Tiered Deposit Rules: New Bill Changes How Banks Over $1 Trillion Manage Insured Funds

The Keeping Deposits Local Act is a highly technical bill aimed squarely at how large financial institutions manage their insured deposits, specifically focusing on what are called “reciprocal deposits.” Essentially, this bill creates a complex, sliding-scale calculation for how much of these deposits can be treated favorably—meaning they won't be counted as if they came from a deposit broker, which triggers stricter regulations. The change is based entirely on the institution's total liabilities, setting up different rules for banks depending on their size.

The Deposit Broker Loophole Gets a Scale

For most people, the term “deposit broker” sounds like something out of a movie, but it matters greatly in banking regulation. Reciprocal deposits are when banks swap deposits with each other through a network. This lets them offer customers full FDIC insurance on amounts far exceeding the standard $250,000 limit, since the money is parceled out to other banks. The current rules exclude a certain amount of these deposits from being counted as “brokered funds,” which is a regulatory win for the bank. Section 2 of this Act replaces the old rule with a tiered structure that dictates the percentage of reciprocal deposits that get this favorable treatment.

This new structure is a regulatory roller coaster. For the first $1 billion in liabilities, 50% of the reciprocal deposits are excluded from the broker count. That percentage slowly drops as the bank gets bigger, hitting 40% for liabilities up to $10 billion, and 30% up to $250 billion. The most significant drop occurs for the very largest institutions: for liabilities over $1 trillion, the favorable treatment plummets to just 2%. In real terms, this means that while mid-to-large banks get a solid regulatory break, the mega-banks—those with liabilities in the trillions—will find their ability to use reciprocal deposits to avoid the “brokered funds” label severely curtailed on the excess amounts.

Standardizing the Agent Institution

Section 3 addresses a much simpler, but still important, administrative change. It tightens the definition of an “Agent Institution.” These are the banks allowed to participate in the reciprocal deposit networks. Previously, a bank qualified if federal regulators determined its financial health was “outstanding or good.” This bill scraps that subjective language and replaces it with a requirement that the institution must have a specific CAMELS rating of 1, 2, or 3.

CAMELS is the standardized rating system regulators use to assess a bank’s health (covering Capital, Assets, Management, Earnings, Liquidity, and Sensitivity). By requiring a 1, 2, or 3 rating (where 1 is the best), the bill standardizes the qualification process. This is good for clarity, but it potentially tightens the gate. If a bank was previously considered “good” but didn't quite hit that CAMELS 3 threshold—perhaps they were a solid 4—they might now be excluded from acting as an Agent Institution, impacting their ability to participate in these deposit networks and potentially limiting their liquidity options.