FDIC's McWilliams on Deposits
FDIC Chairman Jelena McWilliams spoke recently before the House Committee on Financial Services and said, "Our nation's banks have withstood the initial economic and financial market volatility of 2020, reflecting their strength going into the pandemic -- including strong asset quality and robust capital and liquidity positions. After weathering the initial shock, banks became instrumental in supporting individuals and businesses through lending and other financial intermediation and by distributing financial support provided by the federal government. In contrast to the high number of bank failures during the last financial crisis, only three banks failed during the pandemic, and none were due to the pandemic or the ensuing economic stress." She explained, "When I last appeared before the Committee, I reported that the banking system had accommodated a sharp increase in customer demand for deposits that far exceeded any deposit growth the FDIC had seen in the past. Deposit growth accelerated in the fourth quarter, reflecting persistently high savings rates and lower spending. The deposit trend in the first quarter of this year appears generally consistent with last year's deposit growth, due primarily to continued fiscal support for the economy.... The low interest rate environment coupled with economic uncertainties will continue to challenge the banking sector, placing downward pressure on revenue and the net interest margin. However, as noted above, the banking sector maintains strong capital and liquidity levels, which can mitigate potential future losses." She adds, "The Deposit Insurance Fund (DIF) balance was $117.9 billion on December 31, up $1.5 billion from the end of the third quarter and the highest level ever. However, the reserve ratio declined one basis point to 1.29 percent because of strong insured deposit growth, and not as the result of losses to the DIF. In September 2020, the FDIC adopted a Restoration Plan to restore the reserve ratio to at least the statutory minimum of 1.35 percent within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act. In accordance with the Restoration Plan, FDIC staff continues to monitor closely the factors that affect the reserve ratio." Discussing "Brokered Deposits," McWilliams tells Congress, "At the end of 2020, the FDIC Board approved a final rule updating our brokered deposits regulations, the first meaningful update to the brokered deposits regulations since the rules were first put in place approximately 30 years ago. As the banking sector transformed over those decades, the FDIC received many questions regarding whether specific deposit arrangements were brokered or not. The agency typically responded on a one-off basis, resulting in a fragmented legal framework. Meanwhile, many types of deposit arrangements that bear little resemblance to the brokered deposits of the 1980s were categorized as brokered under the regulation. The new rule is intended to encourage innovation in how banks offer services and products to customers by removing regulatory hurdles to certain types of innovative partnerships between banks and fintechs. The final rule accomplishes this by tailoring the scope of deposits captured to align more closely with the types of deposits Congress intended to capture when the restrictions were first put in place. The rule also creates a more transparent and consistent regulatory approach by providing a clearer description of the criteria for meeting the 'facilitation' prong of the deposit broker definition and establishing a consistent process for application of the primary purpose exception. `The final rule became effective on April 1, with an optional extended compliance date of January 1, 2022. The FDIC created a dedicated webpage that contains information relevant to the regulation, including filing instructions for the notice and application process. Although the new framework represents an important step forward, the brokered deposits statute will continue to present inevitable implementation challenges. In 2019, I suggested that Congress consider replacing Section 29 of the Federal Deposit Insurance Act, the section imposing restrictions on brokered deposits, with a simple restriction on asset growth for troubled institutions. This would be a far simpler regime for the FDIC and industry to administer, and would more directly address the problem Congress was trying to tackle in the original legislation. I continue to believe that a simple restriction on asset growth for troubled institutions would be a superior approach in the long run."
