US regulators have begun making moves requiring banks to disclose more details on their deposit bases.
Deposit concentrations have come under intense scrutiny following the failures of Silicon Valley Bank and Signature Bank, both of which had high levels of uninsured deposits and concentrations among specific industries. Now, regulators have started the process of requiring banks to provide more frequent and granular reports on their deposit bases as the agencies hope to get better insight as to where risks might be after the recent failures showcased just how fast deposits can move.
"It's Pandora's box that gets opened by having new reporting requirements," said Christopher Marinac, director of research at Janney Montgomery Scott LLC. "We had three bank failures this year, and we need to rethink it. ... I think, unfortunately, we have to open the box. We have to take a hard look at what we are getting, or in this case not getting, and make it better."
However, industry experts see a mix of potential benefits and challenges for the banking industry if the changes come to fruition.
Reporting on key depositors
As part of the Federal Deposit Insurance Corp.'s recent living will rule proposal, banks with more than $50 billion in assets could soon have to report key information on their top 100 depositors, including details such as names, lines of business and geographic information.
The move is an attempt to make banks "consider what would happen in a stress condition," Chip MacDonald, managing director of MacDonald & Partners LLP, said in an interview. If there are signs of problems at the bank, "typically a lot of those depositors leave, especially if they're uninsured."
Some industry experts believe increased disclosures on the largest depositors are necessary following the recent events, while others believe such disclosures would come with substantial compliance burdens and bring confidentiality risks.
Specifically, getting such details could prove to be a heavy lift for banks.
"Geographic location and line of business may vary, and customers change their lines of business," MacDonald said. "Does that mean you have to do this all over every year with the same customer? There's a lot of 'devil in the details' in this."
Digging deeper into those deposit base details would be a beneficial exercise for most banks, but one lawyer believes the FDIC has gone a step too far in the details it could ask for.
"Every institution, if they don't have granularity, would benefit from it, and I think it's a reasonable approach for the FDIC to say, 'We'd like to see more granularity in understanding the deposit base,'" Scott Coleman, a partner at Ballard Spahr LLP who represents banks and bank holding companies, said in an interview. However, it is unclear how the identity of depositors is helpful, "whereas size of deposits, geography and line of business might be useful in understanding liquidity risks," Coleman added.
Such specific details on the largest depositors could also present confidentiality risks, some experts said. Currently, resolution plans are split into two sections — public and confidential. It is unclear if the new details on depositors would be public or confidential, if it is in the final rule.
If the information is confidential, it could still be at risk if there were a data breach at the agency, industry experts said. Data breaches are not unprecedented, as the Office of the Comptroller of the Currency disclosed a data breach to Congress in October 2016 and the Consumer Financial Protection Bureau disclosed a breach in April.
Marinac believes it would be beneficial for the details to be public. "Part of the art is that you have multiple eyes looking at it," Marinac said in an interview. "It's not just the examiners."
The deposit disclosure detail in the living will proposal comes after a recent speech from FDIC Chairman Martin Gruenberg on Aug. 14 calling for "more granular, and more frequent, reporting of deposits." In that speech, Gruenberg also floated the ideas of establishing a specific threshold for uninsured deposit concentrations that would require examiners to give more attention to that bank's deposit base and charging banks with high levels of uninsured deposits a higher deposit insurance assessment based on risk.
Such changes could push banks to change their behavior and reduce concentrations, such as by diversifying their customer bases, S&P Global Market Intelligence previously reported.
Likelihood of changes
Industry experts were split on just how quickly such changes could go into effect.
"My hunch is that it's a lower likelihood that it happens this year — I think it'll happen next year," Marinac said.
However, the changes might not be very big, as gathering information related to depositors is within regulators' supervisory discretion and they have likely already been asking for such details, John Gorman, partner at Luse Gorman PC who represents financial institutions on M&A, regulation and other topics, said in an interview.
"My guess is a lot of banks have been providing that information to the FDIC in the last six months" in response to supervisors' requests, Gorman said.