Brokered deposit
| Brokered deposit |
|---|
| See also |
Brokered deposit is a part of a larger deposit certificate or deposit that was sold to a deposit broker and then divided into smaller parts for individual investors[1]. The term "brokered deposits" are of key importance for banks subject to restrictions on accepting brokerage deposits.
Characteristics
Broker deposits are characteristic of deposit brokers (it is an individual or a company that facilitates the placement of deposits in deposit institutions that are insured), who transfer these deposits to the hands of investors. Deposits or certificates of deposit of high value are sold by banks to brokers, and they divide large amounts into parts that are much smaller and easier to manage. The intermediaries then sell the smaller parts of these deposits or certificates of deposit to customers or smaller banks.
These deposits offer higher than typical interest rates, which makes them very attractive to both individuals and banks[2].
The amount of brokered deposits can affect the following components of its deposit insurance assessment rate[3]:
- for a large or highly complex institution, its core deposits ratio
- or a small institution (in the US generally under $10 billion in assets), its brokered deposit ratio.
Individual and corporate clients should carefully and thoroughly examine the bank of origin of brokered deposits, it is particularly important to check whether these brokered deposits are insured by the National Credit Union Administration. This should be checked well because the broker cannot offer deposit insurance, which means that even if the investment is insured in amount determined by the given country (e.g. US - US$250,000), its owner will lose all future and unpaid interest[4].
Core vs. Brokered Deposits
Core deposits, as not only an analytical but also a supervisory tool, should include those deposits that are stable and have the lowest possible cost, and those that price more slowly than other deposits when interest rates rise sharply. These deposits are the funds of usually local clients who also have loans or other relationships with a particular bank. Core deposits are not specified in the statue or in specific regulations, and yet they form the basis of all banks, they are stable, cheap deposits that grow slowly and are usually not sensitive to interest rates. An example would be a traditional savings account[5].
Unlike core deposits, brokered deposits are defined by statue. On the other hand, brokered deposits are larger, often variable and very sensitive to interest rates, which makes them much more risky than core deposits.
Footnotes
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References
- Bologna P., (2011), Is there a Role for Funding in Explaining Recent U.S. Banks' Failures?, International Monetary Fund, p. 22
- Bovenzi J. F., (2015), Inside the FDIC: Thirty Years of Bank Failures, Bailouts, and Regulatory Battles, John Wiley & Sons,p. 2 - 3
- Kolb R. W., (2010), Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future, John Wiley & Sons, p. 38
- Rossi C., (2014),A Risk Professional's Survival Guide: Applied Best Practices in Risk Management, John Wiley & Sons, p. 314 - 316
- Simpson T. D., (2014), Financial Markets, Banking, and Monetary Policy, John Wiley & Sons, p. 118 - 121.
Author: Monika Sojka
