Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on the Proposed Rulemaking on Brokered Deposits
Regulatory amnesia consistently afflicts the banking agencies. Today, the FDIC Board of Directors is cleaning up the unwise and unlawful mistakes the agency made in 2020 related to a risky type of deposit funding.
Rather than rely on relationships with customers who hold their deposits with a bank over the long run, some banks depend on brokered deposits that can quickly run from bank to bank. This dynamic is the opposite of relationship banking and increases the risk of failure. In fact, brokered deposits played a key role in the savings and loan crisis in the 1980s.
In 2011, the FDIC found that banks relying on brokered deposits had a higher likelihood of failure and their failures came with higher losses to the Deposit Insurance Fund.1 The data was updated in 2019 with the same conclusion.2
In 2020, the agency experienced a bout of regulatory amnesia and finalized a series of carveouts and loopholes that eroded the rules.3 These changes exempted roughly $350 billion in deposits previously considered brokered, a 32 percent decline.4 Of course, the risk posed by these deposits didn’t disappear.
We’ve seen firsthand how these rollbacks created turmoil. In 2022, a major crypto platform named Voyager blew up. The deposits it placed at a bank had been exempted by the 2020 rules. After the disruption caused by Voyager’s failure, the bank subsequently announced to its shareholders that it would end these third-party relationships and exit this line of business.5
In 2023, First Republic experienced a run on uninsured deposits, including those that were carved out by the 2020 rule. It was the second largest bank failure in U.S. history.
Today’s proposed rule establishes a simpler, bright line definition of deposit broker. In addition to promoting the stability of the banking system and protecting the Deposit Insurance Fund, the rule would put the agency on better legal footing. It closes loopholes and carveouts put in place by the 2020 rule that were not compliant with the Administrative Procedure Act.
Our banking system is on more stable footing when firms work to develop relationships with depositors based on trust and quality of service. Trouble tends to follow when weaker banks grow rapidly by paying the highest bidder. Today’s proposed rule is an important step to protect relationship banking and safeguard against bank failures that can stem from these risks.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information, visit www.consumerfinance.gov.