Brokered Deposits do not Forecast Bank Failures

High Growth in Assets and Large Proportion of Domestic Deposits in Brokered Deposits in Banks and Thrifts Did Not Forecast Failure of Financial Institutions

Preparing for more bank and thrift failures, the FDIC attempts to increase fees on domestic deposits. Given the belief at the FDIC that bank and thrift failures are a direct result of high asset growth combined with a large proportion of domestic deposits in brokered deposits, the FDIC desires to increase fees on brokered deposits more than on other domestic deposits.

Since 1992, 314 banks and thrifts, which had an IDC rank and assets, failed (excluding 6 banks closed for fraud). Of the 314 failed financial institutions, 93% or 293 were ranked by IDC 74 or less (rank of 300 the highest and 1 the lowest).

Published Rank for
Failed Banks and Thrifts
Prior to Failure No

Ranked 1 or 2 (Lowest Ranks) 270
Ranked 74 to 3 (Lowest Ratios) 23
Ranked Greater than 74 21

Of the 314 failed banks and thrifts, only 117 financial institutions held brokered deposits eight quarters prior to failure.

Failed Banks and Thrifts
Brokered Deposits % Domestic Deposits* No

Greater than 30% 8
20% to 30% 10
10% to 20% 22
5% to 10% 23
0 to 5% 54
No Brokered Deposits Held 197

* Eight quarters Prior to Failure

Over 63% or 197 of the 310 failed institutions held no brokered deposits 2 years prior to failure. Another 77 institutions or 25% held less than 10% of brokered deposits as a percent of domestic deposits 2 years prior to failure. Only 13% or 40 of the failed institutions held more than 10% of domestic deposits in brokered deposits. A small number of 40 banks and thrifts (which is 13% of all failures) does not support the conclusion that all banks and thrifts with a large portion of over 10% of domestic deposits in brokered CD’s cause failure.

Of the 8 bank and thrift failures with the percentage of brokered deposits to domestic deposits over 30% (eight quarters prior to failure), only 3 banks had year to year asset growth (eight quarters before failure) of 18% or higher. Negative asset growth occurred in 2 institutions, -18.2% and -12.7% respectively, and 3 firms had zero growth.

Of the 10 bank and thrift failures with brokered deposits to domestic deposits between 20% and 30% (eight quarters prior to failure), only 2 banks had year over year asset growth over 14.5% (eight quarters prior to failure). Four institutions had negative year-to-year growth in assets 8 quarters prior to failure.

Of the 22 bank and thrift failures with brokered deposits to domestic deposits between 10% and 20% (eight quarters prior to failure), only 5 banks had double digit year-over-year asset growth eight quarters prior to failure. Eight bank and thrift failures had negative asset growth eight quarters prior to failure.

Conclusion: IDC does not believe that high growth in assets and a large proportion of domestic deposits in brokered CD’s cause failure.

Case Study of IndyMac and Washington Mutual

IndyMac Bank failed in the second quarter of 2008 with an IDC rank of 1. Brokered deposits rose from $481 billion in September 2004 to $1,528 billion in September 2006 to a peak of $6,889 billion in March 2008.

Domestic deposits were $4,210 billion in September 2004, $9,465 billion in September 2006, and $18,399 billion in March 2008. The percentage of brokered deposits to domestic deposits rose from 11.4% in September 2004 to 16.1% in September 2006, and to 37.4% by March 2008—clearly excessive and a matter for regulators.

Year-over-year asset growth for IndyMac was 43.5% eight quarters prior to failure and 26.3% four quarters prior to failure. Clearly, IndyMac high asset growth and large and increasing brokered deposits to domestic deposits contributed to failure. Low quality of loans and lack of control by regulators, however, were the major cause of failure.

Washington Mutual Bank (WAMU) failed in the third quarter of 2008 with an IDC rank of 108 prior to failure. Eight quarters prior to failure, WAMU had $40,703 billion of brokered deposits in September 2006, up from $12,476 billion in September 2004. The percent brokered deposits to domestic deposits was 20.2% in September 2006, compared to 9.5% in September 2004. Brokered deposits declined from a peak of $44,668 billion in December 2006 to $25,614 billion in September 2007 and rose to $34,045 billion by June 2008 (quarter prior to failure).

WAMU reported year-over-year asset growth of 8.7% eight quarters prior to failure in September 2006. After December 2006, the year-to-year growth rate in assets was negative for all 6 quarters prior to failure. Clearly, WAMU used growth in brokered deposits to add low quality loans in 2006, which caused the failure (a regulatory problem).

IDC concludes the unusual situations at IndyMac and WAMU were regulatory problems and not a reason to raise fees on the vast majority of successful institutions using brokered deposits.

This article is authored by John E. Rickmeier, CFA. Mr. Rickmeier has over 45 years of experience in evaluating financial institutions. As CEO of IDC Financial Publishing since its founding in 1984, Mr. Rickmeier and his analytical team evaluate and rank quarterly over 17,000 banks, thrifts, and credit unions. IDC ratings of financial institutions have become the standard in evaluating the safety and soundness of institutions issuing brokered certificates of deposit. IDC ratings are used by Fannie Mae, Freddie Mac, Ginnie Mae, insurance and credit card companies, and many state and municipalities as a guide for determining financial relationships.

Mr. Rickmeier can be reached at IDC Financial Publishing, Inc., 700 Walnut Ridge Drive, Suite 201, Hartland, Wisconsin 53029. Voice 1-800-525-5457 or email [email protected]
Website for IDC Financial Publishing Inc. www.idcfp.com