'Til Death Do Us Part: The Brokered Deposit Dilemma

Recent Developments

The rumors of the FDIC “locking down” banks from brokered deposits are true. Here is how it happens. If you are not “well capitalized,” then under Prompt Corrective Action (“PCA”) (a leftover piece of legislative shrapnel from the thrift bailout 20 years ago), you are precluded from accepting or renewing any brokered deposits without receiving a waiver from the FDIC, which is rarely forthcoming and is granted only under limited circumstances. Paying more than 75 basis points above the average deposit rate in your market will be considered the same as taking a brokered deposit.

You can also find yourself in the same fix if you are rated a composite “4” or “5” bank or have a Cease and Desist Order (“C&D”). In that event, you are deemed to be just adequately capitalized (no matter your level of capital), and are subject to the same PCA brokered deposit restrictions.

The Dilemma

If you fall below “well capitalized” or are rated a “4” or “5” bank or get a C&D, you are effectively locked out of taking brokered deposits. If brokered deposits are a critical source of your funding, you could actually expire from a lack of liquidity, like WaMu and Bank of Clark County, even if you have adequate capital. In fact, you technically could be well capitalized and still become illiquid. Again, remember, if you are actually just adequately capitalized or are a “4” or “5” or have a C&D, you cannot even pay a premium for regular deposits in your market above 75 basis points. Further CDARS are also considered brokered deposits, even though they are held by existing customers.

Our discussions with the FDIC suggest that this is a bright line test and that waivers for brokered deposits are the exception (e.g. as a temporary bridge for a sale of the bank). To understand this hard-line approach, you have to realize that the FDIC believes that if a bank fails, the brokered deposits (which the FDIC inherits as a liability) will effectively be a total loss to the deposit insurance fund, based on their past experience. Hence, NO MAS!

What To Do

Clearly, any steps your bank can take now to avoid any of these PCA triggering mechanisms are absolutely critical. We realize that raising capital in today’s environment can be challenging, but significant dilution is still better than the alternative. Ultimately, lowering your dependence on brokered deposits would be a good practice. Keep in mind that once you get in trouble, borrowing from the FHLB, the Fed, or bankers’ banks becomes increasingly challenging, further drying up your secondary sources of liquidity.

Conclusion

We highly recommend that your bank focuses on this serious, potential liquidity situation and avoids getting yourself in this impossible dilemma. Whether the FDIC will soften its stance as the breadth of this crisis spreads, is hard to determine. Even arguments allowing you to renew or replace brokered deposits solely to support the steady disposal of toxic assets have fallen on unreceptive ears to date. So please be forewarned of the seriousness of this situation.