The FDIC recently decided to assess a fee on brokered deposits, depending on the mix of deposits and health of the bank. I have to disclose that our company is considered a broker, although we should really be classified as a vendor (that is how the NCUA views us). The difficulty is, deposits, brokered or otherwise, are not the real problem. The banks making poor management decisions are the problem. The problem is with the bank’s bad loans and poor investment decisions. It is not the acceptance of brokered deposits that causes banks to fail.

The perceived problem with brokered deposits is that they are more volatile than a bank’s “core” deposits. This may have been true in the Stone Age when we didn’t have newspapers and the Internet, but it simply IS NOT TRUE anymore. In a matter of hours, a bank through the Internet can take in Millions of dollars. Just look at the huge amount of funds that AARP helped Huntington National Bank raise last year or how about Countrywide Bank? Those Internet funds are as volatile (and “expensive” I might add) as any brokered deposit. Current regulations though allow the funds to be classified as a core deposit.

There is also another class of deposits that most people outside of the banking industry probably haven’t heard about. They arrive from a rate listing service. Rate listing services actually have a specific exemption from being considered deposit brokers because they don’t “facilitate” the placement of the deposit. They just provide rates and the investment manager makes the decision as to which institution to place the deposit. Of course, the fact that the only reason a bank lists their rates on the listing service is to acquire deposists is overlooked. Again, a bank can list CD rates on these services and within hours raise Millions of dollars. Millions of dollars that are just as volatile as any brokered deposit. Once again, current regulations allow these deposits to be classified as a core deposit. Clearly, a Hawaiian credit union depositing $99,000 in a Maryland Bank is not a core deposit.

Sadly, brokers make for nice scapegoats. It is much easier to make Brokers the target of blame instead of asking bank management or FDIC examiners to look in the mirror. The media uses scare tactics and a nice salting of misinformation to give the impression that brokered deposits are bad. In the second installment I will debunk some of this information.

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