These are funds that financial institutions obtain through intermediaries, who then place these deposits in various banks, often in smaller denominations to meet FDIC insurance limits. A practical illustration involves a brokerage firm that gathers large sums from numerous investors and then distributes this capital across several banks. Each placement remains under the $250,000 FDIC insurance threshold, maximizing investor security while providing banks with a source of funding.
This mechanism offers several advantages, particularly for institutions seeking to augment their capital base quickly and efficiently. This can be especially useful for rapidly growing banks or those facing localized funding constraints. Historically, they have played a significant role in facilitating lending activities, enabling institutions to extend credit to businesses and individuals that might otherwise lack access to capital. However, over-reliance on this form of funding can also pose risks to an institution’s stability, as these deposits can be more sensitive to interest rate changes and economic conditions than core deposits.
