Shearman & Sterling LLP | Financial Regulatory Developments Focus | <span ><font >US Federal Deposit Insurance Corporation Seeks Comments Regarding the Treatment of Reciprocal Deposits</font ></span >
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  • US Federal Deposit Insurance Corporation Seeks Comments Regarding the Treatment of Reciprocal Deposits
    09/13/2018
    The U.S. Federal Deposit Insurance Corporation published a notice of proposed rulemaking and request for comments regarding a limited exception for a capped amount of reciprocal deposits from treatment as brokered deposits.  In general, brokered deposits are treated in a restrictive or adverse manner for various regulatory purposes.  Most significantly, an FDIC-insured institution that is less than adequately capitalized is prohibited from accepting brokered deposits.  Reciprocal deposit arrangements generally permit a bank to accept a large deposit in excess of FDIC insurance limits and place the excess amount with other banks in a reciprocal network, thereby affording full FDIC insurance coverage to the bank’s customers.  The proposed rule would implement Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends Section 29 of Federal Deposit Insurance Act.  Under the proposed rule,  a well-capitalized and well-rated (composite condition of outstanding or good) depository institution would be permitted to except non-brokered reciprocal deposits (defined in Section 202 of the EGRRCPA as “deposits received by an agent institution through a deposit placement network with the same maturity (if any) and in the same aggregate amount as covered deposits placed by the agent institution in other network member banks”) up to the lesser of 20 percent of its total liabilities or $5 billion from treatment as brokered deposits (referred to as the general cap).  For institutions that are not both well-capitalized and well-rated, the proposed rule provides for the exclusion of reciprocal deposits up to the lesser of the general cap or a special cap amount calculated as the average amount of reciprocal deposits held at quarter-end during the last four quarters preceding the quarter that the institution ceased to qualify as well-capitalized or well-rated, subject to certain conditions.     One potential impact of the rule is an increase in the use of reciprocal deposits given that undercapitalized banks would be permitted to accept such deposits to a limited extent.  The FDIC also proposes to make corresponding amendments to its insurance assessment regulations to ensure conformity with the statutory definition of reciprocal deposits.  The FDIC estimates that the changes could cause deposit insurance assessments to increase for certain banks that have brokered deposits greater than 10% of total assets.  The FDIC noted that this proposal will be followed by a proposed rulemaking that would address comprehensively the FDIC’s overall framework for regulating brokered deposits in light of changes in technology, business models and product types since the rules were put in place.  Comments to the proposed rule regarding reciprocal deposits are due no later than October 26, 2018.

    View full text of the FDIC proposal.