WASHINGTON - Brokered deposits, which got a bad name during the savings and loan crisis, are working their way back to respectability.
The volume of such deposits, usually sold as jumbo CDs, has been rising slowly since hitting bottom in 1993. And though many banks still shy away from brokered funds, one trade association is now looking into ways to make it easier for its members to bring in deposits from out of town.
Regulators don't see this as a reason for worry.
"Like everything else, brokered funds can be managed properly and they can be abused," said Robert Miailovich, associate director of supervision at the Federal Deposit Insurance Corp. "We do not have a negative attitude toward them."
C.J. Pickering, chief executive officer of IBAA Securities Corp., the brokerage subsidiary of the Independent Bankers Association of America, recently visited the Office of the Comptroller of the Currency to talk about setting up an electronic bulletin board to broker deposits between IBAA members. He said he was surprised by the positive reception.
"I was thinking back to when brokered deposit was a nasty word," Mr. Pickering. "What I got back from them was, within safety and soundness guidelines, there's no difference between brokered deposits and other ones."
"The idea was to have community banks help each other raise funds," said Karen Thomas, the IBAA's director of regulatory affairs.
Mr. Pickering said some IBAA members, squeezed between rising loan demand and slow deposit growth, are looking to new sources for funds. The bulletin board he proposes would help cash-starved small banks bring in deposits from cash-rich banks in other parts of the country.
This is a different game from the brokering of jumbo deposits by securities firms. But that business too has been on the rise over the last year, though brokers say it has lagged along with interest rates in recent months.
Among commercial banks, brokered deposits went from a low of $41.7 billion, or 1.5% of total deposits, at the end of 1993, to $49.2 billion, or 1.7%, as of March 31 of this year, according to the FDIC.
Thrifts' holdings of brokered funds have gone up more sharply, from $4.9 billion, or 0.9% of total deposits, at the end of 1993, to $8.7 billion, or 1.6%, as of March 31, according to the Office of Thrift Supervision.
Observers say higher interest rates are part of the reason for the rise. But it's also the case that brokered funds are outgrowing their bad name.
"Brokered deposits got an unfair rap in the 1980s because they were used by insolvent S&Ls that should have been shut down anyway," said industry consultant Bert Ely, who advised Merrill Lynch, the biggest deposit broker, before it started aggressively promoting CDs in September.
Now, the FDIC Improvement Act of 1991 and subsequent FDIC regulations allow only well-capitalized institutions to deal freely in brokered deposits.
"That banking legislation put the hot-money brokers out of business, and primarily left legitimate deposit brokers and investment banks," said Marion Neustadter, product manager for bank liabilities products at Merrill Lynch.