Posted in Finance, Accounting and Economics Terms, Total Reads: 324
Definition: Brokered Deposit
Brokered Deposits are large sum deposits made by brokers in a bank or an investment vehicle. The brokers collect small sums from investors and compile them into brokered deposits and they qualify for an interest rate higher than the normal interest rate from the bank.
Banks prefer brokered deposits as it helps in cost reduction since it is easier to handle a single large deposit than numerous small deposits equalling the same amount. Also it gives access to a large pool of investment funds which can help improve the liquidity of the banks. ‘Well-capitalized’ banks are permitted to accept brokered deposits without any restrictions whereas ‘adequately-capitalized’ banks need to get approval from FDIC and ‘under-capitalized’ banks are prohibited from accepting such deposits.
A broker collects $10,000 from 10 investors at an interest rate of 1.00% and deposits $100,000 in Bank of America at an interest rate of 1.25%. This kind of deposit is called brokered deposit.