Deposit Broker

What Is a Deposit Broker?

A deposit broker is an individual or firm that facilitates the placement of investors' deposits with insured depository institutions. Deposit brokers offer investors an assortment of fixed-term investment products, many of which yield low-risk returns. An individual or firm may still be considered a deposit broker even if they do not receive a fee or direct compensation. 

Key Takeaways

  •  A deposit broker is a person, company, or organization tasked with placing financial deposits at an insured depository institution on behalf of a third party.
  • A deposit broker can also place these "brokered deposits" with a financial institution with the intent to sell interests in those deposits to a third party.
  • As opposed to a stockbroker, a deposit broker can offer alternative investments, versus just equities.
  • Brokered deposits are usually FDIC insured, but it's worth double-checking.
  • A depositing broker may not need regulatory approval to market certain securities.

Understanding a Deposit Broker

A deposit broker is similar to a stockbroker but differs in a few key areas. While a stockbroker deals only in equity, a deposit broker can offer alternative investment opportunities. Another significant difference is that stockbrokers must pass the Series 7 exam to sell securities, whereas deposit brokers may not need regulatory approval to market fixed-term securities.

The term deposit broker often refers to an individual or firm that facilitates the placement of investors' deposits with insured depository institutions. Though "deposit broker" is a broadly defined term, financial institutions and their employees, trustees, and pension plan advisers are notably precluded from the definition.

4,803

The number of FDIC insured institutions as of May 12, 2022.

By accepting brokered deposits, a bank can access a larger pool of potential investment funds and improve its liquidity. For banks, liquidity is critical to survival. This improved liquidity can give banks the capitalization they need to make loans to businesses and the public.

Under Federal Deposit Insurance Corporation (FDIC) rules, only well-capitalized banks can solicit and accept brokered deposits. Adequately capitalized banks may take them after being granted a waiver, and under-capitalized banks cannot accept them at all. Even if a bank is well-capitalized, overuse of brokered deposits can lead to losses.

What Does a Deposit Broker Sell?

Deposit Brokers sell brokered deposits—usually, large-denomination deposits first sold by a bank to a brokerage or deposit broker—who then divide them into smaller pieces for sale to customers. Brokered deposits are one of two types of deposits that comprise a bank's deposit liabilities; the second one is core deposits.

Lending banks value core deposits for their stability. Core deposits monopolize a bank's natural demographic market and offer many advantages to financial institutions, such as predictable costs and a measurement of how loyal their customers are. Specific forms of core deposits include checking accounts and savings accounts made by individuals.

Examples of Deposit Broker

A depository institution can be an organization, bank, or other institution that holds and helps in the trading of securities. The term can also refer to an institution that accepts currency deposits from customers. Deposit brokers working for a depository institution can take client's money and apply it to a fractionalized CD that the broker purchases in a large value from a bank.

The depositing broker took the large CD and broke it up into many smaller pieces. They may have adjusted the interest rate to deliver a profit and although the rate difference seems very small to a retail investor, the depositing broker can make decent profit if the original CD purchased was of significant value.

Are Brokered Deposits FDIC Insured?

Generally yes, brokered deposits are FDIC insured through a process called "pass-through insurance." For this reason, the FDIC requires that the broker who opened the deposit account provide ownership information in the rare case that an insured institution fails.

How Do I Deposit Into FDIC?

You don't deposit directly into FDIC. The way it works is you make a deposit or purchase a product that is FDIC insured, and it's automatic. As long as your deposit doesn't exceed the FDIC insurance limit for that specific category (generally $250,000), you are covered. To find out if your bank is FDIC insured, FDIC has a tool called BankFind Suite that allows you to search for institutions.

Is a Brokered CD a Security?

According to the Financial Industry Regulatory Authority (FINRA) brokered CDs, as long as they are issued by a banking institution and FDIC insurance applies to them, are considered bank products and not securities. However, if a broker materially alters the terms and features, it could be considered a security. If the broker buys a large CD and fractionalizes it, this also qualifies it as a security. To put it simply, if a broker adjusts or repurposes a CD, it could be considered a security.

Are CDARs Brokered Deposits?

IntraFi® Network Deposits (formerly known as the Certificate of Deposit Account Registry Service (CDARS)) assist investors who want to invest in a variety of CDs, but don't want to surpass the FDIC limit of $250,000 per depositor per bank. According to IntraFi, most reciprocal deposits are considered core deposits, not brokered.

The Bottom Line

Depositing brokers are responsible for the legal placement of client's money at a separate institution, usually one that is FDIC insured. The broker may attempt to package products offered by the institution to sell to their clients, which may or may not affect those products' ability to be insured under FDIC rules.

Article Sources

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  1. FINRA. ”General Securities Representative Qualification Examination (Series 7) Content Outline.”

  2. FDIC. "BankFind Suite."

  3. FDIC. "Guidance on Identifying, Accepting, and Reporting Brokered Deposits."

  4. FDIC. "Deposit Broker's Processing Guide."

  5. FINRA. "Certificates of Deposit."

  6. IntraFi. "Network Deposits for Community Banks."

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