As Brookline Bank – now the 10th-largest bank in Massachusetts – grew its assets, it also outgrew a private, industry-sponsored deposit insurance fund. Image courtesy of Brookline Bank

In a few days, Brookline Bank will no longer be a member of the state’s Deposit Insurance Fund, a private, industry-sponsored insurance fund that insures all deposits above FDIC limits at member banks. 

The departure is only the fourth to ever occur since DIF began in 1934 and is a result of Brookline Bank’s steady growth – the company is now the 10th largest state-chartered bank in the commonwealth and has grown to more than $4.7 billion in assets. 

Still, despite the loss of Brookline’s contributions, executives at DIF say the fund is in great shape and believe the current structure is appropriate to protect the state’s savings banks in the event of a financial disaster. 

“It is a program designed to support small- to medium-sized community banks,” said David Elliott, president and CEO of DIF. “That’s what we are doing, and we hate to lose larger members, but we have to be disciplined and we have to be there for depositors when a downturn or crisis in a bank occurs.” 

The fund first launched 85 years ago for savings banks in the state. Cooperative banks can join a similar entity called the Share Insurance Fund. 

The Deposit Insurance Fund only insures deposits in excess of the
FDIC limit up to $1.1 billion per bank, before the fund feels it can
no longer both provide support to a bank and protect its other members,
should there be a crisis or bank failure.

DIF initially insured all deposits at a bank, but in 1987 that changed when savings and cooperative banks were forced to take insurance from the FDIC or the now-defunct Federal Savings and Loan Insurance Corp. From that time, DIF only insured deposits in excess of $250,000, the current FDIC limit for all bank accounts. 

The fund was put to the test during the savings and loan crisis when 19 state-chartered banks failed between 1989 and 1994, and DIF paid out $50 million to more than 6,000 depositors. Massachusetts is currently the only state to have insurance funds that insure deposits in excess of the FDIC limit. 

Like the FDIC’s arrangement with its members, DIF member banks pay assessments every year in order to belong and DIF is not backed or supported by the state or federal government. 

Why Brookline Is Leaving 

Brookline Bank did not choose to leave DIF – the bank is more or less being kicked out, despite being in sound financial shape. It simply got too big. 

DIF can only insure deposits in excess of the FDIC limit up to $1.1 billion per bank, according to Elliot, before the fund feels it can no longer both provide support to a bank and protect its other members, should there be a crisis or bank failure. 

When banks close in on $700 million or $750 million in excess deposits, the fund alerts the bank so they have two or three years to prepare to leave. Even after a bank leaves, Elliot said DIF will still insure all excess deposits for up to one year and all term deposits until they come to maturity, regardless of when that occurs. 

Banks could theoretically remain in the fund past the $1.1 billion deposit limit if they took some type of remedial action such as getting reinsurance, but that market has all but dried up, according to Elliott, who pointed out that such actions would only buy banks over the threshold a limited amount of time. 

Banks do, however, see DIF as a value add for their members and an extra safety net that not all community banks in the country have. 

“We have never contemplated leaving. We have many clients with deposit balances in excess of the FDIC coverage,” said Bob Conery, chief operating officer at the $1.6 billion–asset, Hudson-based Avidia Bank. “Otherwise, we would need to purchase treasuries and hold them as collateral at the Fed. The opportunity cost associated with holding low–yielding treasuries for collateral purposes only exceeds the cost of remaining a member of DIF.” 

Bram Berkowitz

Community Banks Are Getting Bigger 

The banking landscape has changed considerably in Massachusetts in the last few decades. In 1992, the oldest year the FDIC website keeps data for, there were 292 banks in Massachusetts. Today, there are only 115. 

In addition, as a result of regulatory changes and competition, many community banks believe they need to be larger and some industry leaders have said publicly they think $1 billion is the asset threshold a community bank must meet to survive. Roughly 40 banks in the state currently have more than $1 billion assets, a figure that includes cash deposits, government securities they hold and interest-earning loans they’ve made.  

While DIF executives could not say exactly how many member banks were close to reaching the $1.1 billion excess deposit threshold, they said they felt the threshold is adequate. 

DIF typically insures 10 to 15 percent of a bank’s total deposits, according to DIF Vice President John D’Alessandro, who added that number could get as high as 25 percent for member banks that are more commercially-oriented. 

Three of the largest state-chartered banks – Eastern Bank, Rockland Trust and Berkshire Bank – are no longer members, although the $6.2 billion–asset East Boston Savings Bank is still listed as a DIF member bank. 

“We’ve been asked to review [the threshold] and we do review it as part of our strategic planning,” said Elliott. “We discuss it with the board every year, but when we run the numbers, we feel that is the appropriate number to insure the greatest number of depositors in our state-chartered banks.”