Brokered Deposits 101: A Guide to Their Use and Regulation

Brokered deposits are a type of deposit account that can be opened through a bank or credit union, but are actually sold to investors by a broker.

They are often referred to as "brokered CDs" because they are typically certificates of deposit, but can also be other types of deposit accounts.

Brokered deposits offer higher yields than traditional deposit accounts, but also come with some unique characteristics that are worth understanding.

To get started with brokered deposits, you'll need to find a broker who offers them and open an account with them.

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National Rate Regulations are in place to ensure that institutions maintain fair and competitive interest rates for their customers. This is particularly relevant for less than well-capitalized institutions.

The National Rate and Rate Caps apply to these institutions, setting limits on the interest rates they can offer. This is to prevent them from taking advantage of their customers.

For institutions that are adequately capitalized, there are no rate caps, giving them more flexibility in setting their interest rates. However, they must still adhere to the regulations set forth in Section 303.243(a) — Brokered Deposits Waivers.

To help institutions understand and comply with these regulations, the FDIC has created a Small Entity Compliance Guide. This guide provides practical advice and examples to help institutions navigate the complex rules and regulations.

Here are the key resources related to National Rate Regulations:

A deposit broker is any person engaged in the business of placing deposits with insured depository institutions, or facilitating the placement of deposits, for third parties. This can include agents or trustees who establish deposit accounts to facilitate business arrangements with insured depository institutions.

Deposit brokers can also be insured depository institutions that are not well capitalized, and any employee of such an institution, which engages in the solicitation of deposits by offering rates of interest significantly higher than prevailing rates.

Insured depository institutions that are undercapitalized are restricted from soliciting deposits by offering rates of interest that are significantly higher than prevailing rates.

Reciprocal deposits are deposits received by an agent institution through a deposit placement network, with the same maturity and in the same aggregate amount as covered deposits placed by the agent institution in other network member banks.

Here are some key benefits of accepting brokered deposits through a reputable company like Primary Financial:

A covered insured depository institution may not pay a rate of interest on funds or reciprocal deposits that significantly exceeds the limit set forth in paragraph (3).

Insured depository institutions undercapitalized by definition in section 1831o of this title are restricted from soliciting deposits with significantly higher interest rates than prevailing rates in their normal market areas.

An insured depository institution undercapitalized as defined in section 1831o of this title shall not solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the market area in which such deposits would otherwise be accepted.

The FDIC has the authority to grant waivers to certain insured depository institutions that want to accept brokered deposits. This waiver authority is crucial for institutions that don't meet the capital requirements but still want to participate in the market.

An adequately capitalized insured depository institution can apply for a waiver if it's not well capitalized. The FDIC will review the application on a case-by-case basis to determine if accepting deposits would be an unsafe or unsound practice.

To be eligible, the institution must not be well capitalized, but it must be adequately capitalized. This means it has a certain level of capital, but not enough to be considered well capitalized.

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Depository institutions engaging in certain activities can be subject to specific regulations. A deposit broker includes any insured depository institution that is not well capitalized and engages in soliciting deposits with significantly higher interest rates than prevailing rates in its normal market area.

Insured depository institutions that are not well capitalized must be cautious with their deposit solicitation practices. Any employee of such an institution that engages in soliciting deposits with significantly higher interest rates is also considered a deposit broker.

Not well capitalized institutions are not allowed to engage in certain deposit solicitation practices. An insured depository institution that is undercapitalized shall not solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in its normal market area.

Undercapitalized institutions are restricted from soliciting deposits in certain ways. They cannot offer significantly higher interest rates than prevailing rates in their normal market area or in the market area where the deposits would otherwise be accepted.

The FDIC has specific rules for depository institutions engaging in deposit placement networks. An insured depository institution that participates in a deposit placement network is considered to be engaging in reciprocal deposits.

Reciprocal deposits are a type of deposit that is facilitated through a network of insured depository institutions. A deposit placement network is a network where an insured depository institution participates with other insured depository institutions for the processing and receipt of reciprocal deposits.

Well capitalized institutions have more flexibility with brokered deposits. A well capitalized insured depository institution is allowed to solicit and accept, renew or roll over any brokered deposit without restriction.

An insured depository institution is excluded from being considered a deposit broker, which means it's not subject to the same rules as deposit brokers. This is a key distinction.

An employee of an insured depository institution is also excluded from being considered a deposit broker, when placing funds with their employing institution. This makes sense, as they're not acting as a separate entity from their employer.

A trust department of an insured depository institution is excluded from being considered a deposit broker, if the trust wasn't established for the primary purpose of placing funds with insured depository institutions. This highlights the importance of understanding the purpose of a trust.

The trustee of a pension or other employee benefit plan is excluded from being considered a deposit broker, with respect to funds of the plan. This is likely because these plans have specific rules and regulations that govern their management.

A person acting as a plan administrator or investment adviser is excluded from being considered a deposit broker, as long as they're performing managerial functions with respect to the plan. This suggests that their role is more focused on managing the plan than on placing funds.

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The trustee of an irrevocable trust is excluded from being considered a deposit broker, as long as the trust wasn't established for the primary purpose of placing funds with insured depository institutions. This is similar to the exclusion for trust departments of insured depository institutions.

