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A few weeks ago, we discussed the distinction between core and brokered deposits. Brokered deposits — including their history, regulation, and usage — are a fascinating topic that we’ll explore over time. This week, we dig into their growth and prevalence.
The concept of brokered deposits, deposits that are placed by a third party (a “deposit broker”), was introduced in 1989. In 1992, there were only $59B brokered deposits, accounting for 1.7% of bank balance sheets. Fast forward three decades and brokered deposits have become an integral part of bank funding. As of 2020, there were $1.2T brokered deposits, accounting for 7.6% of all deposits. 1972 banks, 38% of all banks, utilize them as part of their funding strategy.
Brokered deposits can often be raised more quickly than core deposits and require less overhead. As a result, banks tap them to strategically and tactically manage their balance sheets. However, they tend to cost more than core deposits in terms of interest expense, and institutions that rely on them must carefully model their stability. Ultimately, the prevalence of brokered deposits signals that they have become a useful tool to fill liquidity gaps, cover upcoming liabilities, and facilitate loan origination, and we expect their use to continue growing over the next few years.