The models use 
year-end Call Reports from 1987 to 2014 to predict bank failures from 
1988 to 2017.\68\ The models are estimated as a pooled time-series 
cross section. The standard errors are clustered at the bank level.
---------------------------------------------------------------------------

    \68\ We use non-overlapping three year intervals. For example, 
1987 Call Report data is used to predict banks failures that 
occurring in 1988, 1989, and 1990; 1990 Call report data is used to 
predict bank failures in 1991, 1992, and 1993. This timing pattern 
is continued through the end of the sample.
---------------------------------------------------------------------------

    Bank failures are modeled as a function of banks' income statement 
and balance sheet information, supervisory composite CAMELS ratings, 
and time fixed effects to capture differences in economy-wide 
unconditional average bank default rates. The model uses the total 
equity-to-assets ratio rather than the Tier 1 capital ratio because the 
Tier 1 capital ratio was not used in the 1980s. Core deposits are 
defined as: total domestic deposits net of large time deposits \69\ and 
fully insured brokered deposits.
---------------------------------------------------------------------------

    \69\ To reflect a change in insured deposits limit, large time 
deposits are time deposits over $100,000 up to December 2009. 
Starting in March 2010, large time deposits refer to time deposits 
over $250,000. Because the last year-end Call Reports data used is 
2017, the core deposit variable reflects the prevailing definition 
through 2017.
---------------------------------------------------------------------------

    A bank's nonperforming loans and other real estate owned are used 
to measure a bank's asset quality. Nonperforming loans are defined as a 
sum of loans past due 90+ days and non-accruing loans. We also include 
a bank's concentration in CRE, C&D, C&I, and consumer loans. A bank's 
asset growth rate measures percent change in bank's total assets from 
one year ago.
    Bank earnings are measured as a ratio--income before taxes to 
assets. A bank's interest expense is also included as an explanatory 
variable. A bank's composite CAMELS ratings are represented as separate 
binary (0,1) variables to allow for non-linear ratings effects on the 
probability of default. ``CAMELS 3'' is a binary variable that 
indicates a bank's composite CAMELS rating is 3. ``CAMELS 4 or 5'' is a 
binary variable that indicates a bank's composite CAMELS rating is 4 or 
5. All financial variables are normalized by total assets with the 
exception of CAMELS 3, CAMELS 4 or 5, and Asset Growth.
    Time fixed effects are included to capture any difference in the 
unconditional probability of bank failure across years. The 
unconditional likelihood of a bank failing differs by period in part 
because macroeconomic conditions and regulation vary. In the 
probability of failure models, time fixed effect coefficients estimate 
the unconditional failure probability for 3-year periods.\70\
---------------------------------------------------------------------------

    \70\ For example, when Call Report and CAMELS ratings data from 
December 1987 are used to predict failures in 1988, 1989, and 1990, 
the time fixed effect coefficient measures the unconditional 
probability of failure for 1988, 1989, and 1990.
---------------------------------------------------------------------------

Loss Rate Models

    Failed bank loss rates are computed as a ratio of the most recent 
estimate of the failure expense and the bank's total assets as of the 
quarter before its failure. For the most part, the loss rates for 
recent bank failures are estimates and not final costs as a 
receivership process can take many years to conclude. The sample used 
for the analysis includes banks that failed between April 13, 1984 and 
December 15, 2017.\71\ The banks in the sample were insured by the BIF, 
SAIF, and DIF. The analysis excludes any banks that received open bank 
assistance.
---------------------------------------------------------------------------

    \71\ The loss rate data for more recent bank failures is updated 
through 2017.
---------------------------------------------------------------------------

    Failed bank loss rates are modeled as a function of the income and 
balance sheet characteristics of the failed bank. The model explains 
loss rates using a failed bank's equity, nonperforming loans, other 
real estate owned, core deposits, brokered deposits, income earned but 
not collected, and total loans to executives as explanatory variables. 
These variables are scaled by a bank's asset size. The model allows 
loss rates to differ for small (asset size $500 million or less), 
medium (asset size between $500 million to $1 billion), and large 
(asset size $1 billion and higher) banks. Call Report/TFR data are from 
the last quarter before the bank failure date.\72\
---------------------------------------------------------------------------

    \72\ There are some banks in the sample that have not filed Call 
Reports or TFRs on the quarter prior to its failure. For those 
banks, we use Call Reports as of two quarters prior to failure.
---------------------------------------------------------------------------

Reciprocal Deposit Data

    Banks began reporting their reciprocal brokered deposit funds 
separated from non-reciprocal brokered deposits beginning in June 2009. 
In analyzing the effects of reciprocal deposits, we use Call Reports/
TFRs and CAMELS rating data from June 2009 through December 2017. The 
analysis examines reciprocal deposit data through December 2017. During 
this time period, all reciprocal deposits were considered brokered 
deposits. The Economic Growth, Regulatory Reform, and Consumer 
Protection Act, which was signed into law on May 24, 2018, allows 
certain banks to except a limited amount of reciprocal deposits from 
brokered deposits.

Listing Service Deposit Data

    Banks began reporting deposits obtained through the use of deposit 
listing services that are not brokered deposits beginning in March 
2011. In analyzing the effects of reciprocal deposits, we use Call 
Reports and CAMELS rating data from March 2011 through December 2017.
Estimation Results

Core Deposits and Bank Failure Probability

    In this section, we examine the relationship between core deposits 
and bank failure probabilities. Core deposits provide a bank with a 
stable and

[[Page 2385]]

relatively cost effective source of funds. Core deposits, moreover, are 
an important component of customer-bank relationships. Many core 
depositors have long-term financial relationships with a bank that 
involve deposits, lending, and other financial services that generate 
bank profits. A bank's core deposit base is a measure of the size of a 
bank's opportunity set for relationship lending. Academic studies as 
well as FDIC resolutions experience suggest that core deposits are a 
significant source of bank franchise value.
    Table 1 reports the results of a failure probability model that 
includes equity and the core deposits to assets ratio as predictive 
variables. The estimated coefficient on equity is negative, 
statistically significant, and very large in magnitude, suggesting that 
adequate equity buffers are among the most important factors lowering a 
bank's risk of default. The coefficient estimate on core deposits is 
also negative and statistically significant. Controlling for bank 
equity, the core deposits ratio is negative and statistically 
significant, suggesting that banks with higher core deposits have lower 
failure probability.\73\
---------------------------------------------------------------------------

    \73\ The regression includes time fixed effects, but the 
coefficient estimates are not reported in Table 1.

          Table 1--Core Deposits and Bank Failure Probabilities
------------------------------------------------------------------------
                                                            Coefficient
                        Variable                             estimates
------------------------------------------------------------------------
Intercept...............................................      *** -2.331
                                                                 [0.000]
Equity..................................................      *** -0.284
                                                                 [0.000]
Core deposits...........................................      *** -0.027
                                                                 [0.000]
Nonperforming loans.....................................       *** 0.132
                                                                 [0.000]
Other real estate owned.................................       *** 0.124
                                                                 [0.000]
Income before taxes.....................................      *** -0.145
                                                                 [0.000]
Interest expense........................................       *** 0.172
                                                                 [0.000]
CAMELS rating 3.........................................       *** 0.867
                                                                 [0.000]
CAMELS rating 4 or 5....................................       *** 1.687
                                                                 [0.000]
Asset growth............................................       *** 0.012
                                                                 [0.000]
CRE loans...............................................       *** 0.019
                                                                 [0.000]
C&D loans...............................................       *** 0.061
                                                                 [0.000]
C&I loans...............................................       *** 0.024
                                                                 [0.000]
Consumer loans..........................................       *** 0.013
                                                                 [0.000]
Pseudo R2...............................................           0.515
Wald Chi2...............................................       *** 3,224
N.......................................................          98,237
------------------------------------------------------------------------
Notes:
\1\ Uses December Call Report data from 1987, 1990, 1993, 1996, 1999,
  2002, 2005, 2008, 2011, and 2014 to predict failures from 1988-2017.
\2\ Core deposits are defined as domestic deposits minus time deposits
  over the insurance limit and fully insured brokered deposits.
\3\ All financial variables are normalized by total assets with the
  exception of CAMELS rating 3, CAMELS rating 4 or 5, and Asset Growth.
  CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables
  indicating that the institution is CAMELS 3-rated and the institution
  is CAMELS 4 or 5-rated, respectively. Asset Growth is the
  institution's one-year asset growth rate.
\4\ Year fixed effects are included but not reported.
\5\ Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. **
  Indicates statistical significance at the 5 percent level. * Indicates
  statistical significance at the 10 percent level. P-values are
  reported in brackets.

