Over time, its usage increased steadily and slowly until 2019, with regulatory changes leading to a noticeable increase, as explained later in this article. But what is even more surprising is that there will be a significant increase in 2023 due to the banking turmoil that spring. This increase was concentrated among medium-sized banks, the class of banks most affected by the spring 2023 run. By 2024, the majority of U.S. banks will be members of the network, and many will be using it. IntraFi claims that 64% of U.S. banks participate in its network. According to the Cole report, 44% of U.S. commercial banks had positive mutual deposits at the end of 2023.
The purpose of this economic commentary is to explain the history of mutual deposits, why they have been used primarily by medium-sized banks, and what limits their widespread use. We also discuss long-term trends in deposit insurance that have contributed to the increased use of mutual deposits.
Brokered deposits and mutual deposits
Since the FDIC’s creation in 1934, depositors have been able to increase the amount of their insured deposits by opening accounts with multiple banks. The U.S. Federal Deposit Insurance System sets deposit insurance limits per depositor and per bank, allowing depositors to open accounts with multiple banks to receive more insurance coverage. .
Some depositors open and operate multiple bank accounts at any given time, which takes time and makes managing payments and liquidity more complex for depositors. The intermediary deposit market exists for term deposits to alleviate this inconvenience. Section 29 of the Federal Deposit Insurance Act defines a brokered deposit as a deposit accepted through a deposit broker. A deposit broker, broadly defined, is a deposit accepted through an individual or third party who is in the business of placing deposits, i.e., an agent who receives and distributes deposits. Depositors in various banks.
According to Goodman and Shaffer (1984), brokered deposits were not originally developed to increase the effective deposit insurance limit. Instead, they were developed in the 1960s and 1970s as a way for banks to obtain time deposits (such as CDs) from outside their own markets, allowing depositors to earn higher interest rates. However, in 1982, when Penn Square Bank failed and the FDIC could not find a buyer, the FDIC liquidated the bank. Owners of uninsured Penn Square CDs suffered losses. In response to these losses, deposit brokers began breaking CDs into $100,000 increments, the FDIC insurance limit at the time, to provide more deposit insurance.
Brokered deposits are generally considered to be high risk. Penn Square famously funded much of its rapid growth with brokered deposits, as did many savings that ultimately failed during the savings and loan crisis of the 1980s. In general, research has found that brokered deposits are positively correlated with bank failures and the magnitude of FDIC losses in failed banks.
Brokered deposits involve risks and are subject to legal restrictions. These were first enacted into law by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and have since been amended by subsequent legislation. Currently, banks that accept brokered deposits have the following restrictions:
Well-capitalized banks can accept and roll over an unlimited number of brokered deposits. Banks with sufficient capital can accept new brokered deposits or roll over existing deposits with exemption from the FDIC. Additionally, such banks cannot pay interest rates that exceed the limits calculated by the FDIC. Banks that are not sufficiently capitalized cannot accept or roll over brokered deposits.
Additionally, brokered deposits are factored into the formula the FDIC uses to set deposit insurance premiums. Broadly intermediated deposits increase bank premiums, although the exact impact depends on bank size and other factors. Finally, supervisors have historically considered intermediary deposits to be a more volatile source of funding than core deposits and will adjust their level of supervision accordingly.
When mutual deposits were introduced in 2003, mutual deposits were treated as brokered deposits under the definition of deposit broker then used by the FDIC. However, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 changed the definition of brokered deposits, allowing a bank’s insured mutual deposits of up to $5 billion or 20% of the bank’s total debt, whichever is less. It has been excluded. Rules reflecting this change were implemented by the FDIC in 2019, resulting in an increase in the use of mutual deposits that year, as shown in Figure 1.
Which banks use mutual deposits?
Given the costs involved, the only reason to use mutual deposits is to effectively increase your insured deposits. Table 1 shows the distribution of uninsured deposits by bank size. The column titled ‘p50’ shows the uninsured deposit holdings of the median bank in each size class. The median proportion of uninsured deposits increases with bank size. The median for the smallest banks, those with less than $100 million in assets, is just 16% of uninsured deposits. Furthermore, as shown in Figure 1, this type of bank makes little use of mutual deposits, so perhaps its depositors are small businesses with small balances and do not need the additional insurance that comes with mutual deposits. or households.
