Pub. 15 2018 Issue 2

Issue 2 • 2018 21 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S In fact, the combination of rate hikes (more are expected later this year) and the Federal Reserve’s $1.5 trillion reduc - tion of its balance sheet should continue to push deposit costs upward. With the Fed not reinvesting the principal proceeds from maturing securities, liquidity will be pulled from the markets and banking system, reversing the impact of the first and second Quantitative Easing. And banks are bracing themselves for more competition from the nation’s larg- est banks, as well as from non-traditional players that include the likes of fintech companies, Goldman Sachs’s Marcus, and the potential entry of Amazon. Reciprocal Deposits Fortunately, the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act should offer banks some relief. This important new law provides that most reciprocal deposits are no longer considered brokered deposits. Reciprocal deposits are deposits that a bank receives through a deposit placement network in return for placing a matching amount of deposits at other network banks. Al- though there are a number of providers, the leading reciprocal deposit placement network in the United States is operated by Promontory Interfinancial Network, LLC, which invent - ed reciprocal deposits and offers two of the nation’s largest reciprocal deposit placement services: Insured Cash Sweep ® , or ICS ® , and CDARS ® . The Economic Growth, Regulatory Relief, and Consumer Protection Act This new law recognizes something that many in the bank- ing sector have long understood –reciprocal deposits behave as core deposits in that they are “sticky” (CDARS deposits reinvest at a rate of approximately 80%, for example), and that the institution accepting the deposit maintains the relation- ship with the depositor. 2 Specifically, the law amends section 29 of the Federal De - posit Insurance Act so that, subject to the definitions, terms, and conditions of the Act as amended: • If a bank is well capitalized and has a composite condi- tion of outstanding or good (CAMELS 1 or 2), its recip - rocal deposits up to the lesser of $5 billion or 20% of the bank’s total liabilities are no longer considered brokered. Reciprocal deposits over these amounts are allowed, but the incremental amount (overage) is treated as brokered. • If a bank drops below well capitalized, the bank no lon- ger requires a waiver from the FDIC to continue accept- ing reciprocal deposits, so long as the bank does not receive an amount of reciprocal deposits that causes its total reciprocal deposits to exceed a specified previous average. As before, interest rate restrictions apply while the bank is less than well capitalized. Banks now have a much larger, approved source of stable de- posits that can be tapped. This means banks can help even more customers—including businesses (large and small), nonprofits, municipal governments, financial advisers, and even individu - als—to safeguard their funds, potentially at even higher levels. All at the same time attracting locally priced, large-dollar depos- its, which can be used to reinvest in the bank’s community. Furthermore, banks can use reciprocal deposits to replace more expensive deposits, like routinely collateralized deposits that come with tracking burdens, and those from listing ser- vices (generally associated with wholesale pricing and no loyal or local customer relationship). Making the Most of This New Opportunity Now is the time to act by taking advantage of this import- ant change in banking law. Read more about the new law and about the nation’s largest, most well-known recip- rocal deposit services by visiting promnetwork.com . For more information, contact Glenn Martin at gmartin@ promnetwork.com . n 1The Bank Executive Business Outlook Survey is a publication of Promontory Interfinancial Network, LLC. 2Promontory Interfinancial Network calculates the reinvestment rate as the percentage of the aggregate balance of CDARS deposits that are reinvested through CDARS within 28 days of maturity. Reciprocal deposits are deposits that a bank receives through a deposit placement network in return for placing a matching amount of deposits at other network banks. Although there are a number of providers, the leading reciprocal deposit placement network 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: Insured Cash Sweep ® , or ICS ® , and CDARS ® .