Are Banks That Rely on Broker Deposits Really Banks?

Analyst: Bill Bradway

June 24, 2009

A number of recent FDIC bank failures have relied heavily on broker deposits as a source of funds in lieu of conventional retail deposits raised through a branch network. In fact, of the 39 FDIC failures through June 19, 2009, over 50% had a broker deposit ratio in excess of 30%. Among the 2008 – 2009 FDIC failures are banks like New Frontier Bank and MagnetBank, both funded by broker deposits.

The debate over FDIC insured broker deposits should begin and will involve political as well as banking ramifications. This analysis examines the degree of broker deposit usage among FDIC banks with a focus on banks that rely heavily on broker deposits. Broker deposits have been in use for over 20 years by FDIC insured institutions albeit on a much smaller scale than today. The asset – liability strategies of the broker deposit driven banks has ramifications for the regulators and the key suppliers to these institutions, particularly FinTech vendors. Many of the broker deposit banks have no deposit franchise and a failure forces an immediate FDIC payout to the brokers that supplied the deposits.

• Why do some banks rely on broker deposits?
• What will happen to broker deposit driven banks?
• Should regulators curtail the broker deposit volume at some institutions?

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