Dedicated to Deposits: Deals, Data, and Discussion

Brokered CDs and Bank Failures

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The bank failure of ANB Financial last month showed some of the risks that CD depositors face. One risk was having deposits over $100K. Deposits over $100K can be FDIC insured, but as I described in this post, you have to careful.

Brokered CDs added another risk to depositors. Brokered CDs are sold to customers by brokerage companies like Charles Schwab. The brokerage acts as an intermediary with the bank which actually holds the deposits (see About.com article on brokered CDs). As I described in this post, brokerage customers holding brokered CDs from ANB Financial are having to wait over a month to get back their money.

Depositors may not be the only one with added risks from brokered CDs. This Reuters article reported on recent Senate committee meetings looking into brokered deposits and how banks most at risk of failure, like ANB Financial, tend to be heavy users of brokered deposits. According to one Senator, "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."

It's questionable if brokered deposit had any influence in causing the recent bank failures (there have only been 4 bank failures this year). Chris of the CD Rates blog made some good points in this brokered deposit post about how the root cause of the failures are the "bad loans and poor investment decisions" and not the brokered deposits. Brokered deposits should not be considered 'hot money'. With online savings accounts and internet CD specials, it's easier for depositors to rate chase with regular accounts than with brokered deposits.


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Comments
4 Comments.
Comment #1 by CD Rates Blog (anonymous) posted on
CD Rates Blog
Ken, thank you for linking to my post and including some quotes.

I try to make the case that brokered deposits are no more "hot" or volatile then internet specials, rate listing services, and even rate blogs :O). If more oversight is going to be put in place, all volatile deposits should be looked at.

Brokered deposits can even be a stable source of funds for banks, especially those having to compete head-to-head with Countrywide, IndyMac, etc. or those that are losing core deposits to the internet.

ChrisCD

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Comment #2 by Banking Guy (anonymous) posted on
Banking Guy
Yup, we definitely don't want the government trying to restrict banks or services that may encourage hot money.

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Comment #3 by Anonymous posted on
Anonymous
Bigger U.S. bank failures may be coming – FDIC:

"Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday."

WaMU DOWN TO A NEW LOW. Fell below $6. Wouldnt touch this firm with a 10 foot pole. We have thousands of good banks to park money in for high rates.

Will be interesting to see if WaMU will get a takeover, but WaMU and Wachovia and Citicorp are all ****ty now.

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Comment #4 by Anonymous posted on
Anonymous
As of 7/4/09 - From NY Times - "The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm, according to an analysis performed for The New York Times by Foresight Analytics, an industry research firm based in California. And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate — often a disastrous recipe for banks."

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