Brokered Deposits and the Probability of Bank Failure

    In this section, we examine the relationship between brokered 
deposits and bank failure probability and loss rates to the insurance 
fund. To summarize the results in this section, we find that brokered 
deposit use is associated with higher probability of bank failure and 
higher insurance fund loss rates. Brokered deposits may elevate a 
bank's risk profile in part because brokered deposits are frequently 
used as a substitute for bank core deposits and, less frequently, for 
equity, and so from the FDIC's perspective, banks that use brokered 
deposits operate with a higher risk liability structure relative to 
banks that do not use brokered deposits.
    Bank failure probability model estimates are reported in Table 2. 
Column (1) of Table 2 reports that brokered deposits have a positive, 
statistically significant effect on a bank's estimated probability of 
failure over a three-year horizon. In this logistic regression 
specification, the income

[[Page 2386]]

before tax ratio is negatively correlated with bank failures, implying 
that banks with higher earnings ratios are less likely to fail. Banks 
with higher nonperforming loan and other real estate owned ratios are 
more likely to fail. All of these effects are statistically significant 
at the 1 percent level. There is a positive and statistically 
significant relationship between lagged asset growth rate and bank 
failures. The estimated coefficient for the growth rate is positive and 
statistically significant suggesting that, other things equal, banks 
experiencing rapid growth are more likely to fail within the next 3 
years. Estimates also suggest that CRE, C&D, C&I, and consumer loan 
concentrations increase failure probability estimates. Banks with a 
composite CAMELS rating of 3 and those with a rating of 4 or 5, are 
more likely to fail compared to CAMELS 1 or 2 rated banks. This model 
specification shows a statistically significant relationship between 
interest expense and bank failures. The model also includes time fixed 
effects, but these estimates are not reported.\74\
---------------------------------------------------------------------------

    \74\ The omitted period, the period without an estimate of time 
fixed effect, is 1988-1990 and so time fixed effects estimates the 
unconditional probability of a 3 year period relative to the 
unconditional probability for 1988-1990. The time fixed effect 
coefficients estimates are negative and statistically significant 
indicating that the unconditional probability of failure was lower 
in the periods 1991-1993, 1994-1996, 1997-1999, 2000-2002, 2003-
2005, 2006-2008, 2012-2014 and 2015-2017 (relative to 1988-1990). 
The time fixed effect coefficient for 2009-2011 is negative but 
statistically insignificant indicating no average default rate 
difference relative to 1988-1990.
---------------------------------------------------------------------------

    In the estimates reported in Table 2, Column (1), brokered deposits 
are the only funding variable included in the regression (equity and 
core deposits are excluded from the regression). In this specification, 
brokered deposits are clearly associated with an increase in bank 
failure probability, but the reason for the increase is unclear. When a 
bank increases its brokered deposit-to-asset ratio, there must be an 
offsetting change in at least one of the bank's other funding sources. 
That is, the bank must change its equity-to-asset ratio, its core 
deposit-to-asset ratio, or its other non-core deposits and other 
liabilities to asset ratio to offset the increase in its brokered 
deposit ratio. This implicit shift in a bank's liability structure is 
one possible source of the increase in bank fragility that is 
identified by the positive coefficient on brokered deposits reported in 
Column (1). For example, if the bank's equity-to-asset ratio declines 
to offset an increase in a bank's brokered deposit ratio, then the bank 
is using brokered deposits to increase its leverage which would 
increase its probability of failure. We investigate these potential 
capital structure effects on bank failure probability using a series of 
regressions reported in Columns (2) and (3) of Table 2.
    To control for bank leverage, we include a bank's equity-to-asset 
ratio in the failure model. The results are reported in Table 2, Column 
(2). By controlling for the equity ratio, the estimated coefficient on 
brokered deposits measures the effect of increasing a bank's reliance 
on brokered deposits and decreasing its reliance on other liabilities 
(such as core deposits, federal funds purchased, and FHLB advances), 
holding a bank's equity-to-asset ratio unchanged. The negative and 
statistically significant coefficient estimate on the equity ratio 
implies that greater equity lowers a bank's probability of default. The 
positive and statistically significant coefficient on the brokered 
deposits ratio (unchanged from previous) suggests that, holding bank 
leverage constant, a higher brokered deposits ratio (with decreased 
reliance on other funding sources) unambiguously increases the 
probability that a bank will fail in the subsequent three years. These 
results show that the use of brokered deposits increases a bank's 
failure probability even when they are not used as a substitute for 
bank equity.
    Controlling for a bank's leverage ratio, the use of brokered 
deposits raises the estimated probability of bank failure. Why? As we 
have demonstrated in the prior section, core deposits are an important 
category of bank liabilities. Core deposits are associated with a lower 
probability of bank failure. Other things held constant, should a bank 
with a large core deposit franchise become distressed, long-standing 
FDIC resolution experience suggests that it is much more likely to be 
recapitalized through a purchase or a merger and not through an FDIC 
resolution. Thus, one possible avenue through which failure probability 
might be affected by the use of brokered deposits is if brokered 
deposits are used as a substitute for core deposit funding.
    In Table 2, Column (3), we estimate the effects of brokered 
deposits on the probability of bank failure holding constant a bank's 
core deposit ratio. In this specification, core deposits are negative 
and statistically significant whereas brokered deposits are positive 
and statistically significant. The interpretation is that, holding 
constant the asset risk characteristics of a bank, provided a bank's 
share of funding from core deposits remains unchanged, on average, the 
use of brokered deposits increases a bank's probability of failure.
    In Table 2, Column (4), we include three bank funding categories as 
controls: brokered deposits, equity, and core deposits. The 
coefficients of equity and core deposits are both negative and 
statistically significant, indicating that higher equity and core 
deposit funding shares both reduce the probability of bank failure. In 
this specification, the estimated coefficient on the brokered deposits 
ratio measures the effect of increasing brokered deposits, holding 
constant equity and core deposits, and reducing reliance on other bank 
liabilities. The estimated coefficient on brokered deposits is not 
statistically significant. These results suggest that brokered deposits 
can be substituted for other bank liabilities without any statistically 
measureable effect on a bank's failure probability, provided that a 
bank's share of equity and core deposit funding and its asset risk 
characteristics remain unchanged.

                  Table 2--Brokered Deposits and Failure Probability Over a Three-Year Horizon
----------------------------------------------------------------------------------------------------------------
                                                    Coefficient     Coefficient     Coefficient     Coefficient
                    Variable                         estimates       estimates       estimates       estimates
                                                             (1)             (2)             (3)             (4)
----------------------------------------------------------------------------------------------------------------
Intercept.......................................      *** -6.447      *** -4.674      *** -5.119      *** -2.312
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Brokered deposits...............................       *** 0.026       *** 0.022       *** 0.013          -0.001
                                                         [0.000]         [0.000]         [0.014]         [0.790]
Equity..........................................  ..............      *** -0.273  ..............      *** -0.284
                                                  ..............         [0.000]  ..............         [0.000]
Core deposits...................................  ..............  ..............      *** -0.016      *** -0.027

[[Page 2387]]

 
                                                  ..............  ..............         [0.000]         [0.000]
Nonperforming loans.............................       *** 0.164       *** 0.138       *** 0.164       *** 0.132
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Other real estate owned.........................       *** 0.142       *** 0.117       *** 0.147       *** 0.124
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Income before taxes.............................      *** -0.148      *** -0.149      *** -0.140      *** -0.145
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Interest expense................................       *** 0.114       *** 0.199       *** 0.097       *** 0.172
                                                         [0.000]         [0.000]         [0.000]         [0.000]
CAMELS rating 3.................................       *** 0.992       *** 0.862       *** 1.002       *** 0.867
                                                         [0.000]         [0.000]         [0.000]         [0.000]
CAMELS rating 4 or 5............................       *** 2.280       *** 1.596       *** 2.347       *** 1.688
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Asset growth....................................       *** 0.009       *** 0.014       *** 0.007       *** 0.012
                                                         [0.000]         [0.000]         [0.000]         [0.000]
CRE loans.......................................       *** 0.022       *** 0.020       *** 0.021       *** 0.019
                                                         [0.000]         [0.000]         [0.000]         [0.000]
C&D loans.......................................       *** 0.065       *** 0.066       *** 0.062       *** 0.061
                                                         [0.000]         [0.000]         [0.000]         [0.000]
C&I loans.......................................       *** 0.031       *** 0.030       *** 0.028       *** 0.024
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Consumer loans..................................       *** 0.021       *** 0.015       *** 0.018       *** 0.013
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Pseudo R\2\.....................................           0.471           0.509           0.473           0.515
Wald Chi2.......................................       *** 3,678       *** 3,193       *** 3,763       *** 3,228
No. of observations.............................          98,237          98,237          98,237          98,237
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Uses December Call Report data from 1987, 1990, 1993, 1996, 1999, 2002, 2005, 2008, 2011, and 2014 to
  predict failures from 1988-2017.
\2\ Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured
  brokered deposits.
\3\ All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating
  4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the
  institution is CAMELS 3-rated and the institution is CAMELS 4 or 5-rated, respectively. Asset Growth is the
  institution's one-year asset growth rate.
\4\ Year fixed effects are included but not reported.
\5\ Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
  percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
  brackets.

    To summarize, these series of regression model estimates show that 
the use of brokered deposits is associated with a higher probability of 
bank failure. The higher probability owes to a core deposit or equity 
effect: When banks substitute brokered deposits for core deposits or 
equity, this can increase their probability of failure. It is also 
possible that the use of brokered deposits is a general indicator of a 
higher risk appetite on the part of bank management which, may be 
reflected in the riskiness of the assets that a bank purchases. We turn 
to this issue in the next section.

