Article Treasure Cove

The media’s attempts at missinformation regarding brokered certificates of deposit are especially clear in an article by John Poirier (linking restrictions don’t allow me to activate it, but you can cut and paste, http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0431477920080604?pageNumber=1&virtualBrandChannel=0). It is very frustrating to be the scapegoat.

First, the article leads with a statement about “cash hungry banks are in danger of failing” because of brokered CDs. 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. Of course that is in addition to all of the Jumbo CD rates deals. Finally, they are losing deposits because rate services are allowing banks in another state the ability to steal your local community’s deposits and classify them as a core deposit.

Next the article states that brokered deposits have “fueled a spate of recent bank failures.” The evidence just doesn’t bear this out though. Although, ANB had a large amount of brokered deposits (they failed in 2008), most other banks have only had a small percentage of brokered deposits on the books. Horizon Bank (Pine city, MN) had about 5.1% of their deposits listed as brokered and MetroPacific had about 7.8%. Banks that do use brokered funds usually limit them to no more than 10% of their deposit base. A much more interesting statistic would be how much of a percentage of their deposit base were deposits raised through a listing service or the Internet. Unfortunately, because those deposits are classified as core, there is no way to tell.

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 cash 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.

One of the few partially true statements is “Brokered deposits also usually offer higher rates than other bank products such as certificates of deposits…” The true part is often the rates are higher. However, as I stated above, they may be no higher than many Internet specials. This author shows just how little time he took with his research. 99% of brokered deposits are certificates of deposits. Recent brokered certificate of deposit rates, however, put brokered CDs at a cost far below CD rates found elsewhere. A bank can fund a 1-year brokered CD at about 1.25%. There are Internet rates from the 2.30% to 2.50% range. Which is the better deal for the bank?

Even though historically, brokered deposits are higher, are they really more expensive? If a bank that has $1 Billion deposits needs $5 Million dollars they can make a special offering to brokers without alerting their entire deposit base of these special rates. So would you rather pay a higher rate on $5MM or $1BB? Moreover, brokered deposits tend to be higher amounts that means much, much less paperwork and handling for the bank. They also tend to be from other financial institutions. This means the Patriot Act doesn’t apply and the bank doesn’t have to worry about OFAC violations. In the long run, brokered deposits cost the bank less. Finally, although a single deposit may be more volatile, the broker is usually able to replace any deposits that close and thus, brokered deposits become a stable funding source. They are certainly more stable than high-yielding savings accounts being advertised across the Internet that can be withdrawn at anytime.

The author goes on to infer that ANB was a small Arkansas bank. He makes it seem like the evil brokers took advantage of a small little bank. ANB Financial at the time of closing was over $2BB in assets. Most banks do not have over a billion dollars in assets. ANB was a large bank. The management of this bank did not have the wool pooled over their eyes. The brokers didn’t come to them as wolves in sheep’s clothing.

He states that the FDIC picked up the $214 million tab when ANB was taken over. Pulaski took over a large part of the deposits. As the closure process hasn’t been completed and ANB’s assets sold off, there is no way to know how much it will actually cost. But if you want to talk about cost, how about the Bear Stearns bailout or the billions and billions of dollars the Fed has pumped into the system. How much is that costing and how much of that are the banks using to continue their mismanagement practices.

Deposits from any source other than the local area should have more scrutiny, if any additional scrutiny is going to be placed. If a bank’s insurance premiums are increased for using brokered deposits/CDs, the practice of utilizing rate listing services and offering internet specials will increase, thus skirting the intent of the original regulations (which is to make banks keep a watchful eye on their non-core deposits).

Who is really going to pay for higher oversight and or the increased premiums that have been suggested? You the saver. You the saver are the one that will pay with lower rates and/or higher banking fees. You have already been hit hard with the Fed lowering rates over 4%. The FDIC should scrutinize the entire banking operation, including all sources of deposits and lending practices.

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Tags: CD Rates