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Brokered Deposits, Where is the Big Bad Wolf

Reuters published an article last week on the “evils” of brokered deposits. And now my gloves are off!

Let’s get something straight. Deposits, brokered or otherwise are not the 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 accepting 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¬†in 2008. In a matter of hours, a bank through the internet can take in Millions of dollars. Just look at the recent onslaught of funds that AARP helped Huntington National Bank raise or how about Countrywide Bank? Those internet funds are as volatile (and “expensive” I might add) as any brokered deposit.

There is also another class of deposits that most people outside of the banking industry probably don’t even know 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. (Don’t even get me started on this one). 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.

The article written by John Poirier also uses scare tactics and a nice salting of misinformation to give the impression that brokered deposits are evil. Almost every paragraph could be rebutted. But then this post would be 10 pages long.

First, the article leads off with a statement about “cash hungry banks are in danger of failing” because of brokered deposits. The fact is that the banks are cash hungry because they made risky loans that aren’t being paid back. Secondly, they are cash hungry because they are losing “core” deposits to high yield savings accounts and checking accounts that are being offered on the internet.

Next the article states that brokered deposits have “fueled a spate of recent bank failures.” First, there have only been four failures this year. I wouldn’t classify that as a spate. Dominoqq Deposit 5000 Second, of the four banks, only ANB had a large amount of brokered deposits. Douglas NB had about 3.2% of their deposits listed as brokered and First Integrity had about 4%. Banks that do take brokered deposits usually limit them to no more than 10%.

One of the funnier misstatements is the fact that the author writes, “Brokered deposits are short-term deposits that often attract banks in remote areas to increase lending activity.” First, brokered deposits can be far from short-term. They can be anywhere from 90-Days out to 20-years. The term is really dependent on the market. Secondly, the article implies that it was the lure of brokered deposits that caused them to increase risky lending activity. However, usually the bank has already begun the lending activity and suddenly realizes they need more deposits to fund the loans. The increased risk the bank was willing to take (at least during the Housing bubble) was fueled by greed and the low cost of funds, not brokered deposits.


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