Brokered Deposits and Bank Asset Growth and Quality

    To determine whether the use of brokered deposits may also be a 
general indicator of a higher risk appetite on the part of bank 
management, as reflected in the bank's asset growth or nonperforming 
loans, the FDIC examined the relationship between brokered deposits and 
asset growth, and between brokered deposits and nonperforming loans.
    To assess whether the use of brokered deposits helps to explain the 
variation in observed bank growth rates, we estimate alternative models 
in which a bank's 3-year growth rate is in part determined by its 3-
year average use of brokered deposits. Overall, the regression analysis 
suggests that banks using brokered deposits often exhibit higher 3-year 
growth rates compared to banks that do not use brokered deposits. This 
positive relationship is likely to be the result of a complex series of 
choices made by bank management that drive both a bank's growth rate 
and its use of brokered deposits. The underlying structural choice 
models are undoubtedly much more complex than the models estimated in 
this analysis. For example, we would expect that aggregate and local 
market lending conditions, interest rates and employment all to be 
factors included in the simultaneous determination of a bank's growth 
rate and brokered deposit usage.
    To analyze the relationship between brokered deposits and asset 
quality, we estimated various models that explain the level of non-
performing bank loans at the end of three years using macroeconomic 
controls and bank-specific measures of risk, including variables that 
measure their use of brokered deposit funding. Nonperforming loans are 
defined as a sum of loans past due 90+ days, non-accruing loans, and 
other real estate owned. Banks that are willing to undertake riskier 
funding structures may also be willing to invest in higher risk loan 
portfolios. If this is true, banks that fund themselves with brokered 
deposits would also tend to be banks with higher non-performing loans.
    The results of the regression analysis include an estimated 
coefficient for the brokered deposits to assets ratio that is positive 
and statistically significant, implying that an increase in the 
brokered deposit ratio is associated with an increase in the 
nonperforming loans ratio three years into the future. In contrast, 
higher core deposits are

[[Page 2388]]

associated with more conservative lending practices. Banks with high 
reserves, liquid assets, and consumer loans tend to have a lower 
nonperforming loan-to-asset ratio three years later. In contrast, banks 
with high interest expenses, income before taxes, C&I loans, C&D loans, 
and CRE loans are more likely to have a higher nonperforming loan ratio 
three years later. An increase in bank size, on average, is associated 
with a lower nonperforming loan ratio.
    The FDIC also tested an alternative definition of a nonperforming 
loans ratio (the sum of loans past due 90+ days and non-accruing 
loans), and the results are qualitatively similar to those in the 
initial regression analysis. Brokered deposits continue to be 
positively correlated with nonperforming loan ratios.

Loss Rate Models

    In this section, we investigate whether banks' use of brokered 
deposit funding is associated with higher DIF loss rates when a bank 
fails. Banks with heavy reliance on brokered deposits may have a low 
franchise value because they lack a large core deposit customer base. 
In addition, banks that fund themselves with brokered deposits tend to 
have higher non-performing loans which may contribute to higher DIF 
losses.
    Table 3 reports the results of the loss rate regression analysis. 
Column (1) of Table 3 suggests that higher nonperforming loans, other 
real estate owned, income earned but not collected, loans to executives 
to asset ratios are associated with higher loss rates. Banks with 
higher C&D, C&I, and consumer loans also tend to have higher loss 
rates. Medium-sized (asset size between $500 million to $1 billion) and 
large failed banks (asset size $1 billion and higher) tend to have 
lower loss rates compared to small banks (asset size $500 million or 
less). The year fixed-effects (not reported) are added to capture any 
difference in unconditional loss rates across years. These fixed 
effects capture loss rate differences that may be driven by year-to-
year differences in the strength of the economy or supervision and 
regulation.\75\
---------------------------------------------------------------------------

    \75\ For example, legislative changes such as the cross 
guarantee provision in FIRREA of 1989 and the least cost resolution 
requirement in FDICIA of 1991. Unconditional loss rates of banks 
that failed in 1998, 2007, 2008, and 2009 are higher compared to 
loss rates in 1984 (the base year) with statistical significance. 
Compared to loss rates in 1984, loss rates are substantially lower 
in 1985, 1990, 1991, 1992, 1993, 1994, 2000, and 2004 with 
statistical significance.
---------------------------------------------------------------------------

    In the failure loss rate model specification reported in Table 3, 
Column (1), only brokered deposits are included as a funding variable. 
The estimated coefficient for brokered deposits measures the effect of 
an increase in brokered deposits and an offsetting reduction in other 
funding sources on the loss rate. The positive and statistically 
significant coefficient on brokered deposits in Column (1) suggests 
that an increase in a bank's reliance on brokered deposits (and an 
offsetting decrease in other funds either equity or other liabilities) 
increases the DIF loss rate.
    In Table 3 Column (2), the failed bank's equity ratio is also 
included as an explanatory variable. The positive and statistically 
significant coefficient on brokered deposits suggests that increasing 
reliance on brokered deposits, holding bank equity constant and 
reducing other liabilities (such as core deposits, fed funds purchased, 
FHLB advances), there is an increase in the DIF loss rate. The negative 
and statistically significant coefficient on the equity ratio suggests 
that increasing equity and decreasing a bank's reliance on other 
liabilities with no change in brokered deposits reduces the loss rate.
    In Table 3, Column (3), the failed bank's core deposit ratio and 
brokered deposit ratio are included as explanatory variables. The 
positive and statistically significant coefficient on brokered deposits 
suggests that, increasing reliance on brokered deposits, holding core 
deposits constant and reducing other liabilities (such as federal funds 
purchased, FHLB advances) and possibly equity, there is an increase in 
the DIF loss rate. The negative and statistically significant 
coefficient on the core deposit ratio suggests that increasing core 
deposits and decreasing a bank's reliance on other liabilities while 
holding brokered deposits constant reduces the DIF loss rate.
    The model specification reported in Table 3, Column (4) includes 
brokered deposits, equity, and core deposits as funding measures. In 
this specification, the estimated coefficient on brokered deposits is 
negative and statistically insignificant suggesting that, other control 
variables held constant, when equity and core deposits are unchanged, 
increasing brokered deposits and decreasing other bank liabilities has 
no statistically measurable effect on loss rates. In contrast, 
replacing other liabilities with equity or core deposits with no change 
in brokered deposits decreases a bank's failure loss rate.
    To summarize these results, we find that the use of brokered 
deposits results in higher loss rates to the DIF. These higher losses 
can be linked to two causes, a leverage effect and a core deposit 
effect. The leverage effect arises because brokered deposits are often 
used as a substitute for bank equity and so when brokered deposits are 
in use there is less capital to cushion the DIF's loss. The core 
deposit effect is the substitution of brokered for core deposits. This 
lowers bank franchise value which also increases the DIF loss rate.

                                     Table 3--Bank Failure Loss Rate Models
----------------------------------------------------------------------------------------------------------------
                                                    Coefficient     Coefficient     Coefficient     Coefficient
                    Variable                         estimates       estimates       estimates       estimates
                                                             (1)             (2)             (3)             (4)
----------------------------------------------------------------------------------------------------------------
Intercept.......................................       *** 6.350       *** 9.324       *** 9.680      *** 17.465
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Brokered deposits...............................       *** 0.104       *** 0.082         * 0.063          -0.015
                                                         [0.000]         [0.003]         [0.061]         [0.665]
Equity..........................................  ..............      *** -0.470  ..............      *** -0.550
                                                  ..............         [0.000]  ..............         [0.000]
Core deposits...................................  ..............  ..............       ** -0.044      *** -0.102
                                                  ..............  ..............         [0.030]         [0.000]
Nonperforming loans.............................       *** 0.431       *** 0.327       *** 0.441       *** 0.333
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Other real estate owned.........................       *** 0.835       *** 0.738       *** 0.845       *** 0.746

[[Page 2389]]

 
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Income earned but not collected.................       *** 3.620       *** 3.888       *** 3.690       *** 4.095
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Loan to executive officers......................       *** 0.334        ** 0.302        ** 0.323        ** 0.272
                                                         [0.008]         [0.015]         [0.010]         [0.027]
Bank size between $500 mil-$1 bil...............      *** -5.517      *** -5.118      *** -5.882      *** -5.886
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Bank size >$1 billion...........................      *** -9.064      *** -9.015      *** -9.567     *** -10.158
                                                         [0.000]         [0.000]         [0.000]         [0.000]
CRE loans.......................................          -0.002          -0.014          -0.001          -0.013
                                                         [0.940]         [0.650]         [0.974]         [0.674]
C&D loans.......................................       *** 0.140       *** 0.163       *** 0.134       *** 0.151
                                                         [0.001]         [0.000]         [0.001]         [0.000]
C&I loans.......................................       *** 0.243       *** 0.216       *** 0.237       *** 0.199
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Consumer loans..................................       *** 0.128       *** 0.117       *** 0.125       *** 0.108
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Adjusted R......................................           0.350           0.373           0.351           0.381
No. of observations.............................           1,943           1,943           1,943           1,943
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Estimates use data from 1984 to 2017 to predict failure loss rates in 1984 to 2017.
\2\ Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured
  brokered deposits.
\3\ All financial variables are normalized by total assets with the exception of Bank size between $500 mil-$1
  bil and Bank size <ls-thn-eq>$1billion. Bank size between $500 mil-$1 bil is a dummy variable indicating that
  the institution's asset size is between $500 million and $1 billion. Bank size <ls-thn-eq>$1billion is a dummy
  variable indicating that the institution's asset size is over $1 billion.
\4\ The regressions include year fixed effects, but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
  percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
  brackets.

