Pub. 16 2019 Issue 1

10 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 Good News for Banks: Congress Makes Way for Reciprocal Deposits A lesser-known provision of a new law just changed the market for deposits, and it could not have come at a better time for banks, especially com- munity banks. The provision, which is part of the regulatory relief package for banks just signed by President Trump, provides that most reciprocal deposits are no longer treated as brokered. As a result, well-capitalized banks can now attract more large-dollar, local relationships and, in turn, have more cost-effective funding on hand to finance lending in their communities. In recent months, U.S. banks have been bracing for in- creased competition for customer deposits. According to the Bank Executive Business Outlook Survey (2018, Q1) a record number of bank respondents (76 percent) reported facing more competition for deposits over the past year and almost 90 percent believe it is only going to get tougher. 1 Source: Bank Executive Business Outlook Survey 1st Quarter, 2018 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 them - selves for more competition from the nation’s largest banks, as well as from non-traditional players that include the likes of fintech companies, Goldman Sachs’s Marcus, and the poten - tial entry of Amazon. Reciprocal Deposits Fortunately, the enactment of the Economic Growth, Regu- latory Relief, and Consumer Protection Act should offer banks some relief. This important new law provides that most recip- rocal 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 ® . By Chuck McBrayer, Regional Director, Promontory Interfinancial Network, LLC Banks now have a much larger, approved source of stable deposits that can be tapped.