The term "deposit broker" refers to any person working in the field who is responsible for facilitating third-party deposits with a financial institution that is insured. A deposit broker will be responsible for arranging deposits with insured institutions on behalf of others. It is important to note that while the financial institution and its employee's advisors to pension plans and trustees can make deposits for individuals or banks, they aren't considered deposit brokers.
How a Brokered Deposit Works
Within the United States, the Federal Deposit Insurance Corporation (FDIC) is charged with regulating brokered deposits. The FDIC sets the rules and the regulatory framework concerning what constitutes a deposit and defines who can be considered a deposit broker. In simple terms, a deposit broker is an entity or person who assists in the placement of individuals' deposits with institutions that are insured, like banks.
Typically, banks will offer the deposits (often as a large-denomination certificate of deposits) at the request of a deposit broker, who then break down these deposits into smaller investment units for resales to individual customers or banks with smaller branches at a competitive interest rate.
According to FDIC regulations, only banks that have sufficient assets can offer and accept the brokered deposit. The banks that are adequately capitalized may be able to accept them after obtaining an exemption, while those with lower capitalization cannot take these deposits at all. By accepting the brokered deposit, banks can gain access to more investment funds and boost their liquidity.
Who Can Accept Brokered Deposits?
Section 29 in the FDI Act, implemented by Part 337 of the FDIC Rules and Regulations, states that a properly capitalized covered depository establishment can solicit and accept, renew, or transfer any brokered deposit without limitation. A well-capitalized and insured depository institution can accept, renew, or roll over a brokered deposit once it has applied for and received an exemption from the FDIC. A depository institution that is not insured cannot take, renew, or transfer any resold deposit.
Brokered Deposit vs. Core Deposit
Core deposits and brokered deposits are two kinds of deposits that comprise the bank's deposit liability. Core deposits are savings accounts, checking accounts, and certificates of deposits owned by individuals. Although any account could be a small sum of cash combined, these accounts constitute the primary part of the bank's deposit.
The advantage of core deposits for banks is that they tend to be stable long-term, have predictable costs, and are less susceptible to changes in interest rates. On the contrary, brokered deposits are thought to be a riskier source of money for banks because they are heavily affected by changes in interest rates.
Benefits of Brokered Deposits
The increased liquidity in the banking system provided by the brokered deposit often provides banks the capital they require for loans to companies and the general public. Banks can also reduce costs by accepting these deposits instead of managing the equivalent amount of a variety of smaller core deposits. Individuals may choose to participate in transactions involving brokered deposits since they typically are charged a higher interest than conventional deposits.
Why Should Banks Take Deposits From Brokered Banks?
Suppose you're in charge of generating funds for the institution you manage. In that case, you're in the obligation to your owners to boost your profit margin by investigating every viable option for funding. The positive side is that you can accept brokered deposits with no restrictions when your institution is adequately capitalized and has a good balance sheet. The FDIC accepts the sensible use of the brokered deposit in compliance with legal requirements. Brokered deposits should be viewed and analyzed like any other alternative to funding, with their distinct advantages and drawbacks.
Before you can issue federally insured CDs via SimpliCD, Primary Financial recommends that you establish policies for accepting brokered deposits to satisfy regulators and auditors. We also suggest that your institution adopt appropriate policies for managing funds, do thorough due diligence in assessing broker and brokered deposit options and diversify the portfolio of its clients. With a plan in place to accept deposits that are rate sensitive, breaking up deposits offers a variety of advantages:
You can access an investor pool larger than when you take deposits from only the local market. Using rate services, you can make deposits at lower rates than when you ask for rates nationwide. It saves operational expenses because you have one central contact instead of multiple. Accepting larger pieces will save you time and money over many smaller pieces.