Analysis of Reciprocal Deposits

    In this section we use the available data to analyze reciprocal 
deposit use patterns and the effects of reciprocal deposits on the 
probability of bank failure and DIF loss rates. Banks began reporting 
reciprocal brokered deposit funds separately from non-reciprocal 
brokered deposits beginning June 2009. This analysis examines 
reciprocal deposit data through December 2017. During this time period, 
all reciprocal deposits were considered brokered deposits. The Economic 
Growth, Regulatory Reform, and Consumer Protection Act, which was 
signed into law on May 24, 2018, allows certain banks to except a 
limited amount of reciprocal deposits from brokered deposits.
    The data show that while a minority of banks use reciprocal 
deposits, those that use this source of funding tend to raise a large 
percentage of their brokered deposits using reciprocal deposits. From 
June 2009 through December 2010, the use of reciprocal deposits became 
more widespread, but was still uncommon. Over this period, on average, 
the use of brokered deposits declined from December 2011, then 
increased starting in December 2015. The relative importance of 
reciprocal deposits as a component of brokered deposits increased from 
December 2011 to December 2013 and has since fallen. Table 4 reports 
the distribution of different brokered deposit ratios by Call Report 
date.\76\ The first panel of Table 4 reports the distribution of 
different brokered deposit ratios (total brokered, reciprocal brokered, 
and non-reciprocal brokered deposits to assets ratios) for December 
2011. The median values for each of these ratios are zero; in December 
2011, out of 7,366 banks, 3,015 banks had non-zero brokered deposits.
---------------------------------------------------------------------------

    \76\ Banks report a total for brokered deposits and also report 
the amount of this total that are reciprocal deposits. We exclude 
observations when a bank reports a positive reciprocal brokered 
deposit value but reports a zero value for total brokered deposits. 
We also exclude from the sample banks that report higher values for 
reciprocal brokered deposits than for total brokered deposits.
---------------------------------------------------------------------------

    In December 2011, an average bank's reliance on brokered deposits 
(2.43%) was split between reciprocal brokered deposits (0.58%) and non-
reciprocal brokered deposits (1.85%). Only a very small share of banks 
has a heavy reliance on reciprocal brokered deposits. The 99th 
percentile of the reciprocal brokered deposit ratio is 11.61% and the 
maximum observed ratio is 49.55%.
    Rows (4) and (5) of Table 4 report the distributions of the ratios 
of reciprocal deposits and non-reciprocal brokered deposits to total 
brokered deposits for banks that report positive brokered deposits. The 
median reciprocal to total brokered deposits ratio is 0.\77\ Among 
banks using brokered deposits, on average 31.44% of brokered deposits 
are reciprocal deposits. Fourteen percent of banks using brokered 
deposits use only reciprocal brokered deposits.
---------------------------------------------------------------------------

    \77\ Only 1,348 banks reported positive reciprocal brokered 
deposits out of 3,015 banks that report positive brokered deposits.
---------------------------------------------------------------------------

    Rows (6) and (7) of Table 4 report the distributions of reciprocal 
deposits and non-reciprocal brokered deposits to total brokered 
deposits ratios for the sample of banks that report positive reciprocal 
brokered deposits. The data show that while reciprocal brokered 
deposits are not used widely among banks that rely on brokered deposits 
for funding, when they are used, they frequently are a bank's primary 
source of brokered funding.
    Comparing data from December 2011 and December 2017, fewer banks 
are using brokered deposits, but among those banks that do, reliance on 
brokered deposits has been increasing. The mean total brokered deposits 
to assets ratio in December 2017 was 2.90% which increased from 2.43% 
in December 2011. The trend for banks' reliance on reciprocal deposits 
is less clear. In December 2011, 1,348 banks reported positive 
reciprocal deposit

[[Page 2390]]

balances. This number declined to 1,199 banks in December 2014, and has 
remained relatively stable, declining somewhat to 1,184 by December 
2017. The average usage of reciprocal deposits has increased; the mean 
reciprocal deposits to assets ratio was 0.80% in December 2017 compared 
to 0.58% in December 2011. Generally, the share of brokered deposits 
funded by reciprocal versus non-reciprocal deposits has remained 
stable.

                                     Table 4--Distribution of Different Brokered Deposits Ratios by Call Report Date
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                           Ratios                   N           Max          99th         95th         90th         Med          Mean
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      December 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1)..........................  Total brokered/assets.........        7,366        90.83        27.28        12.15         7.30         0.00         2.43
(2)..........................  Reciprocal brokered/assets....        7,366        49.55        11.61         3.63         1.29         0.00         0.58
(3)..........................  Non-reciprocal brokered/assets        7,366        90.83        25.47         9.82         5.40         0.00         1.85
(4)..........................  Reciprocal brokered/total             3,015       100.00       100.00       100.00       100.00         0.00        31.44
                                brokered.
(5)..........................  Non-reciprocal brokered/total         3,015       100.00       100.00       100.00       100.00       100.00        68.56
                                brokered.
(6)..........................  Reciprocal brokered/total             1,348       100.00       100.00       100.00       100.00        97.13        70.31
                                brokered.
(7)..........................  Non-reciprocal brokered/total         1,348        99.99        99.70        96.67        90.91         2.87        29.69
                                brokered.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      December 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1)..........................  Total brokered/assets.........        5,678        87.66        29.92        13.69         9.00         0.00         2.90
(2)..........................  Reciprocal brokered/assets....        5,678        41.37        13.09         5.52         2.25         0.00         0.80
(3)..........................  Non-reciprocal brokered/assets        5,678        87.66        25.32        10.27         6.62         0.00         2.10
(4)..........................  Reciprocal brokered/total             2,526       100.00       100.00       100.00       100.00         0.00        31.79
                                brokered.
(5)..........................  Non-reciprocal brokered/total         2,526       100.00       100.00       100.00       100.00       100.00        68.21
                                brokered.
(6)..........................  Reciprocal brokered/total             1,184       100.00       100.00       100.00       100.00        86.76        67.81
                                brokered.
(7)..........................  Non-reciprocal brokered/total         1,184        99.99        99.65        96.81        91.86        13.24        32.19
                                brokered.
--------------------------------------------------------------------------------------------------------------------------------------------------------

Reciprocal Deposit Usage at Failed Banks

    In this section, we examine the extent to which failed banks relied 
on reciprocal brokered deposits. The analysis includes banks that 
failed between July 2009 and December 15, 2017. During this period, 458 
banks failed.
    Table 5 reports number (percentage in parenthesis) of failed banks 
that reported positive reciprocal deposits and non-reciprocal brokered 
deposits on their balance sheet prior to their failure. In this table, 
data are analyzed according to the Call Report data reported a selected 
number of quarters before the bank failure date. Reciprocal deposits 
were first reported on Call Reports in June 2009. Hence, we are limited 
to 180 failures, which failed between April 2011 and December 2017, to 
have 8 quarters of Call Report data with reciprocal deposit 
information. In contrast, there are 458 failures, which failed between 
July 2009 to December 2017, with 1 quarter of Call Report data with 
reciprocal deposit information.
    The data suggest a number of consistent patterns. Column (3) shows 
that somewhere between 60 and 70 percent of the failed banks used 
brokered deposits for at least six quarters before they failed. There 
is also evidence that suggests that some of these failed banks stop 
using brokered deposits in the quarter prior to their failure. Of these 
failed banks, roughly 20 percent used reciprocal deposits for up to 
seven quarters prior to their failure, but like brokered deposits, some 
also stopped using reciprocal deposit funding the quarter before they 
failed.\78\
---------------------------------------------------------------------------

    \78\ We have not investigated why these banks stopped using 
reciprocal deposits.

                         Table 5--Brokered and Reciprocal Deposits Usage in Failed Banks
----------------------------------------------------------------------------------------------------------------
                                                                             Number of banks    Number of banks
                                                          Number of banks   with positive non-   with positive
   Number of quarters before failure        Number of      with positive        reciprocal         reciprocal
                                          observations   brokered deposits  brokered deposits  brokered deposits
                                                            reported (%)       reported (%)       reported (%)
(1)                                                 (2)                (3)                (4)                (5)
----------------------------------------------------------------------------------------------------------------
8......................................             180        122 (67.78)        116 (64.44)         39 (21.67)
7......................................             206        140 (67.96)        134 (65.05)         44 (21.36)
6......................................             236        165 (69.92)        159 (67.37)         53 (22.46)
5......................................             277        196 (70.76)        183 (66.06)         64 (23.10)

[[Page 2391]]

 
4......................................             322        224 (69.57)        211 (65.53)         67 (20.81)
3......................................             363        251 (69.15)        235 (64.74)         64 (17.63)
2......................................             408        277 (67.89)        260 (63.73)         70 (17.16)
1......................................             458        295 (64.41)        283 (61.79)         63 (13.76)
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Based on 458 Failures between July 2, 2009 and December 15, 2017. All failures after June 2009 when the
  reciprocal deposits were first reported on the Call Reports.

