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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A regional bank's treasurer is comparing two ways to raise $50 million of term funding: issuing five-year senior notes or accepting brokered certificates of deposit through a deposit broker. Which statement best describes a key risk of relying heavily on brokered deposits compared with core retail deposits?

Brokered deposits are rate-driven rather than relationship-driven, so they can be lost or become restricted when the bank's condition weakens. Regulators may limit their use for weaker banks, so they are less stable than core retail deposits despite possibly being insured.

  1. ABrokered deposits are rate-sensitive and may leave quickly, or become unavailable, if the bank's condition weakens or regulatory restrictions applyCorrect
  2. BBrokered deposits carry no fees, so their all-in cost is always below the bank's cost of senior debt
  3. CBrokered deposits are always insured and therefore have no sensitivity to the bank's credit quality in any regulatory setting
  4. DBrokered deposits have contractual maturities that cannot be matched to assets, which makes them unsuitable for term funding

Explanation

Brokered deposits are gathered on rate rather than relationship, so depositors are highly rate-sensitive. Regulators can restrict their use for weaker institutions, so funding can disappear when most needed. The other options are wrong: brokers charge fees, and regulatory restrictions apply despite insurance. Maturities can be matched to assets.

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