Brokered Deposits and Strategic Planning Considerations

By: John Popeo

Overview

Brokered deposits are often viewed by insured depository institutions (IDIs) as a cost-effective source of liquidity and funding. Federal bank regulatory agencies, however, consider brokered deposits to be a less stable source of funding that contributed to the 2008 global financial crisis. This article provides an overview of brokered deposits and discusses applicable regulatory restrictions, including recent guidance by the Federal Deposit Insurance Corporation (FDIC) regarding the identification, acceptance, and reporting of brokered deposits (FDIC Guidance) by IDIs.

Core Deposits Compared to Brokered Deposits

The Federal Deposit Insurance Act (FDI Act), 12 USCS § 1811 et seq., broadly defines the term “deposit” as the “unpaid balance of money or its equivalent received or held by a bank or savings association.” This sweeping definition encompasses nearly all funds subject to transfer or withdrawal by depositors at an IDI. For regulatory examination purposes, the federal bank regulatory agencies primarily distinguish between core deposits and brokered deposits.

Core deposits are not defined by federal banking statutes and regulations. Rather, core deposits are defined in the Uniform Bank Performance Report (UBPR), a supervisory tool used by examination staff of the federal bank regulatory agencies. Under the UBPR definition, core deposits are “the sum of demand deposits, all negotiable order of withdrawal (NOW) and automatic transfer service accounts, money market deposit accounts, other savings and time deposits under $250,000, minus all brokered deposits under $250,000.” Notably, this definition specifically excludes brokered deposits. For regulatory examination purposes, core deposits include deposits that are “stable, lower cost [and] reprice more slowly than other deposits when interest rates rise. [Core] deposits are typically funds of local customers that also have a borrowing or other relationship with the institution.” As discussed below, federal bank regulatory agencies generally prefer core deposits to brokered deposits as a preferred method of funding.

Federal bank regulatory agencies consider the presence of core deposits and brokered deposits in evaluating liquidity management programs and assigning liquidity ratings for regulatory examinations. In connection therewith, the agencies assess whether an IDI has properly identified, measured, monitored, and controlled its funding risks. While federal bank regulatory agencies maintain there is no stigma attached to the acceptance of brokered deposits, regulatory examination staff tend to favor core deposits over brokered deposits as core deposits are viewed as a more stable, less costly funding source from long-term customers. Brokered deposits, on the other hand, are viewed as a more volatile funding source typically associated with interest rate sensitive deposits, or hot money, from customers consistently seeking a higher rate of interest.

To read the full practice note in Lexis Practice Advisor, follow this link.

John Popeo is a Content Manager for Lexis Practice Advisor. Previously he worked at Hogan Lovells US LLP, as a senior associate in the financial institutions group where he focused on representing FinTech companies, banks and their holding companies. Before Hogan, John spent nearly a decade in various roles at the Federal Deposit Insurance Corporation, the Federal Reserve Bank of Boston, and the Financial Litigation Unit of the United States Attorney’s Office.

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