    Figure 1 graphs the failing banks' reciprocal deposits to assets 
ratio prior to failure. The median reciprocal deposits ratio at 5, 4, 
3, 2, and 1 quarter(s) before failure is 0%. In other words, the median 
failed bank did not hold any reciprocal deposits up to 5 quarters prior 
to failure. The reciprocal deposit ratios at the 90th percentile of the 
distribution (the failed banks most reliant on reciprocal deposits) for 
the 5 quarters before failure decline from nearly 1.6% to just over 
0.2% of reciprocal deposit usage as banks approach failure.
    Figure 2 graphs the failing banks' usage of non-reciprocal brokered 
deposits (as a percentage of assets) prior to failure. Figure 2 shows 
that the median bank usage of non-reciprocal brokered deposits also 
declines as the banks approach failure. In contrast, those banks most 
reliant on brokered deposits (the 90th percentile of the distribution), 
do not show any significant run off in non-reciprocal brokered deposits 
as the banks approach failure.
    Given the small sample size involved in this analysis, it is 
inappropriate to draw strong overall conclusions regarding the behavior 
of reciprocal deposits balances at failing banks. Moreover, since not 
all weak banks fail, the behavior of reciprocal deposit funding at weak 
banks (not analyzed in this memo) could also inform the regulatory 
debate about safety and soundness issues associated with reciprocal 
deposit usage.
[GRAPHIC] [TIFF OMITTED] TP06FE19.020


[[Page 2392]]


[GRAPHIC] [TIFF OMITTED] TP06FE19.021

Failure Prediction and Reciprocal Deposits

    We estimate three-year failure prediction models using 2009, 2012, 
and 2015 data to predict failures from 2010 to 2017. We estimate 
failure models as a function of reciprocal and non-reciprocal brokered 
deposits. The results are reported in Table 6. Table 6 reports the 
estimated coefficients and p-values of the logistic regressions.
    In the failure model specification reported in Column (1) of Table 
6, two funding ratios, reciprocal deposits and non-reciprocal brokered 
deposits are included. Table 6 reports that the non-reciprocal brokered 
deposits ratio has a positive and statistically significant effect on a 
bank's estimated probability of failure.
    Column (1) of Table 6 also shows that higher nonperforming loans 
and other real estate owned are positively and statistically 
significant variables in the bank failure probability model.
    Because we measure the banks' liability components as ratios, as a 
bank increases its use of reciprocal deposits and non-reciprocal 
deposits, there are necessarily offsetting changes in the bank's other 
funding sources. By including other funding measures in the models, we 
investigate whether the implicit shift in a bank's liability structure 
(as a bank increases its dependence on reciprocal and non-reciprocal 
brokered deposits) is a possible source of the increase in failure 
probability.
    Column (2) of Table 6 reports the results of the failure 
probability model when we include a bank's equity to asset ratio to 
control for bank leverage. By including the equity ratio in the model, 
the coefficient estimates on reciprocal and non-reciprocal brokered 
deposits measure the effect of increasing a bank's reliance on these 
deposit sources and decreasing its reliance on other liabilities, 
holding the bank's equity ratio unchanged. Holding the bank equity 
ratio constant, the estimated coefficient on non-reciprocal brokered 
deposits ratio is positive with a p-value of 0.128. The estimated 
coefficient on reciprocal deposits ratio remains statistically 
insignificant.
    Column (3) of Table 6 reports the failure model estimates when the 
model includes a bank's reciprocal deposits, non-reciprocal brokered 
deposits, and core deposits to assets ratios. In this specification, 
the estimated coefficient on the reciprocal deposits ratio measures the 
effect of increasing reciprocal deposits, holding constant non-
reciprocal brokered deposits and core deposits and reducing other bank 
liabilities. The coefficient of the reciprocal deposits ratio remains 
statistically insignificant. The coefficient of non-reciprocal deposits 
is statistically significant when core deposits are held constant. The 
coefficient of the core deposits ratio on bank failure probability is 
statistically insignificant. This result differs from the results in an 
earlier section as well as long standing FDIC experience where, on 
average, core deposits reduce the failure probability.
    Column (4) of Table 6 reports the failure model estimates when the 
model includes a bank's reciprocal deposits, non-reciprocal brokered 
deposits, equity, and core deposits to assets ratios. In this 
specification, the estimated coefficient on the reciprocal deposits 
ratio measures the effect of increasing reciprocal deposits, holding 
constant non-reciprocal brokered deposits, equity, and core deposits 
and reducing other bank liabilities. The coefficient of reciprocal 
deposits remains statistically insignificant. The coefficient of non-
reciprocal deposits is not statistically significant when the equity 
and core deposits ratios are both held constant.
    The results suggest that, on average, failed banks that used 
reciprocal brokered deposits did not use them as a substitute for 
equity or core deposit funding. The regression results show that equity 
and core deposits both decrease a bank's probability of failure. If 
banks that used reciprocal deposits used them as a substitute for 
equity or core deposit funding, the reciprocal deposit coefficient in 
Column (1) would be positive and significant and mirror the coefficient 
for non-reciprocal deposits. The fact that the reciprocal deposit 
coefficient in Column (1) is insignificant is consistent with the

[[Page 2393]]

interpretation that banks that used reciprocal brokered deposits in 
this sample period did not use them to substitute for equity or core 
deposit funding. At the same time, this analysis is based on a small 
sample limited to failures between 2010 and 2017. We believe it is 
inappropriate to place a high degree of confidence in the results of 
the analysis based on this limited sample.

                      Table 6--Three Year Failure Prediction Models for Reciprocal Deposits
----------------------------------------------------------------------------------------------------------------
                                                    Coefficient     Coefficient     Coefficient     Coefficient
                    Variables                        estimates       estimates       estimates       estimates
                                                             (1)             (2)             (3)             (4)
----------------------------------------------------------------------------------------------------------------
Intercept.......................................      *** -7.053      *** -2.995        * -9.289          -1.602
                                                         [0.000]         [0.000]         [0.069]         [0.137]
Non-reciprocal brokered deposits................       *** 0.023           0.014       *** 0.033          -0.003
                                                         [0.001]         [0.128]         [0.001]         [0.836]
Reciprocal deposits.............................          -0.015          -0.028           0.001          -0.040
                                                         [0.544]         [0.349]         [0.978]         [0.181]
Equity..........................................  ..............      *** -0.508  ..............      *** -0.520
                                                  ..............         [0.000]  ..............         [0.000]
Core deposits...................................  ..............  ..............           0.019       ** -0.019
                                                  ..............  ..............         [0.515]         [0.033]
Nonperforming loans.............................       *** 0.190       *** 0.142       *** 0.184       *** 0.142
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Other real estate owned.........................       *** 0.086           0.040        ** 0.075           0.042
                                                         [0.001]         [0.210]         [0.030]         [0.182]
Income before taxes.............................      *** -0.090       ** -0.097      *** -0.092       ** -0.101
                                                         [0.000]         [0.026]         [0.000]         [0.028]
Interest expense................................          -0.018       *** 0.419           0.561         * 0.359
                                                         [0.499]         [0.000]         [0.746]         [0.078]
Asset growth....................................        ** 0.009       *** 0.021           0.014       *** 0.020
                                                         [0.037]         [0.000]         [0.388]         [0.000]
CRE loans.......................................          0.0002          0.0007         -0.0007           0.001
                                                         [0.979]         [0.929]         [0.923]         [0.890]
C&D loans.......................................       *** 0.035       *** 0.047       *** 0.034       *** 0.046
                                                         [0.004]         [0.001]         [0.007]         [0.001]
C&I loans.......................................           0.007           0.022           0.012           0.021
                                                         [0.534]         [0.111]         [0.589]         [0.121]
Consumer loans..................................          -0.014          -0.030          -0.026          -0.025
                                                         [0.484]         [0.599]         [0.506]         [0.632]
CAMELS 3........................................       *** 1.772       *** 1.498       *** 1.772       *** 1.501
                                                         [0.000]         [0.000]         [0.000]         [0.000]
CAMELS 4 or 5...................................       *** 3.730       *** 2.101       *** 3.576       *** 2.087
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Pseudo R2.......................................           0.543           0.633           0.545           0.634
Wald Chi2.......................................             867             733             838             744
No. of observations.............................           21225           21225           21225           21225
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Using year-end Call Reports from 2009, 2012, and 2015 to predict 363 failures from 2010 to 2017.
\2\ Core deposits is defined as domestic deposits minus time deposits over the insurance limit and fully insured
  brokered deposits.
\3\ All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating
  4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the
  institution is CAMELS 3-rated and the institution is CAMELS 4 or 5-rated, respectively. Asset Growth is the
  institution's one-year asset growth rate.
\4\ The regressions include time fixed effects, but the coefficient estimates are not reported.
\5\ Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
  percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
  brackets.

Failure Loss Rate Models Including Reciprocal Deposits

    In this section, we examine whether banks' reliance on reciprocal 
brokered deposits are associated with differential failure loss rates. 
Again, data on reciprocal brokered deposits limits the sample to banks 
that failed between July 2009 and December 2017.\79\
---------------------------------------------------------------------------

    \79\ The Loss rate model is based on 457 failures instead of 458 
as reported in Table 5. One institution was excluded from loss rate 
model estimation because of abnormality in its last Call Report 
data. Namely, its core deposits to assets ratio was higher than 
100%.
---------------------------------------------------------------------------

    Failed bank loss rates are modeled as a function of the income and 
balance sheet characteristics of the failed bank. The explanatory 
variables included in the model are reciprocal deposits, non-reciprocal 
brokered deposits, equity, core deposits, nonperforming loans, other 
real estate owned, income earned but not collected, and loans to 
executive officers. In addition, we include a bank's concentration in 
CRE (commercial real estate), C&D (construction and development), C&I 
(commercial and industrial), and consumer loans. The model allows loss 
rates to differ for small (asset size $500 million or less), medium 
(asset size between $500 million to $1 billion), and large (asset size 
$1 billion and higher) banks. The year fixed-effects are added to 
capture any difference in unconditional loss rates across years. Call 
Report/TFR data are from the last quarter before the bank failure 
date.\80\
---------------------------------------------------------------------------

    \80\ There are some banks in the sample that have not filed Call 
Reports/TFRs on the quarter prior to its failure. For those banks, 
we use Call Reports/TFRs as of two quarters prior to failure.

