The Federal Deposit Insurance Corporation (FDIC) recently proposed significant changes to the rules governing “brokered deposits” at US banks. Specifically, the proposal would change the definition of “brokered deposits,” making it difficult to come up with a succinct legal definition. So a functional definition will have to do: The brokered deposit rules are designed to enhance bank safety and soundness by limiting the ability of banks to rely on a source of funding that is deemed to be risky and unreliable–to be “hot money” in the parlance. 

Historically, deposits that were intermediated–or “brokered”--were considered to be high risk. Banks’ use of such deposits was limited by regulation, and under-capitalized banks were prohibited from using them altogether. Certificates of deposit, issued by banks and sold through brokers to customers seeking the highest available rates, were the original “hot money” targeted by the rules. And with good reason, as many savings and loan institutions that failed in the 1980s and early 1990s used brokered CDs to fuel rapid asset growth. (These were often Hail Mary attempts by the S&Ls to grow their way out of the holes blown in their mortgage-heavy balance sheets by the Volcker rate hikes. Some echoes worth noting.)