A Game Changer for Banks and Local Communities - The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018: Promontory ...
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The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018: A Game Changer for Banks and Local Communities
THE ECONOMIC GROWTH, REGULATORY RELIEF, AND CONSUMER PROTECTION ACT OF 2018:
A GAME CHANGER FOR BANKS AND LOCAL COMMUNITIES
The U.S. Senate and the U.S. House of Representatives have
passed the Economic Growth, Regulatory Relief, and Consumer
Protection Act. Once signed into law by President Trump, the
Act will provide relief from certain rules and regulations for
community banks. Among the Act’s many provisions, one
stands out in importance—most reciprocal deposits will no
longer be considered “brokered deposits.”
This change will benefit banks and local communities across the United States in
a number of ways. In particular, it will help Main Street banks to attract and retain
a greater amount of deposits that behave like core deposits from local customers by:
expanding the availability of deposit potentially lowering the cost of funding
funding for such banks; for banks over time; and
providing banks with more funding enabling such banks to compete more
to make loans available within effectively with larger, too-big-to-fail
their communities; banks for stable funding.
1
THE ECONOMIC GROWTH, REGULATORY RELIEF, AND CONSUMER PROTECTION ACT OF 2018:
A GAME CHANGER FOR BANKS AND LOCAL COMMUNITIES
DEPOSITS SENT TO ICS /CDARS NETWORK BANKS
1 2 3 +
LARGE DEPOSIT < $250,000 < $250,000 < $250,000 < $250,000
WITH A BANK IN PRINCIPAL IN PRINCIPAL IN PRINCIPAL IN PRINCIPAL
AND INTEREST AND INTEREST AND INTEREST AND INTEREST
MATCHING DEPOSITS SENT BACK TO BANKS
What Reciprocal Deposits Are and Why They Matter
In the past, many large-dollar depositors, such as public entities, institutional
investors, and nonprofits, were reluctant to deposit their cash at small banks because
their deposits could only be insured up to $250,000; they feared losing money if
their bank failed. In effect, small banks were often penalized for their size on the
mistaken belief that small automatically equalled risky.
This changed in the fall of 2002 when Promontory
Interfinancial Network began offering the first “reciprocal The leading reciprocal
deposit” placement service—CDARS® and, later, another deposit placement
one called Insured Cash Sweep , or ICS .
® ®
network in the United
Reciprocal deposits are deposits that a bank receives
States is operated by
through a deposit placement network in return for placing a
matching amount of deposits at other network banks.1 Promontory Interfinancial
Although there are a number of providers, the leading Network, LLC.
reciprocal deposit placement service in the United States
is operated by Promontory Interfinancial Network, LLC, which invented reciprocal
deposits and offers two of the nation’s largest reciprocal deposit placement services
mentioned above, ICS and CDARS.
Nationwide, thousands of banks use these services to provide safety-conscious
customers with access to FDIC insurance beyond the traditional $250,000 per
insured bank, per depositor (technically, for each account ownership category). The
Insured Cash Sweep service provides access to FDIC insurance on funds placed into
demand deposit accounts and money market deposit accounts, whereas the CDARS
service provides that access on funds placed into CDs. The safety-conscious customer is
1 Most state laws expressly permit the use of reciprocal deposits by public entities, and they define reciprocal deposits in similar
ways, generally adding that the maturities, if any, of the deposits placed and received, as well as the amounts, must match.
2
THE ECONOMIC GROWTH, REGULATORY RELIEF, AND CONSUMER PROTECTION ACT OF 2018:
A GAME CHANGER FOR BANKS AND LOCAL COMMUNITIES
often a government organization (such as a city or county treasurer or a public school
district), an institutional investor, a nonprofit, or another depositor that would otherwise
make a large deposit in a large money-center bank, rather than a community bank
(foregoing access to FDIC insurance for most of the deposit and relying on large
rating agencies, like Standard & Poor’s and Fitch, and
then tracking the ratings over time);
require that a bank collateralize or otherwise secure the …a participating
deposit with Treasuries or other ultra-safe, highly liquid bank can offer access
government securities (an added cost for the bank and
to FDIC insurance
one that could lead to the customer receiving a lower
interest rate if the bank adjusts its rate to compensate beyond $250,000…
for the added cost it incurs); or
manually split its large deposit among multiple banks, maintaining relationships
with each (which requires negotiating different interest rates, signing multiple
agreements, receiving multiple statements, etc.).