[[Page 2394]]



                        Table 7--Loss Rate Models Including Reciprocal Brokered Deposits
----------------------------------------------------------------------------------------------------------------
                                                    Coefficient     Coefficient     Coefficient     Coefficient
                    Variable                         estimates       estimates       estimates       estimates
                                                             (1)             (2)             (3)             (4)
----------------------------------------------------------------------------------------------------------------
Intercept.......................................      *** 11.754      *** 13.479           0.551           5.101
                                                         [0.000]         [0.000]         [0.890]         [0.220]
Non-reciprocal brokered deposits................         * 0.092         * 0.095       *** 0.262       *** 0.218
                                                         [0.090]         [0.073]         [0.000]         [0.003]
Reciprocal deposits.............................          -0.253          -0.230          -0.131          -0.145
                                                         [0.448]         [0.483]         [0.694]         [0.658]
Equity..........................................  ..............      *** -0.738  ..............      *** -0.623
                                                  ..............         [0.000]  ..............         [0.001]
Core deposits...................................  ..............  ..............       *** 0.168        ** 0.121
                                                  ..............  ..............         [0.001]         [0.016]
Nonperforming loans.............................       *** 0.502       *** 0.415       *** 0.467       *** 0.404
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Other real estate owned.........................       *** 0.827       *** 0.783       *** 0.801       *** 0.771
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Income earned but not collected.................       *** 6.453       *** 6.361       *** 6.276       *** 6.247
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Loan to executive officers......................           0.041          -0.074           0.020          -0.071
                                                         [0.915]         [0.844]         [0.958]         [0.848]
Bank size between $500 mil-$1 bil...............      *** -6.063      *** -5.905      *** -5.526      *** -5.540
                                                         [0.000]         [0.000]         [0.001]         [0.001]
Bank size > $1 billion..........................      *** -8.686      *** -8.305      *** -7.151      *** -7.253
                                                         [0.000]         [0.000]         [0.000]         [0.000]
CRE loans.......................................           0.018           0.027           0.013           0.022
                                                         [0.695]         [0.549]         [0.780]         [0.628]
C&D loans.......................................           0.123         * 0.137         * 0.134         * 0.143
                                                         [0.103]         [0.065]         [0.073]         [0.053]
C&I loans.......................................        ** 0.162         * 0.138         * 0.151         * 0.134
                                                         [0.043]         [0.079]         [0.056]         [0.087]
Consumer loans..................................        ** 0.705       *** 0.758        ** 0.702       *** 0.747
                                                         [0.013]         [0.007]         [0.012]         [0.007]
Adjusted R......................................           0.315           0.341           0.332           0.348
No. of observations.............................             457             457             457             457
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Estimates use data from 2009 to 2017 to predict 457 failure loss rates from July 2, 2009 to December 15,
  2017.
\2\ Core deposits are defined as domestic deposits minus time deposits over the insurance limit and fully
  insured brokered deposits.
\3\ All financial variables are normalized by total assets with the exception of Bank size between $500 mil-$1
  bil and Bank size <ls-thn-eq> $1billion. Bank size between $500 mil-$1 bil is a dummy variable indicating that
  the institution's asset size is between $500 million and $1 billion. Bank size <ls-thn-eq> $1billion is a
  dummy variable indicating that the institution's asset size is over $1 billion.
\4\ The regressions include year fixed effects, but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
  percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
  brackets.

    Table 7 reports the results of the failure loss rate model. Column 
(1) of Table 7 shows that higher nonperforming loans and other real 
estate owned are associated with higher loss rates. Banks with higher 
C&I and consumer loans (to assets ratios also tend to have higher loss 
rates. Medium-sized and large failed banks tend to have lower loss 
rates compared to small banks.
    In the specification reported in Column (1), reciprocal deposits 
and non-reciprocal brokered deposits ratios are included. The estimated 
coefficients for reciprocal deposits and non-reciprocal brokered 
deposits ratios measure the effect of increases in these ratios and an 
offsetting reduction in other funding sources on the loss rate. The 
positive and statistically significant coefficient on non-reciprocal 
brokered deposits suggests that an increase in non-reciprocal brokered 
deposits (and an offsetting decrease in other funds either equity or 
other liabilities) increases the DIF loss rate. The coefficient on 
reciprocal deposits ratio is not statistically significant.
    Column (2) of Table 7 reports results when the failed bank's equity 
ratio is also included as an explanatory variable. The positive and 
statistically significant coefficient on non-reciprocal brokered 
deposits ratio suggests that increasing reliance on non-reciprocal 
brokered deposits, holding bank equity constant and reducing 
liabilities other than reciprocal deposits, increases the DIF loss 
rate. The estimated coefficient on reciprocal deposits ratio remains 
statistically insignificant. The negative and statistically significant 
coefficient on the equity ratio suggests that increasing equity and 
decreasing a bank's reliance on other liabilities with no change in 
non-reciprocal brokered and reciprocal deposits reduces the loss rate.
    Column (3) of Table 7 reports results when the reciprocal deposits, 
non-reciprocal brokered deposits, and core deposits ratios are included 
as funding measures. The estimated coefficient on non-reciprocal 
brokered deposits ratio is positive and statistically significant 
suggesting that, holding the reciprocal deposits and core deposits 
ratios constant, increasing non-reciprocal deposits and decreasing 
other bank liabilities and possibly equity, increases the failure loss 
rate. Reciprocal deposits are statistically insignificant.
    Column (4) of Table 7 reports results when the reciprocal deposits, 
non-reciprocal brokered deposits, equity, and core deposits ratios are 
included as funding measures. The estimated coefficient on the non-
reciprocal

[[Page 2395]]

brokered deposits ratio is positive and statistically significant, 
suggesting that, holding reciprocal deposits, equity, and core deposits 
ratios constant, increasing non-reciprocal deposits and decreasing 
other bank liabilities increases the failure loss rate.
    The results reported in Table 7 do not suggest that the use of 
reciprocal deposits have been associated with higher loss rates on 
average while non-reciprocal brokered deposits clearly have a strong 
relationship with FDIC losses. At the same time, the sample size is 
small and specialized to the crisis. Unlike the full brokered deposit 
sample results (reported in an early section) and FDIC practical 
resolution experience, core deposits do not clearly reduce FDIC losses. 
While the reasons for this difference in findings are beyond the scope 
of this analysis, it is likely that they owe in part to the intensive 
FDIC resolution activity in this sample period with heavy reliance on 
loss sharing agreements. There were an unusually large number of bank 
franchises available through the FDIC resolution process at a time when 
franchise values may also have been depressed due to unusually weak 
opportunities for profitable lending growth. These issues raise 
concerns that the limited data in reciprocal deposit sample may not be 
representative of the characteristics of the true failure population. 
On balance, we believe it is inappropriate to place a high degree of 
confidence in the results of the analysis of this limited and 
potentially unrepresentative sample period.

CAMELS Ratings of Banks Using Reciprocal Deposits

    In this section, we investigate what type of banks use reciprocal 
deposits. In particular, we analyze the financial health of these banks 
by looking at their CAMELS ratings. We identify banks with positive 
reciprocal deposits on their balance sheet. We investigate the 
relationship between CAMELS ratings and the use of reciprocal brokered 
deposits. During the crisis, in 2009 and 2010, banks with reciprocal 
deposits made up higher percentages of banks with a 3, 4, or 5 
composite CAMELS rating. Banks with reciprocal deposits made up a 
smaller share of banks with a 1 CAMELS rating. By 2011, banks with 
reciprocal deposits made up higher percentages of banks with a 2 or 3 
CAMELS rating, although the share banks with reciprocal deposits and a 
4 or 5 CAMELS rating was still higher than the share with a 1 CAMELS 
rating. In 2017, banks with reciprocal deposits made up higher 
percentages of banks with a 1 or 2 CAMELS rating.
    Figure 3 charts the percentages of banks with positive reciprocal 
deposits for each rating category as of December 2017. For instance, 
19.35% of all banks with CAMELS rating of 1 had reciprocal deposits in 
December 2017. A substantially lower share, 6.56% of 4 rated banks and 
9.68% of 5 rated banks had reciprocal deposits.
[GRAPHIC] [TIFF OMITTED] TP06FE19.022

Analysis of Listing Services Deposits

    In this section we use the available data to analyze non-brokered 
listing service deposit use patterns and the effects of listing service 
deposits on the probability of bank failure and DIF loss rates. Banks 
began reporting non-brokered listing service deposit funds beginning 
March 2011.
    Table 8 reports the distribution of different listing service 
deposit ratios by Call Report date. The first panel of Table 8 reports 
the distribution of different listing service deposit ratios (total 
listing service deposits relative to total assets, total domestic 
deposits, and total brokered deposits) for December 2011. Row (3) 
reports the distribution of the ratios of listing service deposits to 
total brokered deposits, among banks that reported non-zero brokered 
deposits.
    Across the available Call Report filing dates, the average bank's 
reliance on

[[Page 2396]]

listing service deposits shows a stable trend. The mean total listing 
service to assets ratio in December 2017 was 1.18% which was similar to 
1.36% in December 2011. In December 2017, the average listing service 
deposit to total brokered deposit ratio was much higher at 1197.21.

