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Community banks won a victory with a newly revised proposal from the Federal Deposit Insurance Corp. (FDIC) that would tweak how banks are assessed for deposit insurance, but industry observers say the new proposed rule still has a few kinks they’d like to see worked out.
When the FDIC released the original proposal last summer, an outcry went up among the nation’s community banks. Specifically, the proposed rule concerned how banks under $10 billion in assets are assessed for deposit insurance, and it would have treated brokered deposits as riskier than core deposits.
That might not have been too much of an issue, except the rule would also have considered reciprocal deposits – wherein banks place deposits with one another – as brokered deposits and treated them as riskier. For many community banks experiencing healthy growth, brokered deposits are a key source of funding, many said, and no riskier than their core deposit base.
“In the proposal, the FDIC gives no justification for this shift, which would result in reciprocal deposits being treated like any other form of brokered deposit or wholesale funding. It simply and arbitrarily lumps reciprocal deposits in with traditional brokered deposits. In doing so, it would penalize banks that use them by, in effect, taxing them,” Nicholas Lazares, chairman and CEO of Admirals Bank, wrote in a letter to the agency, which was publicly available on the FDIC’s website.
The proposal as it was written last June would make FDIC insurance the third largest expense line after salaries and data processing costs at Belmont Savings Bank, President and CEO Robert Mahoney wrote.
After the agency received nearly 500 comment letters, it quietly withdrew the proposal and went back to the drawing board.
Though the new version of the proposal would treat reciprocal deposits and Federal Home Loan Bank advances in the same as the current system, the agency said, Boston-based banking lawyer Kevin Handly called it a tactical victory for community banks, rather than a strategic victory. That’s because the FDIC did not come out and explicitly exclude reciprocal deposits from beneath the umbrella of brokered deposits; it just said it wouldn’t treat them any differently.
“A strategic victory would be winning the argument that reciprocal deposits are not brokered deposits. They didn’t win that argument. The FDIC continues to believe and assert that reciprocal deposits are brokered deposits and are subject to these notice provisions,” Handly said. “But community banks did win the tactical victory of causing the FDIC to reverse course on the treatment of reciprocal deposits for purposes of calculating deposit insurance assessments.”
Still, he expects the rewritten proposal to pinch community banks much less.
“I think it is a victory for community banks,” said Chris Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America. “By excluding reciprocal deposits as part of core deposits, they were going to disadvantage a lot of community banks.”
One Size Doesn’t Fit All
Still at issue, however, is the loan mix index, which the FDIC did not remove or adjust in its revised proposal. That would essentially weight some categories of loans as riskier than others by using the industry’s average historical charge-off rate, but community bankers say that since different parts of the country were impacted differently during the last recession, that measurement effectively amounts to a “one size fits all” approach.
Mahoney also alluded to this in his comment letter to the agency, writing that “we operate in an area which has weathered the economic downturn better than most of the country. However, under the new calculations we would be subject to the historical charge-off rates experienced in other regions where poor credit decisions were made for three consecutive cycles.”
The ICBA and others would like to see the agency base the charge-off rates in its model off yearly averages over a period of time, as opposed to weighted averages, and they would like to see the FDIC take into account the differences across the United States.
“These charge-off rates don’t reflect different experiences from different regions of the country. We said this needs to be more regionally tailored,” Cole said. “That was something we wanted to say about the loan mix index.”
But a victory is a victory, however small, and Cole said the changes the FDIC did make to its proposal demonstrate the value of community banks banding together to speak up.
“It was an example of community banks being able to make their voices known and to change a regulatory provision,” he said. “We always liked to point to those because that’s the reason we ask bankers to comment. It works sometimes and it did [this time].”
