The American Bankers Association recently released a report from a major law firm detailing the legislative history of the Federal Deposit Insurance Corp.’s battle against bank purchases of deposits from money brokers, continuing a policy debate that began over 30 years ago when I was chairman of the FDIC. The ABA report suggests that over time the FDIC may well have gone further than necessary in addressing the underlying problems with the practice.
I believe the ABA report is responsible and helps illuminate a possible solution to the issues that have arisen with the FDIC’s rules. That said, I’m concerned that the rhetoric of some bankers paints the FDIC’s restrictions on brokered deposits as antiquated vestiges of a bygone era of no value in today’s rapidly evolving internet era.
Let’s take a quick look at the origins of the restrictions in order to better understand the problem and a possible solution. Deregulation of interest rates in the 1980s gave rise to the practice of money brokers raising vast sums of money and bundling the funds for sale to the banks and thrifts that bid the highest prices, generally those that had the highest risk profile. The then-$100,000 limit on deposit insurance flowed through to each of the thousands of investors in the money broker, allowing hundreds of millions of dollars to be placed by the deposit broker fully insured in each bank.
As the bank and thrift failure rate began its dramatic rise, we found an increasing number of failed banks and thrifts had large amounts of fully insured brokered funds. We concluded we had to take strong actions to stop this massive abuse of the deposit insurance system which was under siege.