    Table 8--Distribution of Listing Deposits as a Ratio of Assets and Domestic Deposits by Call Report Date
----------------------------------------------------------------------------------------------------------------
                                         N         Max        99th       95th       90th       Med        Mean
----------------------------------------------------------------------------------------------------------------
                                                  December 2011
----------------------------------------------------------------------------------------------------------------
(1)..............  Listing services       7366      85.89      23.18       9.57       3.56          0       1.36
                    deposits/Assets.
(2)..............  Listing services       7364     100.00      28.11      11.18       4.34          0       1.61
                    deposits/Total
                    Domestic
                    Deposits.
(3)..............  Listing services       3015      86730    4089.05     514.81     173.12          0     239.09
                    deposits/Total
                    Brokered
                    Deposits.
----------------------------------------------------------------------------------------------------------------
                                                  December 2017
----------------------------------------------------------------------------------------------------------------
(1)..............  Listing services       5679      45.92      19.69       7.71       3.48          0       1.18
                    deposits/Assets.
(2)..............  Listing services       5678      97.71      25.43       9.66       4.35          0       1.49
                    deposits/Total
                    Domestic
                    Deposits.
(3)..............  Listing services       2527    2550800    1627.28     281.10     122.34          0    1197.21
                    deposits/Total
                    Brokered
                    Deposits.
----------------------------------------------------------------------------------------------------------------

Listing Service Deposit Usage at Failed Banks

    In this section, we examine the extent to which failed banks relied 
on non-brokered listing service deposits. Because of data limitations 
on listing service deposits, the analysis includes only banks that 
failed between April 8, 2011 and December 15, 2017. During this period, 
180 banks failed.
    Table 9 reports number (percentage in parenthesis) of failed banks 
that reported positive listing service deposits on their balance sheet 
prior to their failure. In this table, data are analyzed according to 
the Call Report data reported a selected number of quarters before the 
bank failure date. Listing service deposits were first reported on Call 
Reports in March 2011. We are limited to 63 failures, which failed 
between January 2013 and December 2017, to have 8 quarters of Call 
Report data with listing service deposit information. In contrast, 
there are 180 failures, which failed between April 2011 to December 
2017, with 1 quarter of Call Report data with listing service deposit 
information.
    The data suggest a number of consistent patterns. Somewhere between 
60 and 65 percent of the failed banks used listing service deposits for 
at least 8 quarters before they failed. There is also evidence that 
suggests that some of these failed banks increased use of listing 
service deposits in the quarters leading up to their failure.

    Table 9--Listing Deposits Usage in Failed Banks by Quarter Before
                                 Failure
------------------------------------------------------------------------
                                                        Number of banks
                                          Number of      with positive
  Number of quarters before failure     observations    listing deposits
                                                          reported (%)
(1)                                               (2)                (3)
------------------------------------------------------------------------
8....................................              63         40 (63.49)
7....................................              71         44 (61.97)
6....................................              83         51 (61.45)
5....................................              98         62 (63.27)
4....................................             114         72 (63.16)
3....................................             132         85 (64.39)
2....................................             158        108 (68.35)
1....................................             180        116 (64.44)
------------------------------------------------------------------------
Notes:
\1\ Based on 180 failures between April 8, 2011 and December 15, 2017.
  All failures are after March 2011 when the listing services deposits
  were first reported on the Call Reports.

    Figure 4 graphs the failing banks' listing service deposits to 
assets ratio prior to failure, based on 180 failures between April 8, 
2011, and December 15, 2017. The median listing service deposits ratio 
increases from approximately 4% at 5 quarters before failure to just 
over 5% at 1 quarter before failure. The listing service deposit ratios 
at the 90th percentile of the distribution (the failed banks most 
reliant on listing service deposits) increased from about 26% at 5 
quarters before failure to 33% at 1 quarter before failure, which shows 
an increase of listing service deposit usage as banks approach failure.
    Figure 5 graphs the failing banks' usage of listing service 
deposits (as a percentage of assets) prior to failure, based on 63 
failures between January 11, 2013 and December 15, 2017. This time 
frame incorporates banks that failed and had at least 8 quarters of 
data on listing service deposits. Figure 5 shows that the median bank 
usage of listing service deposits remains relatively stable as the 
banks approach failure. In contrast, those banks most reliant on 
listing service deposits (the 90th percentile of the distribution), 
show an initial increase in listing service deposits as the banks 
approach failure.\81\
---------------------------------------------------------------------------

    \81\ Given the small sample size involved in this analysis, it 
is inappropriate to draw strong overall conclusions regarding the 
behavior of listing service deposits balances at failing banks. 
Moreover, since all weak banks do not fail, the behavior of listing 
service deposit funding at weak banks (not analyzed in this memo) 
could also inform the regulatory debate about safety and soundness 
issues associated with listing service deposit usage.

---------------------------------------------------------------------------

[[Page 2397]]

[GRAPHIC] [TIFF OMITTED] TP06FE19.023


[[Page 2398]]


[GRAPHIC] [TIFF OMITTED] TP06FE19.024

Failure Prediction and Listing Service Deposits

    We estimate three-year failure prediction models using 2011 and 
2014 data to predict failures between 2012 and 2017. We estimate 
failure models as a function of non-brokered listing service deposits 
and non-listing, non-brokered deposits. Table 10 reports the estimated 
coefficients and p-values of the logistic regressions.
    In the failure model specification reported in Column (1) of Table 
10, only the listing service deposits ratio is included to characterize 
a bank's liability structure. Column (1) of Table 10 reports that the 
listing service deposits ratio has a positive and statistically 
significant effect on a bank's estimated probability of failure.
    Because we measure the banks' liability components as ratios, as a 
bank increases its use of listing service deposits, there are 
necessarily offsetting changes in the bank's other funding sources. By 
including other funding measures in the models, we investigate whether 
the implicit shift in a bank's liability structure (as a bank increases 
its dependence on listing service and other non-listing, non-brokered 
deposits) is a possible source of the increase in failure probability.
    Column (2) of Table 10 reports the results of the failure 
probability model when we include a bank's equity to asset ratio to 
control for bank leverage. By including the equity ratio in the model, 
the coefficient estimates on listing service deposits measure the 
effect of increasing a bank's reliance on this deposit source and 
decreasing its reliance on other liabilities, holding the bank's equity 
ratio unchanged. The estimated coefficient on the listing service 
deposits ratio becomes statistically insignificant when equity is held 
constant.
    Column (3) of Table 10 reports the failure model estimates when the 
model includes a bank's listing service deposits and non-listing, non-
brokered deposits. In this specification, the estimated coefficient on 
the listing deposits ratio measures the effect of increasing listing 
deposits, holding constant non-listing, non-brokered deposits and 
reducing other bank liabilities. The estimated coefficient on listing 
service deposits is positive and statistically significant. Moreover, 
the estimated coefficient on non-listing, non-brokered deposits is 
positive and statistically significant. To the extent that non-listing, 
non-brokered deposits is a measure of banks' core deposits, this result 
differs from those reported in Tables 1 and 2 based on a dataset with 
longer bank failure experiences. Column (4) of Table 10 reports the 
failure model estimates when the model includes a bank's listing 
deposits, non-listing non-brokered deposits, and equity ratios. In this 
specification, the estimated coefficient on the listing deposits ratio 
measures the effect of increasing listing deposits, holding constant 
non-listing non-brokered deposits and equity, and reducing other bank 
liabilities. The coefficient of listing deposits becomes statistically 
insignificant. The coefficient of non-listing, non-brokered deposits is 
no longer statistically significant when the equity ratio is held 
constant.
    This analysis is based on a small sample limited to failures 
between 2012 and 2017. We believe it is inappropriate to place a high 
degree of confidence in the results of the analysis based on this 
limited sample.

[[Page 2399]]



