Key Insights
- Eligible community financial institutions under $10B can exclude fiduciary custodial deposits up to 20% of liabilities.
- New tiered formula significantly expands reciprocal capacity, especially for institutions with liabilities under $1B.
- Institutions may want to model special caps and retain documentation to protect liquidity if supervisory ratings change.
The children's story about the three little pigs is not so much a lesson in building materials, but a reminder about mistaking calm-weather stability for resilience under stress. Brokered-deposit regulations arose from a similar realization following the savings and loan crisis: funding that appears plentiful in ordinary times can quickly become a vulnerability when market confidence shifts.
In 1989, Congress enacted Section 29 of the Federal Deposit Insurance Act through FIRREA to restrict brokered "hot money" that pursued high yields and fled during turbulence. While that core framework remains in place, recent legislation has introduced meaningful flexibility. In July 2026, the 21st Century ROAD to Housing Act took effect, adding a new custodial-deposit exception and expanding reciprocal-deposit capacity for community financial institutions (CFIs). With the FDIC implementing these statutory provisions, leadership teams can assess who qualifies, how capacity expands, and where to integrate these updates into balance sheet planning.
Smaller Eligible Institutions Gain Custodial Relief
Section 901 establishes an exclusion for custodial deposits placed by a bank, trust company, or retirement plan fiduciary to maintain full deposit insurance for clients. For an eligible institution, qualifying balances are not classified as brokered deposits up to 20% of total liabilities. Third-party deposits placed for a fee do not qualify.
Eligibility under Section 901 is targeted. An institution must hold less than $10B in total assets, maintain well-capitalized status (or hold a supervisory waiver), and have received a composite CAMELS rating of 1, 2, or 3 at its most recent examination. Because the deposit arrangement itself must meet the fiduciary definition, institutions may want to review custodian agreements to verify that existing arrangements satisfy the statutory criteria before adjusting classification assumptions.
Exclusion from brokered-deposit treatment does not, by itself, determine an institution’s internal liquidity-risk characterization. Institutions should continue to evaluate reciprocal and custodial deposits based on their funding concentration, pricing sensitivity, maturity and renewal characteristics, depositor or intermediary behavior, and expected availability under stressed conditions.
Tiered Formula Expands Reciprocal-Deposit Capacity
Section 902 replaces the prior reciprocal-deposit cap (the lesser of $5B or 20% of total liabilities) with a graduated formula: 50% of the first $1B in liabilities, 40% of liabilities between $1B and $10B, and 30% of liabilities exceeding $10B, up to an aggregate $30B limit. Because the highest exclusion percentage applies to the first tier, the formula offers substantial proportional relief to smaller balance sheets. For example, a CFI with $600MM in liabilities sees its excludable reciprocal capacity increase from $120MM to $300MM.
Eligibility has also broadened. Well-capitalized institutions with a composite 3 rating now qualify as agent institutions, where previously only 1- and 2-rated institutions were eligible. The FDIC issued an interim final rule conforming its regulations to Section 902, effective September 1, 2026. Because reciprocal balances affect regulatory reporting, institutions should evaluate any potential implications for deposit-insurance assessments, public-deposit collateral requirements, and internal liquidity metrics based on their individual facts, applicable state law, and current regulatory reporting instructions. Any anticipated financial or operational impact should be validated before it is incorporated into funding plans or forecasts.
Navigating Downgrade Rules and Special Caps
Because the custodial and reciprocal exceptions operate under separate criteria, an institution may qualify for one, both, or neither. Institutions with $10B or more in assets can utilize expanded reciprocal capacity under Section 902, but cannot claim the Section 901 custodial exception.
Institutions should monitor continued eligibility for the reciprocal-deposit exception. A change in capital category or supervisory status may affect an institution’s ability to treat reciprocal deposits as nonbrokered. Depending on the applicable requirements, an institution may need to operate within its special cap or obtain appropriate regulatory approval. The special cap generally is based on the average reciprocal-deposit balance during the four quarters preceding the loss of eligibility; reciprocal deposits above the applicable cap may be treated as brokered deposits. Institutions should confirm the relevant timing, calculations, documentation, and reporting implications with legal, compliance, and regulatory-reporting personnel.
Practical Steps for ALCO and Liquidity Planning
While the FFIEC finalizes updated Call Report instructions, institutions can model capacity under the statutory formulas. Management teams might structure upcoming ALCO discussions around several practical steps:
- Audit qualifying balances: Review deposit placement agreements, fiduciary relationships, composite ratings, and capital categories to verify eligibility under each statutory test.
- Recalculate available capacity: Model reciprocal capacity under the tiered liability formula and compare permitted limits against current and anticipated balance sheet needs.
- Quantify financial and operational impacts: Evaluate potential cost reductions in FDIC assessment rates, changes in collateral pledging for public deposits, and adjustments to internal concentration limits.
- Stress-test downgrade limits: Model special-cap restrictions under potential rating changes to ensure liquidity contingency plans accommodate potential reclassifications.
- Assign workstream ownership: Consider aligning Treasury on funding assumptions, Finance on Call Report reporting, and Compliance on documentation and eligibility verification.
- Align internal liquidity treatment: Ensure treatment of reciprocal and custodial deposits is consistent with the institution’s liquidity-risk policy, risk appetite, contingency funding plan, and stress-testing methodology.
- Establish monitoring triggers: Monitor capital status, supervisory status, reciprocal-deposit concentrations, pricing, maturity and renewal characteristics, and potential special-cap constraints.
- Document governance and assumptions: Document eligibility conclusions, calculation methodologies, underlying agreements, reporting treatment, stress assumptions, and appropriate ALCO or management approval for any changes to funding plans.
By grounding liquidity assumptions in verified data and stress modeling, community institutions can strategically leverage expanded deposit flexibility while maintaining sound balance sheet resilience.
