Better Markets says a recent FDIC proposal on brokered deposits would “weaken banks and cost taxpayers money.”

Earlier this year, the FDIC issued a proposal that would make it easier for less than well capitalized banks to accept risky brokered deposits, an unstable form of bank funding that contributed to bank failures during the savings and loan crisis in the 1980s and again during the 2008 financial crisis. The agency claims (without data or evidence) that the new proposal is necessary to help emerging technology companies that want to partner with banks. 

In its comment letter filed June 9, Better Markets voiced strong opposition to the proposal, arguing that it tears huge holes in the current restrictions, which sensibly limit the ability of less than well-capitalized banks to accept brokered deposits. Also, Better Markets notes that the new proposal would “ultimately undermine already weak banks and threaten the deposit insurance fund that protects Americans’ bank balances.”

Steve Hall, legal director and securities specialist, says the proposal fails to offer any persuasive justification for the deregulatory measures except to claim that it’s time to update the rule in light of new technologies in banking and finance.

“But even modern forms of brokered deposits can pose risks to banks. In any event, the FDIC’s primary duty is to protect bank customer deposits and prevent losses to the [Deposit Insurance Fund] from bank failures, not cater to the fintech industry’s desire to increase its business prospects,” Hall says. “To top it off, fintech firms don’t really need this proposal since the vast majority of banks are well-capitalized and can accept brokered deposits without restrictions.”

Hall says Better Markets urged the FDIC to abandon the proposal but noted that it must at least strengthen key elements, identified in the comment letter, if it decides to move forward.