The FDIC-lightened regulatory burden: What this means for banks

Banks can breathe a bit easier now that the FDIC’s Board of Directors provided temporary relief for insured depository institutions (IDI) from the burden of FDICIA Part 363 audit and reporting requirements.

Unlike during the financial crisis, when the reputation of banks was tarnished, COVID-19 has positioned banks as a lifeline to businesses and their communities. Today, the national banking system is flush with cash from pandemic-related stimulus activities, but has found itself with excess funding as small businesses received lump-sum funds and are using these balances to pay their employees and meet other obligations over time. Prior to this interim rule, banks have been managing their balance sheets to avoid having to develop processes and systems to comply with the substantial requirements of FDICIA.

Last month, the FDIC Board of Directors voted to issue an interim final rule (IFR) to provide temporary relief from the Part 363 audit and reporting requirements for IDIs that have experienced temporary growth due to participation in the Paycheck Protection Program (PPP), the Paycheck Protection Program Liquidity Facility (PPPLF), the Money Market Mutual Liquidity Fund (MMLF), or other factors, including other stimulus activities.

The IFR will allow banks to determine whether they are subject to the requirements of Part 363 of the FDIC’s regulations for fiscal years ending in 2021 based on the lesser of their (a) consolidated total assets as of December 31, 2019, or (b) consolidated total assets as of the beginning of their fiscal years ending in 2021. Prior to this ruling, an IDI determines if it is subject to the annual independent audit and reporting requirements of Part 363 based on its consolidated total assets as of the beginning of its fiscal year.

FDICIA Part 363 requires IDIs with assets of $500 million or more to obtain annual independent audits and meet related reporting requirements, and requires assessments of the effectiveness of internal control over financial reporting for IDIs with consolidated total assets of $1 billion or more. It also includes requirements for audit committees at IDIs meeting these thresholds, plus additional audit committee requirements for IDIs with consolidated total assets of $3 billion or more.

This IFR was effective immediately. It is not often you get to see government respond quickly and timely to a crisis, but the FDIC’s response is commended for the flexibility and freedom it provides banks to manage their businesses. Banks can now focus on meeting the needs of their communities, rather than managing their balance sheets to reduce the impact of the temporary COVID balances. At the macro level, the FDIC has relieved the added downward pressure on rates driven by such balance sheet maneuvering.

The IFR provides banks the opportunity to take advantage of low-cost deposit gathering solutions and to diversify their funding sources. Many banks aimed to utilize the balance sheet management capabilities associated with reciprocal deposit programs to guide overall balances lower, but at the cost of reducing the long-term liquidity available to the bank in the event of a downgrade. Not an optimal result, especially since most reciprocal deposits are considered non-brokered. Thanks to the FDIC, such moves are no longer necessary for FDICIA purposes.

Now, banks can bring money back on balance sheet from various sources, including their reciprocal networks, and generate low-risk spread income. With brokered rates at historic lows, there exists a positive spread even with respect to balances maintained at the Federal Reserve.

Banks that plan to graduate into the next tier under Part 363 now have another year to prepare for additional requirements. Banks that were concerned about FDICIA Part 363 requirements can now rest easier and continue their important role in this recovery.

Joseph Jerkovich is executive vice president and chief operating officer at R&T Deposit Solutions.