Pub. 7 2019 Issue 2

www.uba.org 22 Relief for Community Banks in the Competition for Deposits An important reform of the rules governing reciprocal deposits will make it easier for community banks to compete for the business of large depositors. By Bryan Harper, Regional Director at Promontory Interfinancial Network, LLC T he recent bank reform bill made a lot of news, but what may surprise you is the specific provision of the Economic Growth, Regulatory Relief, and Consumer Protection Act that community bankers believe will have the biggest impact on their daily business. Before the bill became law, a lot of attention was placed on the provision raising the systemically important financial insti- tutions, or SIFI, threshold from $50 billion to $250 billion in assets, above which banks must contend with a heavier compli- ance burden. Yet, the provision involving SIFIs directly impacts only a small number of commercial banks based in the United States – the dozen-plus with between $50 billion and $250 billion in assets. Perhaps that’s why when Promontory Interfinancial Network queried bankers for its second-quarter Executive Business Outlook Survey, executives from the 390 banks that responded pointed elsewhere when asked to identify the law’s most impact- ful provision. Thirty-seven percent of respondents said the law’s provision that allows most reciprocal deposits to be treated as nonbrokered deposits ranked highest on a scale of one to five, placing it first among the seven other provisions tested. It was up against stiff competition. The other provisions includ- ed those that eased the qualified mortgage rule, extended the regulatory exam cycle and simplified capital rules for communi- ty banks, among others. “We think the change to reciprocal deposits is great,” says Christopher Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America. “It clarifies the status of reciprocal deposits and alleviates the concerns many community banks had about using them.” Similarly, the American Bankers Association noted that, “the definition of brokered deposits needs to be modernized and we appreciate that Congress took a first step by recognizing reciprocal deposits are a stable source of funding for many community banks.” The change in the law makes sense, says Neil Stanley, president of community banking at TS Banking Group, which owns three banks, including Treynor State Bank, a $400 million bank based in Treynor, Iowa: “This is one of those areas that reflects what bankers always thought was true – when a large, local depositor does business with us, any deposits above the $250,000 FDIC insurance threshold shouldn’t be considered brokered or highly volatile just because we place them with other institutions on a reciprocal basis.” Underscoring the significance of the change, 58 percent of respondents to Promontory Interfinancial Network’s survey said they plan to start using, or expanding their use of, recip- rocal deposits immediately or very soon because of the new law. An additional 29 percent said they would consider doing so in the future. To put this in perspective, according to the same bank leaders, the next most impactful provision included in the new law