The FDIC has made much needed revisions to a myriad of proposed rules regarding the assessment of deposit insurance for small banks (under $10 billion in assets).
I applaud the bankers and trade associations’ roles in this effort, and the FDIC board of directors, for the adopted recommendation to account for reciprocal deposits as core deposits, rather than brokered funds.
A reciprocal deposit is a financial vehicle executed through an organized “system” where banks essentially swap deposits.
For example, if someone deposits $1 million dollars in their community bank, the FDIC insures $250,000 in that bank, and the remaining $750,000 is deposited between three or more alternative banks in increments below $250,000 through the use of an automated software platform and a master deposit agreement.
In return, the originating bank receives deposits equaling the $750,000 in increments less than $250,000.
The depositor obtains full federal insurance while dealing with a single institution of their choice, the bank is able to service its customer, and book the entire deposit amount on its balance sheet.
Prior to the FDIC’s action in late January, reciprocal deposits were classified as brokered deposits, thereby considered “non-core” and volatile by federal bank regulators.
By classifying these funds as “core,” banks will be able to expand their lending activity, which will positively impact their small business customers.
This welcome action by the FDIC eliminates the extra cost associated with reciprocal deposit funds, which will benefit smaller community banks that are particularly effective in making loans to small businesses in underserved markets.