Busted: Bankers and The Global Economy

June 4, 2008

Brokered Deposits Grow as Bane to Banking

Finance Committee Leader and Senator Charles Schumer urged the Federal Deposit Insurance Corporation to consider assessing higher premiums on banks using deposits gathered by third parties such as securities firms and individual brokers who then sell interests in them to investors.

“These ‘hot money’ deposits have fueled a spate of recent bank failures that has left the deposit insurance fund on the hook for hundreds of millions of dollars.” Time and time again, we have seen that Wall Street cannot be trusted. The collateral damage to the U.S. economy is far and wide while bad investments threaten more damage in the name of greed and profits.

At the end of March, there were almost 8,500 banks and thrifts with more than $7 trillion in domestic deposits, but $4.4 trillion are estimated to be insured. What does this mean? A huge chunk of deposits actually were created by Wall Street third-parties and are technically subject to lack of coverage by the FDIC, putting more pressure on the FDIC and governmental planning for bank failure coverage.

As a result, the FDIC has a real problem that could strike at the heart of consumer confidence as banks continue to fail. The bottom line is that covering risky brokered deposits is subject to put additional strain on government monies and the national debt in the name of FDIC consumer protection. The economic news where banks are concerned just keeps getting worse.

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2 Comments

  1. As I outline on my blog, brokered deposits are not the problem. Of the four banks that failed this year, only ANB Financial had an “over abundance” of brokered deposits.

    Many community banks are feeling their deposits pinched by all of the internet specials that offer high yield savings rates, only to drop those rates shortly after they have received the funds (ie AARP/Hunting NB).

    Brokered deposits, when managed correctly, are a great source of liquidity and offer a very reasonble alternative to having to compete with the above and banks like Countrywide, IndyMac, etc.

    Comment by Brokered Deposits — June 6, 2008 @ 9:57 pm

  2. In the 1980’s we had the same issue of trying to control brokered deposits use by FDIC-insured institutions. It did not work! Reason? The problem is not the money in the bank, but what the bank does with the money.

    In the FDIC Manual of Examinations it is clearly stated that the “prudent” use of brokered deposits is an acceptable funding alternative for financial institutions.

    Fully 30% of bank liabilities are “managed liabilities” and not funded by “core” deposits, they are funded by brokered deposits and borrowings. Simply there are not enough “core” deposts in the system to finance the liability side of the balance sheet of the banking system. By the way “managed liabilities” do not include municipal deposits which are mostly collateralized with negotiable securities.

    You have to either shrink the balance sheet of the banks or make sure that they invest or lend the money in a safe and prudent manner. Until regulators can control the asset side of the balance sheet of the banks we are going to continue having this problem.

    Comment by Jorge H Coloma — July 21, 2008 @ 9:17 am


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