A trustee or custodian of a pension or profit-sharing plan qualified under section 401(d) or 403(a) of title 26 is excluded from being considered a deposit broker. This suggests that these types of plans have specific rules and regulations that govern their management.

An agent or nominee whose primary purpose is not the placement of funds with depository institutions is also excluded from being considered a deposit broker. This highlights the importance of understanding the purpose of an agent or nominee.

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An agent institution is a type of financial institution that plays a key role in the brokered deposit process.

A covered insured depository institution is one that accepts funds obtained by or through a deposit broker, or acts as an agent institution and accepts reciprocal deposits while not well capitalized.

A covered deposit is a type of deposit submitted for placement through a deposit placement network by an agent institution, and does not consist of funds obtained by or through a deposit broker.

A deposit broker is a person or entity that engages in the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties.

A well capitalized insured depository institution is allowed to solicit and accept brokered deposits without restriction.

You can accept brokered deposits if you're a well-capitalized, insured depository institution. A well-capitalized institution can solicit and accept brokered deposits without restriction.

A well-capitalized institution is allowed to accept, renew, or roll over any brokered deposit without restriction. In fact, accepting brokered deposits can be a viable funding alternative for your institution.

You can also accept brokered deposits if you're an adequately capitalized institution and have been granted a waiver by the FDIC. However, undercapitalized institutions may not accept brokered deposits.

Here are some benefits of accepting brokered deposits:

You can access a larger market of investors, including those outside your local market area.

You can open deposits at rates cheaper than when you solicit rates nationally through rate services.

You save operational costs by having one central contact instead of many.

Accepting larger pieces saves you time and resources over multiple smaller pieces.

Primary Financial, a company that has placed over $47 billion in federally insured certificates of deposit, recommends that your institution create a policy on accepting brokered deposits to satisfy regulators and auditors.

Brokered deposits offer a way to earn higher interest rates than traditional savings accounts. They are sold by banks and thrifts to investors, who then lend the money to the bank for a fixed period of time.

By investing in brokered deposits, you can earn higher interest rates than a traditional savings account. This can be a good option for those who want to earn more interest without taking on too much risk.

Brokered deposits are typically sold in $100 increments, making them accessible to a wide range of investors. The interest rates offered can vary depending on market conditions and the specific bank or thrift offering the deposit.

Investors can choose from a variety of brokered deposit terms, including short-term and long-term options. Short-term deposits may offer higher interest rates, but they come with the risk of early withdrawal penalties.

Brokered deposits are FDIC-insured, providing protection for investors up to $250,000. This means that even if the bank or thrift fails, investors will still be able to access their money.

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Renewing an account in a troubled institution is treated as an acceptance of funds.

This means that if you renew your account, the institution is essentially accepting the deposit, which can be a problem if they're already struggling financially.

Any rollover of an amount on deposit in a troubled institution is also treated as an acceptance of funds.

This can have serious consequences for the institution, making it harder for them to recover from financial difficulties.

Renewing or rolling over an account in a troubled institution is equivalent to accepting funds, which is a crucial consideration for account holders.

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The interest rate limit on brokered deposits is an important consideration for insured depository institutions. It's set to prevent unfair competition with other banks.

The limit on interest rates is determined by the Corporation, which considers two main factors: the national rate paid on comparable maturity deposits and the rate paid on similar maturity deposits in the normal market area of the covered institution.

The Corporation establishes the national rate paid on deposits of comparable maturity, which serves as a benchmark for interest rates on brokered deposits. This rate is used to determine the maximum interest rate that can be paid on deposits accepted outside the normal market area of the covered institution.

The Corporation also takes into account the rate paid on similar maturity deposits in the normal market area of the covered institution. This rate is used to determine the maximum interest rate that can be paid on deposits accepted within the normal market area of the covered institution.

An agent institution is a bank that places deposits through a network with other banks. This practice is known as brokered deposits.

To be considered an agent institution, the bank must have a composite condition of outstanding or good when it was last examined under section 1820(d) of the law. In other words, it needs to be in good financial shape.

The bank must also be well capitalized, meaning it has enough capital to cover its debts and risks. This is essential for maintaining stability and trust in the financial system.

Agent institutions are not allowed to receive too many reciprocal deposits, which are deposits placed by other banks. The total amount of reciprocal deposits they hold cannot be greater than the average of the total amount of reciprocal deposits they held in the four quarters preceding the quarter when they were no longer considered outstanding or good.

Temporary brokered deposits can be a useful tool for banks to manage their liquidity needs. They can provide a way for banks to temporarily invest excess funds in low-risk, short-term assets.

Brokered deposits have been used by banks for decades, with the first recorded use in the 1970s. This type of deposit has remained a popular choice for banks due to its low risk and flexibility.

Temporary brokered deposits can be used to meet short-term funding needs, such as covering overdrafts or meeting regulatory requirements. They can also be used to take advantage of short-term investment opportunities.

The Federal Reserve has played a key role in the development of the brokered deposit market, with the creation of the Federal Funds market in 1951. This market allowed banks to borrow and lend funds to each other, making it easier for them to manage their liquidity needs.

Brokered deposits have been used by banks to take advantage of low interest rates, with some banks earning returns of over 4% in the 1990s. This was due in part to the low interest rate environment of the time, which made short-term investments more attractive.