While many were enjoying their summer vacations, the FDIC Board in Washington, D.C., was hard at work tackling pressing issues in the banking and fintech sectors. This effort led to the introduction of several new proposals that have sparked considerable debate among Board members. These developments provide crucial context for industry stakeholders as they engage in the rulemaking process, offering insights that could significantly impact the future of banking and fintech partnerships.
Tightening the Brokered Deposits Rules While Seeking More Information on Deposits
Among the recent FDIC proposals, the brokered deposits initiative and the Request for Information (RFI) on Deposits stand out for their potential to reshape how deposits are sourced and utilized by banks and investment managers. The technical and substantive nature of these proposals makes it essential for industry participants to review the documents and summaries thoroughly.
Engagement with the FDIC, either directly or through trade associations, is crucial at this juncture. The agency values input from individual firms, as your specific concerns could play a role in shaping the final rule. R&T Deposit Solutions is also eager to hear from our clients, as your feedback will help us advocate for a rule that effectively addresses industry challenges.
Basel III Delays and the Rise of BaaS Risks
As Basel III remains in limbo, with the Federal Reserve, FDIC, and OCC still seeking consensus, attention has shifted to the growing risks associated with the Banking as a Service (BaaS) model, especially following the April 2024 bankruptcy of Synapse Financial Technologies following severe liquidity issues and regulatory challenges making them unable to meet customer demand and maintain their operations. This failure has disproportionately affected community and smaller regional banks, which had relied on BaaS as a key driver of revenue and deposit growth.
For a deeper analysis of the Synapse case and its broader implications, I recommend reading Jason Mikula’s updates in Fintech Business Weekly. His insights provide a detailed look at the evolving landscape.
BaaS: Opportunities and Challenges
The Synapse bankruptcy highlights the inherent risks in the BaaS model, particularly for smaller banks with significant exposure to fintech partners. Supervisors have raised concerns about governance and control issues, especially when fintech partners are responsible for a large portion of a bank’s customer acquisition. While BaaS offers significant growth opportunities, it also necessitates robust back-office processes to manage this business model safely.
The recent FDIC/OCC/Fed Community Bank Guide on Third Party Risk Management reflects these concerns, providing a clear framework for upcoming examinations. Banks of all sizes engaging in BaaS should view this guide as more than a “check the box” exercise; it represents heightened expectations for governance and risk management.
To prepare for these examinations, banks should proactively engage with their fintech partners. Partnering with established entities like R&T Deposit Solutions, which has over 50 years of experience in funds management, can be an invaluable asset.
FDIC’s Response to Synapse: Revisiting Brokered Deposits
The FDIC’s response to the Synapse bankruptcy extends beyond third-party risk management guidelines. A June 20, 2024, letter from Synapse’s bankruptcy trustee, former FDIC Chairman Jelena McWilliams, to the heads of banking and securities regulators, is seen as a key catalyst for FDIC Chairman Gruenberg’s proposal to overhaul brokered deposit rules. The letter, which raised concerns about the complexity of account and payment structures, led some customers to be unaware of which bank held their funds. This issue has significant implications for the FDIC’s mandate to safeguard insured deposits.
As a 27-year FDIC veteran, I can confirm that the stability of the deposit insurance fund is the agency’s top priority, even as it navigates the challenges posed by financial innovation.
The July 30th FDIC Board Meeting: Revisiting Brokered Deposit Rules
At the July 30th FDIC Board meeting, a proposal was introduced to revert to pre-2020 brokered deposit rules, which would treat nearly any entity interacting with a bank or depositor as a deposit broker. This proposal, driven by studies linking brokered deposits to higher bank failure probabilities, has ignited a heated debate within the industry.
Vice Chairman Travis Hill and Director Jonathan McKernan expressed concerns about the proposal’s relevance to the Silicon Valley Bank (SVB) liquidity crisis, arguing that the rule lacks sufficient analysis. Their dissent, although not reflected in the Notice of Proposed Rulemaking (NPR), will likely influence industry comments and the final rule. It is advisable for clients to review the Board meeting and accompanying statements to gain insights into these discussions.
Industry Reactions and Strategic Considerations
Former FDIC Chairman Bill Isaac recently wrote an op-ed arguing that uninsured deposits, not brokered deposits, were at the core of the 2023 bank failures. His views align with Vice Chairman Hill’s dissent, suggesting that intermediary involvement is not the primary risk factor. You can read Bill Isaac’s full op-ed here.
Despite these concerns, FDIC leadership sees the brokered deposit rule as necessary to address vulnerabilities in the BaaS space. The quality of data and analysis supporting this rulemaking is expected to remain a contentious point. Already, 11 trade groups have formally requested that the FDIC withdraw the proposal or provide more comprehensive data to justify its approach. The full comment letter from these trade groups can be accessed here.
As the banking landscape continues to evolve, with technology reshaping how consumers interact with financial services, regulatory changes are inevitable. The FDIC’s recent Consumer Alert on third-party apps signals a preference for more traditional bank-depositor relationships. The brokered deposit proposal, along with enhanced supervision of third-party relationships, aims to reassert control over this growing segment.
