Over the past two months, more than 43 million workers have filed for unemployment claims around the country, with more than 1 million of those claims coming out of my home state of Ohio. As the senior executive of a community bank, I focus on helping the small business owners who operate within the communities we support. Anxiety is high, and our mission is to help these businesses survive this crisis — so they can thrive again in a post-pandemic economy. Despite our best efforts to fulfill our mission, we still encounter operational barriers and regulatory roadblocks that limit our impact.
A glimmer of hope has come in the form of the federal government’s funding for the Payroll Protection Program (PPP). Unfortunately for many here in Ohio, the PPP has proved to be better in theory than in practice. Small business owners across America watched in frustration as large public companies received and then returned PPP funding originally intended for small businesses. Still, more than $243.4 million of the PPP funding has gone to publicly traded companies rather than to Main Street small businesses. Where is the disconnect?
As an economic cornerstone in the communities we serve, when given the reins to allocate these loans, community banks have quickly, effectively distributed the PPP funding to those most in need. But we won’t be able to do our jobs and fulfill our missions if the Federal Deposit Insurance Corp. (FDIC) — the prudential federal regulator of most community banks — continues to advance unnecessary regulatory complexities.
Before the pandemic, the FDIC published a proposed rule which, if adopted as currently written, will severely restrict community banks’ ability to serve our communities and the small businesses that operate within them. Community banks often do not have the same resources, technology platforms, technical expertise and financial budgets that large regional and national banks have to develop the modern banking products and services that small business owners and consumers desire. As such, smaller institutions must rely on third-party service providers to help us deliver the types of products, services and digital capabilities that attract new customers and the stable source of deposits that come with those relationships — deposits we need to make the loans our communities desperately need.
The FDIC’s new rule regarding brokered deposits is exceedingly broad and risks treating our deposits as “brokered” — resulting in higher insurance fund premiums and a reputational stain on an institution’s name — if we a.) receive or use any information from any third party, b.) utilize consultants or industry advisers to help us optimize our deposit offerings or c.) utilize third parties for anything other than administrative services within our deposit-gathering activities.
This would have a tremendous negative impact on a small bank’s day-to-day business. For example, we would no longer be able use credit bureaus to verify a consumer’s identity when they open an account, easily detect fraudulent activity by using consumer reporting agencies and artificial intelligence, use a marketing agency for promotion and SEO, or use experts to offer account rewards, loyalty programs and basic geolocation services. The list goes on and on.
Community banks should not be penalized for being small and for outsourcing activities or services that otherwise would be permissible if conducted directly by the institution. So what can be done to empower community banks to gather the deposits they require to fund needed loans for our nation’s small businesses?
There are two channels for a potential solution. One channel is regulatory; the other, legislative.
On the regulatory front, the FDIC should create a narrow exclusion from the “deposit broker” definition for third parties who assist banks in offering deposit products directly to individual depositors, provided the third party has no contractual relationship with the individual depositor to place, move or manage the depositor’s funds. As long as the depositor relationship resides directly with the bank and not with the third party, the bank should be able to utilize the third party’s services without triggering any brokered deposit rules.
The FDIC also should exclude all transaction account deposits and all multiservices relationship deposits (e.g. checking, savings, MMAs, CDs) from the “brokered deposit” definition when a bona fide, direct relationship is established between a bank and an individual depositor. These deposits are stable sources of funds that do not cause any safety or soundness concerns or increased risk to the Deposit Insurance Fund (DIF), because they are associated with a direct depositor relationship owned and controlled by the bank. They actually increase an institution’s franchise value.
In the legislative channel, Congress should take immediate action to replace Section 29 of the Federal Deposit Insurance Act (FDI Act) with a simple, common-sense restriction on asset growth for financially troubled banks. Proposed and supported by FDIC Chairman Jelena McWilliams, this solution would be easier for the FDIC to administer, limit exposure to the DIF and more directly address the key goal of preventing troubled banks from using insured deposits to try to grow out of their problems.
Small community banks are struggling to compete with fintech providers and our country’s large regional and national banks. If unable to utilize third parties without incurring negative regulatory repercussions, the “digital divide” that already exists between community banks and these larger competitors will widen, and community banks will be left behind. Industry consolidation will accelerate, and hundreds of counties and small towns throughout the U.S. will be left without access to any locally decided credit or financial services.
Small business owners in Ohio don’t want their financial future being determined by a bank headquartered in New York City, or a bureaucrat in Washington. My small-business customers want someone who personally knows and cares about them to help them get back on their feet.
Between the FDIC’s proposed rule and the misallocation of PPP loans, I fear our local communities and small business owners will continue to suffer. The time to act is now: Either Congress must replace Section 29 of the FDI Act with a “cap” on asset growth for troubled institutions, or the FDIC’s proposed brokered deposits rule must be revised to exclude certain third parties from the deposit broker definition and to exclude stable sources of funds from the “brokered deposits” definition.
Shon B. Myers is chairman, president and CEO of Farmers & Merchants Bank and its holding company, F&M Bancorp, in Miamisburg, Ohio. He is a member of Miamisburg’s Municipal Trust Fund Finance Committee, vice president of the Miamisburg Community Foundation, past chairman of the Community Bankers Association of Ohio and a committee member of the Independent Community Bankers of America.