What Is a Brokered Deposit?

A brokered deposit is a deposit made to a bank by a third-party deposit broker. A brokered deposit is a type of investment that attracts individual investors because the deposits typically offer higher interest rates. The brokered deposits are usually large-denomination and are often sold by a bank to a deposit broker, who then divides the deposit into smaller pieces for sale to their customers. Banks that accept brokered deposits often do so as a way to increase their liquidity.

Key Takeaways

  • A brokered deposit is a deposit made to a bank with the assistance of a third-party deposit broker.
  • Deposit brokers facilitate the placement of other people's deposits with insured financial institutions, such as banks.
  • Banks sell large-denomination deposits to deposit brokers, who divide these large deposits into smaller investments that they then sell to individual investors or smaller banks.
  • In the United States, the Federal Deposit Insurance Corporation (FDIC) establishes regulations for brokered deposits, which are considered a riskier source of funds for banks compared to core deposits.
  • Individual investors who buy brokered deposits receive a higher interest rate than traditional deposits.

How a Brokered Deposit Works

In the United States, the Federal Deposit Insurance Corporation (FDIC) is responsible for regulating brokered deposits. The FDIC establishes the rules and regulatory framework regarding what constitutes a brokered deposit and defines who is considered a deposit broker. In general terms, a deposit broker is an individual or firm that facilitates the placement of other peoples' deposits with insured institutions, such as banks.

Typically, banks will sell deposits (often in the form of large-denomination certificates of deposit) to deposit brokers, who will then segment these large deposits into smaller investments to be re-sold to individual investors or smaller banks at an attractive interest rate.

Under FDIC rules, only well-capitalized banks with sufficient assets can solicit and accept brokered deposits. Adequately capitalized ones may accept them after being granted a waiver, and undercapitalized banks cannot accept them at all. By accepting brokered deposits, a bank can gain access to a larger pool of potential investment funds and improve its liquidity.

According to the FDIC, the total amount of brokered deposits held in insured U.S. depository institutions was $986 billion as of Sept. 30, 2018, representing 8.0% of the $12.3 trillion in industry domestic deposits.

Brokered Deposit vs. Core Deposit

Brokered deposits and core deposits are the two types of deposits that make up a bank's deposit liabilities. Core deposits include checking accounts, savings accounts, and certificates of deposit held by individuals. While any given account may represent a comparatively small amount of money, in combination these accounts represent the key component of a bank's deposits.

The benefit of core deposits to a bank is that they are generally stable in the long term, have predictable costs, and are less vulnerable to interest rate fluctuations. Brokered deposits, on the other hand, are considered a riskier source of funds for a bank because they are impacted greatly by interest rate changes.

Benefits of Brokered Deposits

The improved liquidity within the banking system offered by brokered deposits often gives banks the capitalization they need to make loans to businesses and the public. The bank can also save money by accepting brokered deposits compared to handling an equivalent dollar amount of numerous smaller, core deposits. Individuals can elect to participate in brokered deposit transactions as they will usually pay a higher rate of interest than traditional deposits.