April 28, 2011
The Honorable Sheila Bair
Chairman
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
RE: Dodd Frank Brokered Deposit Study
Dear Chairman Bair:
The Community Bankers Association of Illinois (CBAI) proudly represents 425 community banks and thrifts throughout the state of Illinois. Wewelcome this opportunity to comment on the FDIC’s Core and Brokered Deposit Study (Study). Section 1506 of the Dodd Frank Reform and Consumer Protection Act requires the FDIC to complete a Study on core and brokered deposits, evaluating the definitions and looking at issues from how they affect deposit insurance premiums to the potential impact of reforms. The objective of the study is to determine if changes are warranted to statutory or regulatory treatment of brokered deposits. The FDIC must report back to Congress by July.
We respectfully provide our observations regarding brokered deposits and key principals the FDIC should strongly consider in designing the study, and only if clearlywarranted, in any new rules, regulations or guidance.
Brokered deposits, if used properly, are a valuable resource for community banks. They can assist acommunity bankin asset liability management, executing funding strategies, and depending onmarket conditions, evenprovide a lower cost of funds. Brokered deposits are not by their very nature something to be avoided. Banks that utilize brokered deposits in their
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funding mixmust not automatically be criticized for usingthese resources. The stigma of brokered deposits hasebbed and flowedduringvarying economic cycles and banking industry conditions. Hopefully, this Study will shed sufficient light, change the misconceptions, and promote the acceptability of banks using brokered deposits.
The assumption that reliance on brokered deposits is the sole determining factor in excessive risk taking is an oversimplification. At most, it is symptomatic rather than the cause. Further, the view that if the “fuel” of such growth (i.e. brokered deposits) is cut off then risky growth slows down is contrary to existing evidence. If a bank is looking to engage in and fund risky growth it will do so and find a way without brokered deposits.
Eachcommunity bankis unique in its complexity and sophistication. Clearly, the overwhelming majority of bank managers are very capable of properly managing their deposit concentrations including brokered deposits. Therefore a one size-fits-all approach with respect to categorizing and assessing brokered vs. core deposits clearly will not work.
Every community is also unique. What may be "hot money" in one bank and community may be solid franchise deposits in a bank located in a more competitive market. Therefore, any blanket requirement that all depositsover a certain threshold are to be considered "hot money" is inappropriate.
Moreover, community banks in general would find it impossible to meet all of the demand for credit from their customers solely from local deposits. It was the need for funding to meet local credit demand that led to the development of alternative funding sources.
Banks should be given the greatest flexibility to include as many deposits as possiblein core deposits. Absent significant evidence to the contrary, all of the bank's deposits should be considered core unless the deposits fall into a very small number of reasonable, easily, and clearly defined categories. Clearly, however, it appears the FDIC is heading towards developing a new way to view funding sources. In the new
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methodology it would certainly be a mistake to categorize deposits as brokered solely as a result of a third party relationship, and any requirement for a granular analysis of each and every deposit and depositor would be an unreasonable and unnecessary regulatory burden.
CBAI members currently use a variety of funding sources, including but not limited to: QwickRate, PMA Financial Network, Promontory Interfinancial Network’s CDARS, and the Federal Home Loan Banks. These are an integral part of diversified funding sources for community banks. Community bank usage of these diversified funding sources should not be discouraged if they are part of a prudent A/L management and funding program. Regulators should certainly not pick the winners and losers among these non-core funding sources by favoring one versus the other.
Any suggestion that banks should refrain completely from using brokered deposits for fear of the potential negative impact on franchise value is misguided. Equally misguided are arbitrary hard cap percentages for brokered deposits above which financial institutions experience heightened regulatory scrutiny and criticism.
Community banks are currently dealing with, and rightly anticipating, a glut of new regulation as a result of the Dodd Frank Act. Any additional new rules/regulations or guidance concerning brokered CDs would only add to this already unacceptable regulatory burden and would be inappropriate. Any new rules/regulationsor guidance resulting from the Study musthelp relieve the regulatory burden and make it easier to distinguish core versus non-core deposits.
Banks that are adversely classified or under regulatory enforcement actions, but have prudently used brokered deposits in the past, should not be barred from renewing brokered deposits - as long as the renewed deposits are consistent with their past usage of brokered deposits. It is an unnecessary disruptionof A/L management, and could even exacerbate a liquidity problem, when a bank that is adversely classified cannot at least renew existing maturities of brokered deposits. Moreover, forcing banks to run off local relationship deposits now defined as brokered lowers the franchise value, something that cannot possibly be in the best interest of either the bank or the FDIC. The current requirement under Section 29 of the FDI Act places an
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unnecessarystress on institutions that are already stressed but that are being very closelymonitored by their regulators. We recommend Section Section 29 as implemented by Section 337.6 of the FDIC Rules and Regulations be amended accordingly.
If, as a result of the Study, a potentially revamping of regulator’s classifications of and assessment on various types of bank deposits and other funding is recommended, CBAI urges the FDIC to carefully consider: any unintended consequences of its recommendations (i.e. impact on community banks, small business lending, and municipal governments), the existing regulatory burden on community banks, preserving a wide variety of funding sources for community banks, and not further stressing adversely classified community banks and those under regulatory enforcement actions.
Thank you for the opportunity to comment on these issues of importance to Illinois community banks. If you have any questions or need additional information, please feel free to contact me by telephone at (847) 909-8341 or by e-mail at .
Sincerely,
/s/
David G. Schroeder
Vice President Federal Governmental Relations
Community Bankers Association of Illinois
901 Community Drive
Springfield, Illinois 62703-5184