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FDIC Remarks Shed Light on Their Regulatory Priorities for Uninsured Deposits
August 22, 2023 | ModernFi Insights
We, like many others in the industry, have been following the FDIC’s remarks closely this year to understand their regulatory priorities following the recent banking stress. In a statement in late March, quickly after the SVB situation, Chairman Gruenberg specifically focused on SVB’s heavy use of uninsured deposits. In a statement last week at Brookings, the Chairman doubled down on this assessment by categorizing uninsured deposits as an unstable funding source.
In his speech at Brookings, the Chairman aptly pointed out how the banks that failed earlier this year had a heavy reliance on uninsured deposits, which made them more susceptible to deposit runs. Large depositors are more likely to actively manage their deposits, and they can meaningfully increase deposit concentration risk. He also highlighted the new role that electronic banking services and social media play in deposit runs and the speed of money movement.
His remarks foreshadow what institutions can expect moving forward. The FDIC will likely heighten supervision around funding concentration and uninsured deposit levels. The remarks even proposed capping the allowed concentration of uninsured deposits and instituting risk-based deposit insurance pricing for uninsured deposits.
In many ways, these proposals for uninsured deposits have parallels to the treatment of brokered deposits. In our mind, lessons learned from brokered deposits should be extended to uninsured deposits. Uninsured deposits, like other funding sources, are not all uniform. Some are stable, while others are unstable. Broadly classifying them all as unstable seems imprecise. Importantly, the majority of bank failures are caused by issues on the asset side, whether it is bad loans or investments. When it comes to deposits, we would suggest the FDIC increase insurance limits and use a more granular assessment of stability.
We’ll keep an eye on these developments, especially around deposit insurance reform. In the meantime, banks should be prepared for increased supervisory scrutiny around uninsured deposit levels and should use reciprocal products to improve the insured / uninsured composition of their deposit base.
Paolo and the ModernFi Team
Change from two week ago
Sources: FHLB Advances are an average of FHLB Boston, FHLB Chicago, and FHLB Des Moines. Brokered CDs are an average of Fidelity and Vanguard. Listed CDs provided by National CD Rateline. US Treasurys provided by WSJ. SOFR provided by CME.