FDIC Targets Brokered Deposits, Growth

I missed this when it came out.

The FDIC has released a rule increasing the complexity of deposit insurance premium calculations:

The final rule adds a new financial measure to the financial ratios method. This new financial measure, the adjusted brokered deposit ratio, will measure the extent to which brokered deposits are funding rapid asset growth. The adjusted brokered deposit ratio will affect only those established Risk Category I institutions whose total gross
assets are more than 40 percent greater than they were four years previously, after adjusting for mergers and acquisitions, rather than 20 percent greater as proposed in the NPR, and
whose brokered deposits (less reciprocal deposits) make up more than 10 percent of domestic deposits. Generally speaking, the greater an institution’s asset growth and the greater its percentage of brokered deposits, the greater will be the increase in its initial base assessment rate. Small changes in asset growth rate or brokered deposits as a percentage of domestic deposits will lead to small changes in assessment rates.

The Canadian approach is not nearly so nuanced since our bankers are ever so smart. In fact, they’re all equally smart, with the vast majority of assets in the system paying into the CDIC fund at the same rate, which is considered desirable. Not so in the States:

A commenting bank argued that:
Arbitrarily establishing targets for percentages of institutions that fall into a given assessment rate is inconsistent with not only the governing statute but the whole concept of risk-based pricing….

The FDIC disagrees with the commenting bank. The purpose of the new large bank method is to create an assessment system for large Risk Category I institutions that will respond more timely to changing risk profiles, will improve the accuracy of initial assessment rates, relative risk rankings, and will create a greater parity between small and large Risk Category I institutions.

Imagine that! Rewards for being better than the competition, even if only by a little bit! It’s a good thing we don’t have that sort of nonsense in Canada – it can lead to bonuses.

Since the FDIC is not Canadian, they address criticism, allowing investors and observers to take an informed view of the desirability of changes:

The FDIC received many comments arguing that brokered deposits should not increase assessment rates for Risk Category I institutions and that the brokered deposit provisions in the NPR do not account for the use to which institutions put these deposits. The FDIC is not persuaded by the arguments. Recent data show that institutions with a combination of brokered deposit reliance and robust asset growth tend to have a greater concentration in higher risk assets. In addition, there is a statistically significant correlation between the adjusted brokered deposit ratio, on the one hand, and the probability that an institution will be downgraded to a CAMELS rating of 3, 4, or 5 within a year, on the other, independent of the other measures of asset quality contained in the financial ratios method.

2 Responses to “FDIC Targets Brokered Deposits, Growth”

  1. lystgl says:

    If our bankers are so smart, why did Credit Suisse just downgrade three of them? Sour grapes? Amazes me that anyone takes ratings seriously or places any credence in financial institutions such as these – institutions poised to go over the financial abyss themselves as a result of their own stupidity yet here they are still doling out what passes for sage advice.

  2. […] I continue to like the idea of dynamic provisioning, in which a bank’s “recent” assets would carry a higher risk weight than “old” assets, penalizing recent growth to a predictable degree (in addition to the unrelated idea of penalizing excessive size, inter alia). Dynamic provisioning has, to some extent of equivalency, been implemented by the FDIC. […]

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