Insured Cash Sweep and CDARS are popular services because they enable safety-
conscious customers to access multi-million-dollar FDIC insurance through a
single bank relationship. Bank customers enjoy peace of mind and the convenience
of working though one institution. Participating banks enjoy the ability to grow
relationships and deposits from a local customer base without losing either to larger,
too-big-to-fail institutions; without the added costs or tracking burdens associated
with ongoing collateralization requirements; and with the ability to turn around and
lend these relatively low-cost funds locally. At the end of the day, it’s a win-win for
banks and their customers. But how this all comes together matters.
How Services Like Insured Cash Sweep and CDARS Work
The mechanics of different reciprocal deposit services vary.
With Insured Cash Sweep and CDARS, a participating
bank can offer access to FDIC insurance beyond
$250,000 because its customer’s original deposit
can be split into smaller increments—each below the
standard FDIC insurance maximum—and placed into
deposit accounts at a large number of other banks.
3THE ECONOMIC GROWTH, REGULATORY RELIEF, AND CONSUMER PROTECTION ACT OF 2018:
A GAME CHANGER FOR BANKS AND LOCAL COMMUNITIES
This process enables a customer to access coverage
from many banks while working directly with just one
(and, generally, receiving just one regular statement
per service).
Bank-to-Bank Connections – Helping
Community Banks Help Each Other
So why would a bank agree to take Insured Cash Sweep
or CDARS deposits from another bank, essentially helping
that other bank? Because in a reciprocal service, it is doing
the same thing with its customers and sending an equal
amount of customer deposits to other banks (generally with help from a sophisticated
matching engine that connects participating banks with each other based on different
variables, such as the total amount of a customer’s deposit). Exchanges occur on a
dollar-for-dollar basis so that each participating bank comes out whole. In other words,
each participating bank reciprocates—thus, the term reciprocal deposits.
The Economic Growth, Regulatory Relief, and Consumer Protection Act
When signed by President Trump, the Economic Growth, Regulatory Relief, and
Consumer Protection Act will recognize something that many in the banking sector
have long understood: reciprocal deposits behave like core deposits; they are “sticky”
(CDARS reinvestment rates are approximately 80 percent), and the institution
accepting the deposit maintains a relationship with the depositor—almost always a
locally based depositor.2
The new law will acknowledge that reciprocal deposits are uniquely different from
brokered deposits.
Specifically, the law will amend Section 29 of the Federal Deposit Insurance Act so
that reciprocal deposits held by an FDIC-insured depository institution
are not be considered brokered deposits as long as:
1. The bank is well capitalized and has received an “outstanding” or “good” on its most
recent examination; and
2. The total amount of reciprocal deposits held does not exceed the lesser of $5
billion or 20% of the bank’s total liabilities.
In addition, a bank that drops below well capitalized can continue to accept reciprocal
deposits without a waiver from the FDIC, so long as it does not receive an amount of
2 Through 2/28/18. Promontory Interfinancial Network calculates the reinvestment rate by determining whether a particular
customer’s funds were reinvested within 28 days of maturity.
4THE ECONOMIC GROWTH, REGULATORY RELIEF, AND CONSUMER PROTECTION ACT OF 2018:
A GAME CHANGER FOR BANKS AND LOCAL COMMUNITIES
reciprocal deposits that causes its total reciprocal deposits to exceed a previous four
quarter average.3
These changes will have positive implications for the banking sector. Banks will have a
much larger, approved source of stable deposits that can be tapped.
Furthermore, banks will be able to replace more expensive deposits, like brokered
deposits, routinely collateralized deposits, and those from listing services (generally
associated with wholesale pricing and no loyal or local customer relationship), with
reciprocal deposits, like those available using CDARS and Insured Cash Sweep.
These are generally lower-cost deposits that are eligible for multi-million-dollar FDIC
insurance and that come from local customers at rates that banks set.
Bank customers will also benefit in a number of ways from this change in law. Banks
can help even more customers—including businesses (large and small), nonprofits,
municipalities, financial advisors, and even individuals—to safeguard their funds,
potentially at even higher levels, while at the same time attracting locally priced, large-
dollar deposits, the full amount of which can be used to make loans locally. This will
help communities across the United States.
Of note, the ability to offer reciprocal
deposits can be critically important to banks
located in disadvantaged/underserved
communities. These banks tend to rely more
heavily on the ability to offer large-dollar
access to FDIC insurance to attract deposits
from socially responsible investors. Deposits
from these investors are then used to fund
local lending initiatives (e.g., infrastructure
improvements, low-income housing,
education, and other important activities)
that otherwise might not take place. n
3 As under current law, interest rate restrictions will apply.
51300 N. 17th Street Suite 1800 Arlington, VA 22209 contactus@promnetwork.com (866) 776-6426 Promnetwork.com
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