Last time around, we talked about how brokered deposits, deposits placed by a third party, have become an important source of bank funding. However, the use of brokered deposits varies greatly among different banks. While some institutions avoid non-core funding altogether, others fund the majority of their balance sheets with brokered deposits.
Focusing on banks that heavily utilize non-core funding, brokered deposits account for more than 20% of deposits for 86 institutions, and more than 70% of deposits for 10 institutions [1]. For these banks, wholesale funding is a key component of their business models. Brokered deposits can be purchased on demand, without the need for branches, and brokered term deposits can be laddered to provide deposit duration and stability.
The 86 brokered-deposit-intensive institutions have 2 branches on average, compared to the national average of 17, and have 232 employees on average, compared to the national average of 435. With less overhead costs, their average efficiency ratio — which measures the fraction of every dollar of income that is spent on overhead — is 0.55, compared to the national average of 0.73.
The interesting takeaway here is the diversity of funding models, and business models, among banks in the US. While the majority rely on core deposits and branch networks, others take a more nontraditional approach and tap wholesale funding to run efficient operations. The different approaches that banks take to serve their communities and clients, how those approaches evolve over time, and how different funding models interact with each other is one of the many reasons this industry is so engaging.