Brokerage Deposits Help Banks Help Their Communities
As a bank serving a low to moderate income clientele with many net borrowers and a large portion of these being minorities, we have seen firsthand how the negotiated deposit rule directly affects them.
These clients generally do not have the necessary deposits to meet their loan request, and the current rule hinders efforts banks to serve LMI consumers when abundant local deposits are not available.
As the CEO of The Peoples Bank in South Arkansas, I’ve seen this 110-year-old institution grow by reaching out to people who don’t have a lot of deposits or high net worth, and are often underbanked or unbanked.
We’ve reached out to previously unbanked people with free accounts, open for a dime, and offer interest-free / no-fee loans to anyone who is overdrawn and can’t escape the cycle.
We have one of the lowest local insufficient fund fees and no daily overdraft fees. We treat our customers with dignity, respect and appreciation.
For years we have tried to increase base deposits, and in 2013 we hired a consultant to help us. In five years, the bank’s demand deposit accounts have doubled, but these new customers have brought in few deposits and a strong demand for credit.
For example, last year the bank had 3,459 “totally free checking” accounts with an average balance of $ 707. But on the loan side, there were 4,476 consumer loans with an average balance of $ 10,424, indicating much higher loan demand.
Banque Populaire began issuing negotiated certificates of deposit in 2008 as an excellent liquidity and financing tool. These traded CDs were stable, inexpensive compared to basic deposits, convenient, and non-volatile. They were readily available, simple to obtain with no collateral required, and could be redeemed at our discretion.
It also improved profit strategies that were not possible with the price and duration of base deposits, and made it easier for us to structure asset / liability management.
The bank’s use of negotiated deposits and wholesale funding is vital for our customers and for us. the current stigma and restrictions on wholesale funding discriminates against customers like ours. And given the increase emphasis on economic inclusion, increased efforts should be made to accommodate the needs of these targeted demographic groups.
Some have claimed that brokerage deposits are lower than core deposits and have been a factor in bank failures, causing excessive losses to the Deposit Insurance Fund.
However, studies have also shown that traded deposits are correlated safer and more profitable banks. Excessive risk-taking involving questionable investments is at the root of failures and losses.
The decades-long stigma against traded deposits is the reason they get devalued in a failed bank resolution. The negative view of deposits negotiated by regulators makes these deposits undesirable for buyers of troubled banks.
However, even the Federal Deposit Insurance Corp. noted in a July 2011 deposit study that “there shouldn’t be any particular stigma attached to the acceptance of negotiated deposits per se and the proper use of such deposits should not be discouraged.
Still, it’s hard to find a banker or examiner who thinks this statement is being followed.
Concerned about pressure from regulators on our high usage of traded deposits – even though we have always been well capitalized – we have started to migrate the portfolio from traded deposits to core deposits.
We have increased the rates offered for local deposits, which has increased the cost of existing accounts. Local competitors matched our rates, which increased our cost of funds without adding new funds. In the end, we would have been better off replacing our maturing brokerage deposits with new ones.
It is clearly understandable why volatility is a concern among regulators and bankers. But due to the conditions available in the traded deposit market, liabilities and assets can be matched, which reduces volatility.
A deposit is volatile if it can disappear unexpectedly. All base deposits can be volatile in this way, while traded deposits are not.
Negotiated deposits are predictable – you know when they will mature or become redeemable. If a bank needs to extend the average lifespan of liabilities, it can add up to 30 years of negotiated deposits – conditions impossible to find in local deposits.
The recently renewed attempt to classify which deposits should be considered traded is complicated. As FDIC President Jelena McWilliams said, a proposal to restrict asset growth “would be a much easier diet for the FDIC to administer ”as the current restriction on negotiated deposits for troubled banks. This simple alternative “responds more directly to the key objective,” she added.
Regulation doesn’t need to be more complicated. Negotiated deposits can be a valuable tool when used correctly. If rapid growth is a problem, limit the growth. But don’t turn a bad situation into disaster by cutting off cash.
A proposal by Senator Jerry Moran, R-Kan., which would replace the restriction on traded deposits with limits on the growth of assets for troubled banks is simple and effective. It directly addresses the problem of rapid growth.
Sometimes the best solution is the easiest. This bill will be effective, less confusing and less complicated, unlike the current rules governing the use of negotiated deposits. There will be no losers; only winners: LMI and minority consumers, regulators, the Deposit Insurance Fund and banks.