Bank executives and boards need to carefully analyze their institution’s liquidity, funding and capital if billions of deposits are deemed risky, following a proposal from the Federal Deposit Insurance Corp. (FDIC) that would undo a four-year-old rule change, reports Bank Director.
In July, the FDIC proposed changing what deposit arrangements count as brokered, indicating that the agency believes a significant reliance on deposits that come through third-party arrangements increases an institution’s risk profile versus deposits brought by banking customers directly. Some industry observers worry that the rule could have unintended consequences for bank liquidity and capital levels.
“In the worst case, these [newly designated brokered deposits] will have to get offloaded in a way that potentially puts those banks at even greater liquidity risk, especially to the extent that they have a higher concentration,” says Alexandra Steinberg Barrage, a partner at Troutman Pepper and former FDIC staffer.
Operationally, Steinberg Barrage says bank boards and executives should examine the rule against their banks’ deposit arrangements to identify what funds may need to be reclassified as brokered against total deposits and total liquidity, to better understand the liquidity, reporting and capital implications of the rule. She also suggests that banks communicate these figures to their examiners.
Finally, she recommends banks revisit their risk assessment and appetite in light of their potential brokered deposit concentration and conduct a scenario analysis and liquidity stress test to explore what could happen if these newly brokered deposits needed to roll off the balance sheet.