Brokered deposits, once a dynamic part of the deposit marketplace, practically vanished during three years of ultra-low interest rates.
And even though deposit yields are climbing back up, it's by no means certain that brokered deposits will surge. Banks increasingly are tapping other sources of funding. And yields on brokered CDs remain firmly below those of comparable Treasury instruments, making the CDs less attractive than they once were.
Customers once flocked to these insured certificates of deposit, which featured the best rates that brokers could find at financial institutions nationwide. But when CD rates tanked, customer interest withered.
"From the consumer's point of view, a 2% CD is not a product to advertise," said Marion Neustadter, a vice president at Merrill Lynch, the nation's largest broker.
Just $27 billion of brokered deposits of $100,000 or less were held by commercial banks at midyear, down 40% from $45 billion in June 1991.
Whether those numbers will begin to climb is anybody's guess, said Edward Furash, chairman of Furash & Co., a Washington consulting firm. "It depends on whether the Federal Reserve will continue to raise rates. It depends on whether demand for rapid loans will continue."
Clearly, traditional users of brokered deposits are relying less on this source of funds. Credit card-issuing banks, for instance, are increasingly securitizing their receivables.
Consequently, brokered deposits account for just 14% of total deposits at First USA Bank of Wilmington, Del., down from 34% last year, said George A. McCaine, a senior vice president.
Across the state in Newark, MBNA America's brokered deposits have declined to 30% of total deposits, and are used selectively as a source of funding, according to spokesman Todd Veale.
The 12 Federal Home Loan Banks have also emerged as an important alternative to brokered deposits.
The bank system, which provides loans to financial institutions that focus on mortgage lending, opened its membership to commercial banks in 1989. Commercial bank members now outnumber the thrifts that had dominated the system since its creation in the 1930s.
Largely as a result, few small banks now depend on brokered CDs to raise funds, according to David Ballweg, president of Community State Bank in Union Grove, Wis.
Financial institutions also appear less than eager to participate in the brokered CD market, which was tainted by the savings and loan crisis.
For instance, John MacMillan, president of Glacier Bank, a $300 million-asset thrift in Great Falls, Mont., said only 2% of his deposits are brokered, down from about 10% a few years ago.
"Even though brokered CDs are back in vogue, we can get CDs at a lower rate through the retail market," Mr. MacMillan said.
Despite the drawbacks, deposit brokers like Merrill Lynch are forging ahead, taking advantage of rising interest rates to offer CD rates above the national average.
The company began promoting CDs aggressively in September, with full-page advertisements in the New York Times, Wall Street Journal, Washington Post, USA Today, and regional newspapers.
"We are saying this is the time to consider investing into CDs," Ms. Neustadter said.