Exclusive: Reps. Barr and Hill press FDIC on brokered deposits rule

WASHINGTON — Leading House Republicans on banking issues called on the Federal Deposit Insurance Corp. to withdraw its brokered deposit proposal, previewing part of the GOP’s bank regulatory agenda in the next Congress. 

Reps. Andy Barr, R-Ky., and French Hill, R-Ark., both leading contenders to be the chairman of the House Financial Services Committee next year, asked that FDIC chair Martin Gruenberg abandon the brokered deposit rulemaking, which would reverse a more bank-friendly rule issued during the first Trump administration. 

“We recommend that the FDIC withdraw the proposal to allow a fresh perspective to guide the agency forward rather than finalizing this controversial proposal in the final months of your tenure,” Barr and Hill said. 

Bank regulators, including Gruenberg, already said at a hearing last week that they would pause finalizing rulemakings in the final lame duck days of the Biden administration, but the letter still offers an insight into the focus of the top House lawmakers on banking issues for the next few years. 

Gruenberg, alongside the July brokered deposits proposal, cited the collapse of Synapse, as well as Voyager and First Republic Bank, as examples of the instability and risks associated with some bank-fintech and bank-crypto relationships. Former FDIC Chairman Jelena McWilliams said in the 2020 brokered deposit rule that fostering such relationships was a key driver of that rulemaking. 

Hill and Barr said in their letter that the Synapse case is a separate issue from brokered deposits, and pushed back against Gruenberg’s characterization. 

“These justifications are disingenuous as neither of these situations

were caused by brokered deposits,” the lawmakers said. “In fact, Synapse is not an insured depository institution.”

The lawmakers criticized the process that the FDIC pursued in its rulemaking, and said that the agency lacked analysis on the impact to regulated institutions. Building the case that an agency didn’t go through the proper path to make a rule can help build a case for a legal challenge under the Administrative Procedures Act, though that path is unlikely because the next Trump-appointed FDIC chair could withdraw the rule immediately upon taking office.

“Instead of performing analysis to substantiate this assertion, the FDIC relies on unsupported conjecture and anecdotal evidence,” Hill and Barr said. “In fact, the only analytical evidence used to justify this policy reversal is a study on core and brokered deposits conducted in 2011 and updated in 2017, to inform the 2020 rulemaking.” 

The Gruenberg rule, Barr and Hill said, would “likely force banks, including ones that do not face restrictions on acceptance of brokered deposits, to significantly alter their liability structures.” The new rule would also increase assessment rates for banks with deposits that would be reclassified under Gruenberg’s rule as brokered deposits, the lawmakers said. 

The new rule “does not address the actual risks that contribute to bank instability,” Barr and Hill said. 

“The proposal aims to restrict brokered deposits for less than well-capitalized insured depository institutions, arguing that such deposits increase an institution’s risk profile,” they said. “However, by focusing too heavily on the source of deposits, the proposal fails to adequately address the characteristics that determine deposit stability “in a fair and risk-sensitive way.”

Barr and Hill don’t argue, however, that the FDIC should never have pursued any kind of rulemaking regarding brokered deposits — a key point as Washington enters Republican trifecta for at least the next two years. 

“A more effective regulatory approach from the FDIC would have considered a wider set of factors affecting bank liquidity, such as concentration risk; large, uninsured deposits; and deposit term maturity,” the lawmakers said.