FDIC raises reciprocal deposit limits to support commercial banking

The Federal Deposit Insurance Corporation has significantly increased the volume of reciprocal deposits that eligible banks may hold under the statutory exception to brokered deposit treatment. The interim final rule, adopted on 27 August and effective from 1 September, replaces previous general caps with a new calculation method that allows for substantially higher deposit limits. This regulatory change provides qualifying institutions with greater capacity to accept reciprocal deposits, particularly those associated with businesses maintaining balances above the standard insurance limit at a single institution.

The new framework implements changes enacted by Congress in July. It supersedes the prior general cap, which was defined as the lesser of five billion dollars or 20 per cent of an institution’s total liabilities. Under the revised calculation, banks may hold 50 per cent of the first one billion dollars in liabilities, 40 per cent of liabilities between one billion and ten billion dollars, and 30 per cent of liabilities above ten billion dollars. This structure leads to a statutory ceiling that produces a maximum general cap of 30 billion dollars. Through this network, the originating bank receives an equal aggregate amount of reciprocal deposits placed by other participating institutions, allowing for a more flexible approach to deposit management.

For commercial banking, the significance of this change lies in the operational capabilities it affords within customer relationships. Companies often require millions of dollars to be readily available for payroll, supplier payments, taxes and other operating expenses. While the standard FDIC insurance amount remains 250,000 dollars per depositor, per insured bank, for each account ownership category, reciprocal deposit arrangements allow participating banks to place portions of a customer’s deposits at other insured banks. These placements are generally designed to remain within applicable insurance limits. In return, the originating institution receives deposits from other banks in the network. This structure enables customers to maintain their principal relationship with one institution while eligible funds are distributed among multiple insured banks.

This distinction is particularly relevant to commercial banking because deposits rarely stand alone. A company keeping its working cash at a bank may also use that institution to collect receivables, make supplier payments, originate payroll, manage liquidity and obtain credit. Recent coverage of regional bank earnings indicates that deposits are growing alongside commercial lending at several institutions. KeyCorp stated that approximately 91 per cent of its commercial loans were made to customers that also used the bank for deposits, payments or capital markets services. Similarly, at Regions, small business balances accounted for just over 30 per cent of the quarter over quarter growth in average noninterest bearing deposits.

Banks have consequently placed greater emphasis on the services surrounding these balances. Recent examinations of second quarter bank results show institutions investing in treasury and payments capabilities, driven by corporate finance departments seeking better cash flow visibility, forecasting and working capital tools. The reciprocal deposit rule affects one specific part of this relationship by determining how much deposit capacity qualifying institutions can accommodate under the statutory exception. The additional capacity may be useful when serving companies whose operating balances would otherwise substantially exceed the amount insured at one institution.

The timing of this rule also intersects with banks’ broader efforts to gather commercial deposits. Recent reporting indicates that banks are using various models to attract deposits through FinTech and embedded finance relationships. Institutions differ considerably in how much partner generated deposit funding they wish to retain on their balance sheets. While reciprocal deposits address a different part of the deposit business, the underlying balance sheet question remains related. Banks have choices about how they source deposits, how much they retain and how those deposits fit with the services they provide.