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What is a Brokered Certificate of Deposit?

To all bankers a brokered certificate of deposit has become an issue which is a constant source of irritation.  In the eyes of the regulators it is considered to be “hot” money.  Yes, it is money received by a bank with no other relationship with the customer and yes, it may go away when it matures.  But, what makes this different than a lot of other “retail” certificates of deposit received by a bank.

If you think about it, the brokered deposit received by a given bank was once considered to be a retail certificate of deposit by the bank that had the certificate of deposit in the first place!

From the regulator perspective the money can flow from the bank easily and leave the bank with no funding or at the mercy of the interest rates in the national market.  Little regard is given to the fact that the average maturity of a brokered certificate of deposit may be much longer than that of a retail certificate of deposit.  Nor, as is often the case, is there any credit given for the fact that the certificate of deposit may have a lower rate than can be received by the bank in its local market.

So, what is a brokered certificate of deposit?  It is a term that without any further thought on the part of the regulators is found in their manual as being a “bad” thing.  Get realistic and get into the 21st century and understand the characteristics of the funding and not just a definition found in a manual.