Banking Bill Tweaks Deposit Rules for Regional Banks, Mandates FDIC Study on Financial Stability

If you’ve ever wondered how your local bank—the one that actually knows your name—manages to stay competitive against the national giants, part of the answer lies in something called reciprocal deposits. This new piece of legislation, the Keeping Deposits Local Act, doesn’t change the fundamental rules of banking, but it makes some crucial technical adjustments that could offer more flexibility to smaller and regional institutions.

The Deposit Broker Problem and the New Tiers

For the average person, a deposit is just cash in the bank. For regulators, however, deposits sometimes get flagged as ‘brokered funds’ if they come through a middleman, which triggers stricter regulatory scrutiny for the bank. Reciprocal deposits—where banks swap deposits to keep large amounts fully FDIC-insured—are currently a gray area. This bill aims to clarify how much of those reciprocal deposits can be excluded from the ‘brokered funds’ label.

Instead of a one-size-fits-all approach, the Act introduces a tiered structure based on the bank's total liabilities (basically, how big it is). The smaller the bank, the more flexibility it gets. For instance, a community bank with less than $1 billion in liabilities can exclude 50% of its reciprocal deposits from the brokered funds calculation. That percentage drops to 40% for banks between $1 billion and $10 billion, and then to 30% for banks up to $250 billion. This change is a big deal for regional banks because it gives them more breathing room to manage their balance sheets without tripping regulatory wires, potentially allowing them to keep more capital available for local lending.

Setting the Bar for Safety: The CAMELS Check

Another key change is how the bill defines an “Agent Institution”—the banks that participate in these deposit swaps. Under Section 3, an institution must now have a CAMELS rating of 1, 2, or 3 from the FDIC's most recent examination to qualify. The CAMELS rating is essentially the regulatory report card for banks, judging their Capital, Assets, Management, Earnings, Liquidity, and Sensitivity to market risk. Ratings 1 and 2 are strong, 3 is acceptable, and 4 and 5 indicate problems. By requiring a 1, 2, or 3 rating, the bill ensures that only financially stable and well-managed institutions are participating in these deposit arrangements. It’s a simple, clear standard that adds a layer of safety to the system.

The Deep Dive Study

Perhaps the most important part of this Act for future policy is Section 4, which mandates a comprehensive study on reciprocal deposits by the FDIC and the Federal Reserve. They have six months to deliver a report to Congress. This isn’t just an academic exercise; the study is specifically tasked with analyzing how these deposits perform during times of financial stress (think 2008 or the 2023 regional bank issues). It also requires them to analyze who the end-users are—the municipalities, businesses, and non-profits—that rely on these products to keep their cash safe while supporting local institutions. This data will be critical for policymakers trying to understand the actual risks and benefits of these products, moving the discussion past assumptions and into hard facts. For anyone who cares about financial stability, this report is the one to watch.