BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C.  20551
			DIVISION OF BANKING SUPERVISION AND REGULATION
			SR 01-14 (SUP) May 31, 2001

	TO THE  OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATIONS STAFF AT EACH FEDERAL RESERVE BANK AND TO EACH DOMESTIC BANKING ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE SUBJECT:   Joint Agency Advisory on Rate-Sensitive Deposits                      On May 11, 2001, the Federal Reserve, along with the other federal banking agencies, issued an interagency advisory on brokered and rate-sensitive deposits to highlight the potential risks associated with excessive reliance on such deposits.  The advisory also provides guidance on prudent risk identification and management for these types of funding.                      The advisory notes that deposits raised through intermediary sources, such as deposit brokers, the Internet, and other automated service providers, may be less stable than traditional deposits, in large part because these depositors may have no other relationship with the institution and may rapidly shift funds to a different institution or investment in search of a higher return.  In some cases, banking organizations have used these rate-sensitive funds to support rapid loan and asset growth, raising safety and soundness concerns.                      Banking organizations are expected to implement appropriate risk management systems to assess and control the risks in these types of funding.  Such systems should include appropriate funds management policies, adequate due diligence in assessing deposit brokers and financial risks, reasonable control and limit structures, adequate management information systems, and contingency funding plans.  The advisory points out the need for examiners to focus an appropriate level of supervisory attention on institutions with a meaningful reliance on rate-sensitive deposits, and to take appropriate action, if warranted.  The advisory also sets forth a list of potential red flags that may indicate the need for closer supervisory review.                      Reserve Banks are asked to send this SR letter and the attached advisory to their supervisory staff and to regulated institutions in their districts.  Any questions may be addressed to Richard Watkins, Supervisory Financial Analyst, (202) 452-3421 or David Kerns, Supervisory Financial Analyst, (202) 452-2428. Richard Spillenkothen Director Attachment (253 KB PDF)
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