If finalized, this rule could compel banks, fintechs, and investment firms to reassess their relationships, potentially leading to increased regulatory scrutiny and a shift toward more traditional banking models. Banks with the capability to manage brokered deposits effectively may view this as an opportunity, while others may need to rethink their strategies.
Looking Ahead: Data-Driven Engagement with the FDIC
The FDIC’s unanimous approval of the Request for Information on Deposits represents an opportunity for banks and their partners to contribute valuable data that will shape future regulations. By participating in this RFI, banks can provide insights into how they manage deposit volatility, particularly in the aftermath of the SVB crisis.
Supporting the FDIC’s data-gathering efforts allows banks to influence the development of a regulatory framework that balances innovation with safety. R&T Deposit Solutions is committed to helping clients navigate the evolving regulatory landscape and strategically manage their funds to ensure their continued success.
Jason Cave
R&T’s Strategic Advisor
About the Author
Jason Cave has over 30 years of experience in public leadership, regulatory development, and financial institution stability. He previously held roles at the Federal Deposit Insurance Corporation (“FDIC”) and Federal Housing Finance Agency (“FHFA”), helping to shape regulations that promote stability across banking, mortgage finance, and technology sectors.
At the FDIC, Jason led capital markets operations and the bank risk oversight program. In this role, he worked to deliver large-scale regulatory initiatives by collaborating with bankers, market participants, and regulators both in the U.S. and internationally. He also served as the FDIC’s top representative on the Basel Committee on Banking Supervision for over a decade.
The opinions expressed in this commentary are my own and subject to change based on evolving market conditions, regulatory developments, and other factors. Readers should exercise caution and consider the suitability of any recommendations in the context of their own financial objectives and risk tolerance. I am committed to transparency and integrity and I encourage readers to conduct their own research and consult with a qualified financial advisor before making any financial or investment decisions.
About R&T Deposit Solutions
Founded in 1974, R&T Deposit Solutions provides deposit funding, liquidity management and securities-based lending programs to the financial services industry. Through its tech-enabled services, R&T helps banks, credit unions, broker-dealers, trust companies and wealth managers meet their unique cash sweep, deposit funding, and securities-based lending needs. As a recognized leader in the administration of deposit networks, the Demand Deposit Marketplace® (DDM®) program administered by R&T provides banks and other depository institutions access to billions of dollars in reciprocal deposits, and for their underlying customers, access to expanded levels of FDIC insurance coverage on their deposits through other participating banks in the program. R&T is a portfolio company with the majority interests owned by private equity firms, GTCR and Estancia Capital Partners. Both firms have partnered with R&T to expand its market presence and achieve sustained growth by further strengthening R&T’s leadership team, expanding its product offerings and enhancing the firm’s risk management and technology infrastructure.
Important Disclosures
Reich & Tang Deposit Networks, LLC, Reich & Tang Deposit Solutions, LLC and Total Deposit Solutions, LLC (each d/b/a R&T Deposit Solutions) and Stable Custody Group II LLC (“Stable”), each a Delaware limited liability company, and/or their affiliates (together, “R&T”) provide administrative, recordkeeping, agency and/or other services to banks, credit unions, trust companies, wealth management firms, broker-dealers and other institutions with respect to deposit placement and sweep programs, including the Demand Deposit Marketplace® (DDM®) program administered by Stable and the R&T Insured Deposits (RTID®) program, as well as other services. R&T’s services are provided subject to the terms and conditions of the written agreements entered between R&T and its client with respect to those service, and R&T provides no representations or warranties, express or implied, except as expressly set forth in those written agreements. Click here for R&T’s legal and other disclosures. R&T is not an FDIC or NCUA-insured institution. FDIC and NCUA deposit insurance only covers the failure of an FDIC or NCUA-insured institution, respectively. Certain conditions must be satisfied for FDIC and NCUA pass-through deposit insurance coverage to apply. Click here for a list of the FDIC and NCUA-insured institutions with which R&T has a business relationship for the placement of deposits under the DDM and RTID programs, and into which a participating institution may place deposits (subject to the program terms and conditions and any opt-outs by the participating institution and/or its customers). While the DDM and RTID programs provide access to an expanded level of FDIC or NCUA deposit insurance coverage on funds placed into deposit accounts at FDIC or NCUA-insured institutions under the programs (up to the program limit and subject to program terms and applicable laws and regulations, including pass-through insurance coverage requirements), the DDM and RTID programs, themselves, as well as R&T’s other service offerings (including LMS, FPL and R&T Bank Monitor), are not insured or guaranteed by the FDIC or NCUA, are not deposits, and may lose value in certain circumstances as described in the program/service terms. R&T is not a division of the FDIC or NCUA, R&T is not associated with the FDIC or NCUA and R&T is not insured by the FDIC or NCUA. R&T®, Reich & Tang®, Demand Deposit Marketplace®, DDM®, DepositView® and RTID® are registered marks of Reich & Tang Deposit Networks, LLC. TBS Verify® and TBS Bank Monitor® are registered marks of Total Deposit Solutions, LLC. RNTSSM, Certificate of Deposit MarketplaceSM, R&T FusionSM and Fusion by R&TSM are pending marks of Reich & Tang Deposit Networks, LLC. IDEASM is an unregistered service mark of Reich & Tang Deposit Networks, LLC.