               Table 10--Three Year Failure Prediction Models Including Listing Services Deposits
----------------------------------------------------------------------------------------------------------------
                                                    Coefficient     Coefficient     Coefficient     Coefficient
                    Variables                        estimates       estimates       estimates       estimates
                                                             (1)             (2)             (3)             (4)
----------------------------------------------------------------------------------------------------------------
Intercept.......................................      *** -8.068      *** -2.929     *** -15.281       ** -4.416
                                                         [0.000]         [0.000]         [0.000]         [0.019]
Listing services deposits.......................        ** 0.021           0.013       *** 0.109           0.028
                                                         [0.025]         [0.248]         [0.000]         [0.215]
Equity..........................................  ..............      *** -0.537  ..............      *** -0.519
                                                  ..............         [0.000]  ..............         [0.000]
Non-listing, non-brokered deposits..............  ..............  ..............       *** 0.087           0.015
                                                  ..............  ..............         [0.000]         [0.456]
Nonperforming loans.............................       *** 0.137       *** 0.124       *** 0.138       *** 0.125
                                                         [0.000]         [0.001]         [0.000]         [0.001]
Other real estate owned.........................       *** 0.088         * 0.065         * 0.054           0.059
                                                         [0.002]         [0.064]         [0.066]         [0.101]
Income before taxes.............................      *** -0.256       ** -0.218      *** -0.310      *** -0.222
                                                         [0.002]         [0.008]         [0.000]         [0.006]
Interest expense................................           0.394        ** 0.728       *** 0.668       *** 0.861
                                                         [0.146]         [0.024]         [0.000]         [0.001]
Asset growth....................................          -0.005           0.002          -0.002           0.003
                                                         [0.687]         [0.890]         [0.858]         [0.835]
CRE loans.......................................          -0.011          -0.022          -0.019          -0.023
                                                         [0.335]         [0.104]         [0.151]         [0.102]
C&D loans.......................................          -0.009          -0.017          0.0001          -0.015
                                                         [0.693]         [0.548]         [0.996]         [0.584]
C&I loans.......................................           0.008           0.036           0.011           0.036
                                                         [0.734]         [0.164]         [0.649]         [0.165]
Consumer loans..................................           0.007          -0.004          -0.018          -0.007
                                                         [0.872]         [0.959]         [0.799]         [0.929]
CAMELS 3........................................           0.941           0.643           0.790           0.650
                                                         [0.274]         [0.382]         [0.313]         [0.373]
CAMELS 4 or 5...................................       *** 3.656       *** 1.459       *** 3.170       *** 1.449
                                                         [0.000]         [0.008]         [0.000]         [0.009]
Pseudo R2.......................................           0.500           0.609           0.526           0.609
Wald Chi2.......................................         *** 259         *** 374         *** 287         *** 377
N...............................................          13,857          13,857          13,857          13,857
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Using year-end Call Reports 2011 and 2014 to predict 113 failures between 2012 and 2017.
\2\ Listing services deposits are defined as estimated amount of deposits obtained through the use of deposit
  listing services that are not brokered.
\3\ Non-listing, non-brokered deposits are defined as domestic deposits minus listing service deposits and
  brokered deposits.
\4\ All financial variables are normalized by total assets with the exception of CAMELS rating 3, CAMELS rating
  4 or 5, and Asset Growth. CAMELS rating 3 and CAMELS rating 4 or 5 are dummy variables indicating that the
  institution is CAMELS 3-rated and the institution is CAMELS 4 or 5-rated, respectively. Asset Growth is the
  institution's one-year asset growth rate.
\5\ The regressions include time fixed effects, but the coefficient estimates are not reported.
\6\ Standard errors are clustered by bank.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
  percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
  brackets.

Failure Loss Rate Models Including Listing Service Deposits

    In this section, we examine whether banks' reliance on listing 
service deposits are associated with differential failure loss rates. 
Data on listing deposits limits the sample to banks that failed between 
April 8, 2011, and December 15, 2017.
    Failed bank loss rates are modeled as a function of the income and 
balance sheet characteristics of the failed bank. The explanatory 
variables included in the model are listing service deposits, non-
listing, non-brokered deposits, equity, nonperforming loans, other real 
estate owned, income earned but not collected, and loans to executive 
officers. In addition, we include a bank's concentration in CRE 
(commercial real estate), C&D (construction and development), C&I 
(commercial and industrial), and consumer loans. The model allows loss 
rates to differ for small (asset size $500 million or less), medium 
(asset size between $500 million to $1 billion), and large (asset size 
$1 billion and higher) banks. The year fixed-effects are added to 
capture any difference in unconditional loss rates across years. Call 
Report/TFR data are from the last quarter before the bank failure date.

                              Table 11--Loss Rate Models Including Listing Deposits
----------------------------------------------------------------------------------------------------------------
                                                    Coefficient     Coefficient     Coefficient     Coefficient
                    Variable                         estimate        estimate        estimate        estimate
                                                             (1)             (2)             (3)             (4)
----------------------------------------------------------------------------------------------------------------
Intercept.......................................      *** 11.256      *** 11.920          -1.982          -0.231
                                                         [0.001]         [0.001]         [0.813]         [0.979]
Listing Services Deposits.......................        ** 0.103         * 0.092        ** 0.259        ** 0.237
                                                         [0.029]         [0.053]         [0.012]         [0.026]
Equity..........................................  ..............          -0.359  ..............          -0.269
                                                  ..............         [0.247]  ..............         [0.391]
Non-listing, non-brokered deposits..............  ..............  ..............         * 0.149           0.135
                                                  ..............  ..............         [0.086]         [0.126]
Nonperforming loans.............................        ** 0.273        ** 0.254        ** 0.296        ** 0.280
                                                         [0.021]         [0.033]         [0.012]         [0.020]
Other real estate owned.........................       *** 0.528       *** 0.520         * 0.507       *** 0.503

[[Page 2400]]

 
                                                         [0.000]         [0.000]         [0.001]         [0.001]
Income earned but not collected.................      *** 13.242      *** 13.167        * 13.802      *** 13.692
                                                         [0.000]         [0.000]         [0.000]         [0.000]
Loan to executive officers......................          -0.265          -0.287          -0.180          -0.205
                                                         [0.617]         [0.588]         [0.733]         [0.699]
Bank size $500 mil-$1 billion...................          -4.117          -3.924          -2.638          -2.633
                                                         [0.126]         [0.145]         [0.347]         [0.348]
Bank size > $1 billion..........................        * -5.854        * -5.773          -4.358          -4.439
                                                         [0.089]         [0.094]         [0.217]         [0.209]
CRE loans.......................................          -0.030          -0.025          -0.034          -0.030
                                                         [0.607]         [0.668]         [0.558]         [0.608]
C&D loans.......................................           0.052           0.052           0.006           0.011
                                                         [0.720]         [0.720]         [0.965]         [0.941]
C&I loans.......................................           0.101           0.096           0.105           0.100
                                                         [0.379]         [0.405]         [0.360]         [0.381]
Consumer loans..................................           0.330           0.359           0.242           0.272
                                                         [0.437]         [0.398]         [0.568]         [0.524]
Adjusted R2.....................................           0.193           0.195           0.203           0.202
No. of observations.............................             180             180             180             180
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Estimates based on data from March 2011 to September 2017 to predict loss rates of 180 failures from April
  8, 2011 to December 15, 2017.
\2\ Listing services deposits are defined as estimated amount of deposits obtained through the use of deposit
  listing services that are not brokered.
\3\ Non-listing, non-brokered deposits are defined as domestic deposits minus listing service deposits and
  brokered deposits.
\4\ All financial variables are normalized by total assets with the exception of Bank size between $500 mil-$1
  bil and Bank size <ls-thn-eq> $1 billion. Bank size between $500 mil-$1 bil is a dummy variable indicating
  that the institution's asset size is between $500 million and $1 billion. Bank size <ls-thn-eq> $1 billion is
  a dummy variable indicating that the institution's asset size is over $1 billion.
\5\ Failure year fixed effects are included but not reported.
*** Indicates statistical significance at the 1 percent level. ** Indicates statistical significance at the 5
  percent level. * Indicates statistical significance at the 10 percent level. P-values are reported in
  brackets.

    Table 11 reports the results of the failure loss rate model. Column 
(1) of Table 11 shows that higher nonperforming loans, other real 
estate owned, and income earned but not collected are associated with 
higher loss rates. Large failed banks tend to have lower loss rates 
compared to small banks.
    In the specification reported in Column (1), the listing service 
deposits ratio is included. The estimated coefficient for the listing 
service deposits ratio measures the effect of an increase in this ratio 
and an offsetting reduction in other funding sources on the loss rate. 
The positive and statistically significant coefficient on listing 
service deposits suggests that an increase in listing service deposits 
(and an offsetting decrease in other funds either equity or other 
liabilities) increases the DIF loss rate.
    Column (2) of Table 11 reports results when the failed bank's 
equity ratio is also included as an explanatory variable. The positive 
and statistically significant coefficient on the listing service 
deposits ratio suggests that increasing reliance on listing service 
deposits, holding bank equity constant and reducing other liabilities, 
increases the DIF loss rate. The estimated coefficient on equity is not 
statistically significant.
    Column (3) of Table 11 reports results when listing services 
deposits and non-listing, non-brokered deposits ratios are included as 
funding measures. The estimated coefficient on listing services 
deposits ratio remains positive and statistically significant 
suggesting that, holding the non-listing, non-brokered deposits ratios 
constant, increasing listing services deposits and decreasing other 
bank liabilities and possibly equity, increases the failure loss rate.
    Column (4) of Table 11 reports results when the listing services 
deposits, non-listing non-brokered deposits, and equity ratios are 
included as funding measures. The estimated coefficient on the listing 
services deposits ratio is positive and statistically significant, 
suggesting that, holding non-listing non-brokered deposits and equity 
ratios constant, increasing listing services deposits and decreasing 
other bank liabilities increases the failure loss rate. An unexpected 
result is that equity remains statistically insignificant in reducing 
DIF loss rates. The non-listing, non-brokered deposits ratio also 
becomes statistically insignificant.
    The results reported in Table 11 suggest that the use of listing 
service deposits are associated with higher loss rates on average. At 
the same time, the sample size is small and specialized to the failures 
from 2012 to 2017. Unlike the full brokered deposit sample results 
(reported in an early section) and FDIC practical resolution 
experience, equity does not clearly reduce FDIC losses.\82\
---------------------------------------------------------------------------

    \82\ The limited data in listing service deposit sample may not 
be representative of the characteristics of the true failure 
population. On balance, we believe it is inappropriate to place a 
high degree of confidence in the results of the analysis of this 
limited and potentially unrepresentative sample period.

---------------------------------------------------------------------------
    Dated at Washington, DC, on December 18, 2018.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Valerie Best,
Assistant Executive Secretary.
[FR Doc. 2018-28273 Filed 2-5-19; 8:45 am]
 BILLING CODE 6714-01-P


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