Strategies for Managing Deposit Risk and Stability   

*This article was published in Bank Director magazine’s first quarter 2025 issue.

Rising funding costs and increased regulatory scrutiny are putting greater pressure on bank directors to build profitable deposit franchises while maintaining institutional safety and stability. As financial regulations evolve in response to recent crises, bank directors play a crucial role in aligning strategies with regulatory expectations to safeguard community and regional banks.

The collapse of Silicon Valley Bank in 2023 underscored the volatility of uninsured deposits, which can pose substantial liquidity risks to financial institutions. Today’s digital, interconnected environment enables depositors to withdraw funds at unprecedented speeds, sometimes triggering bank runs. In response, the Federal Deposit Insurance Corp. has initiated a comprehensive review, including a request for information on deposits.

Gathering better data on depositor behavior — especially regarding uninsured deposits — should be a priority for bank directors. Proactive risk monitoring can mitigate potential disruptions, helping banks manage liquidity and prevent sudden crises. Implementing real-time data analytics and best practices for monitoring large deposits can help leadership stay ahead of market shifts.

Stability Over Growth
Reciprocal deposits, which are products that allow banks to diversify large deposit exposure by exchanging funds with other participating banks, offer stability in uncertain markets. During the 2023 bank failures, reciprocal deposits helped midsized banks weather the storm, as noted in reports from the Federal Reserve Bank of Dallas and that of Cleveland. These deposit products reassure customers and reduce the likelihood of costly bank runs.

For boards looking to mitigate risk, it’s essential to consider how reciprocal deposits can increase the stability of their banks’ funding base and provide a buffer during times of financial stress. Leadership teams should review their institutions’ experiences with reciprocal deposits during the 2023 crisis and consider supporting data from the Fed studies to advocate for policies that maintain or expand access to reciprocal arrangements.

Status Quo on Brokered Deposits
A reevaluation of brokered deposit regulations will likely be a priority for new FDIC leadership. The July 2024 proposal would have included traditional sweep deposits and would have impacted bank funding and business models. The proposal potentially would have added compliance costs and reduced local credit availability in an already challenging business environment.

As banks increasingly partner with fintech companies and third-party service providers, the FDIC has expanded oversight through interagency guidance. It’s critical boards ensure thorough due diligence to manage the operational, legal and liquidity risks associated with these partnerships.

The FDIC’s existing third-party relationship guidance provides a targeted approach to addressing concerns with the banking as a service model. Bank leaders should ensure their teams follow this framework, which offers a constructive path forward.

Moving ahead, bank directors also need clearer, more consistent definitions around deposit classifications. Confusion over distinctions between brokered and reciprocal deposits can lead to compliance challenges. As the FDIC revises its rules, banks should advocate for precise regulatory language to avoid unnecessary burdens and ensure deposits effectively fund lending operations.

Leadership must stay ahead of potential risks in an evolving regulatory landscape while advocating for stability and clarity in deposit regulations. Whether through enhanced data collection, reciprocal deposit programs or strategic third-party partnerships, these approaches help institutions remain resilient in times of uncertainty. Bank boards and executives should continue engaging with regulators to ensure deposit regulations support both financial stability and growth.