Brokered and Reciprocal Deposits Frequently Asked Questions (FAQ)

Brokered deposits are used by financial institutions for a variety of reasons, including liquidity management. In these arrangements, a deposit broker acts as a middleman to facilitate placing deposits from a third party into an IDI or FICU, often for a fee determined by deposit volume. The depositor may be interested in the arrangement for a variety of reasons such as liquidity management, diversification, earned interest, and increased deposit or share insurance coverage.

Reciprocal deposits are a type of brokered deposit and are meant to help provide depositors with access to additional deposit or share insurance coverage. If an IDI or FICU participates in a deposit network, then the participating institution can, at the depositor’s request, facilitate the placement of a portion of the customer’s or member’s deposits into the network. In exchange, the institution facilitating the deposit may receive other deposits from participating institutions that matches the amount (and, if applicable, the maturity of) the funds the institution is depositing on the customer’s or member’s behalf. The customer or member can have expanded insurance coverage and the institution can maintain a more direct relationship with the customer or member. 

As an example: John Doe has $300,000 at ABC FICU, but is only eligible for $250,000 in share insurance coverage. If ABC FICU participates in a reciprocal deposit network, John Doe can utilize that network as one way to increase his share insurance threshold and insure any uninsured funds on deposit at ABC FICU. John Doe may use the network to have ABC FICU place $50,000 of his money into the network, ending up at XYZ Bank. His funds are held as a deposit liability of XYZ Bank and are fully insured. In this scenario: 

• John Doe would still have full access to his $300,000 through ABC FICU. He would not have to work with XYZ Bank to access his money.
• The $50,000 would show up on the balance sheet for XYZ Bank while $250,000 would show up on the balance sheet of ABC FICU.
• ABC FICU would receive $50,000 in reciprocal deposits from another institution participating in the reciprocal deposit network so that the total deposits on their balance sheet remain unchanged.

To be clear, John Doe’s deposit and share insurance coverage is still limited to the standard $250,000 amount per ownership category at each individual IDI and FICU.

Reciprocal deposit networks allow IDIs and FICUs to offer expanded access to FDIC and NCUA deposit and share insurance coverage to customers or members with large balances. These networks facilitate the exchange of matching deposits with other participating IDIs and FICUs. 

More specifically, a reciprocal deposit network is generally operated by a company or business entity that takes deposits from institutions. The third-party entity facilitates the movement of money among participating FICUs and IDIs, pursuant to depositors’ instructions.

Yes, as long as the program is conducted both safely and soundly, and in compliance with other applicable laws, including provisions related to a FICU’s field of membership. Federally insured, state-chartered credit unions who engage in brokered and reciprocal deposits must also comply with any applicable state laws and regulations. 

While FICUs are permitted to use brokered or reciprocal deposits, the regulations governing field of membership still apply: for example, the depositor in the bank or credit union placing deposits in the receiving credit union would have to qualify for and obtain membership in the receiving FICU for the reciprocal deposit to be permitted. 

The field of membership requirement makes it more challenging for a FICU to receive funds through a reciprocal network. A FICU may be able to place funds at an IDI or another FICU, but the IDIs or FICUs in the network may not be able to place the deposits at the receiving FICU unless the depositor meets the requirements of the FICU’s field of membership and becomes a member or is otherwise eligible to be an insured “member account.” 

NCUA is limited to insuring “member accounts” as defined by section 101(5) of the Federal Credit Union Act (FCU Act). Section 101(5) includes as member accounts not only accounts of members (within its field of membership), but also accounts of: (1) nonmember credit unions; (2) nonmember units of Federal, State, or local governments and political subdivisions; and (3) nonmembers at low-income credit unions. 

This field of membership limitation on who is eligible for NCUA share insurance coverage is a practical constraint on FICUs participation in reciprocal deposit networks. Low-income designated (LID) credit unions tend to have the most flexibility when it comes to accepting reciprocal deposits because the designation provides them with the latitude to accept a larger category of nonmember deposits. 

Without a LID or other exception to the general membership requirement, any deposits received by the FICU must come from a source that qualifies for, and obtains, membership at the receiving FICU for the reciprocal deposit to be eligible for NCUA share insurance coverage. 

The field of membership requirements as well as other requirements related to member and nonmembers continue to apply to FICUs seeking to accept brokered deposits. 

NCUA does not impose specific regulatory limits on FICUs’ use of brokered and reciprocal deposits. However, the general limits on nonmember deposits found at 12 CFR § 701.32(b) (and applicable to all FICUs through § 741.204) are always applicable and likely to be relevant to most FICUs’ acceptance of brokered and reciprocal deposits. 

The limit on nonmember funding, to include nonmember brokered and reciprocal deposits, in aggregate is not to exceed the greater of:

• Fifty percent of the net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares, or
• $3,000,000.

Additionally, utilization of brokered and reciprocal deposits must always be done in a safe and sound manner.

Brokered and reciprocal deposits are eligible for NCUA share insurance coverage in the same manner as any other deposit or share. In general, brokered and reciprocal deposits are insured on a pass-through basis as single ownership accounts maintained by an agent or nominee. The NCUA has long provided for share insurance coverage of brokered deposits and for using pass-through coverage, with legal opinions that address these issues dating back nearly 30 years. See NCUA Legal Op. 97-0909 (Feb. 6, 1998) and NCUA Legal Op. 97-1250 (Mar. 2, 1998).

More specifically, 12 CFR § 745.3(a)(2)https://www.ecfr.gov/current/title-12/part-745/section-745.3, states that, when an account is held by an agent or nominee, funds owned by a principal and deposited in one or more accounts in the name or names of agents or nominees shall be added to any individual account of the principal and insured up to the standard maximum share insurance amount (SMSIA) of $250,000 in the aggregate.

This is generally described as “pass-through” share insurance coverage as the insurance coverage passes through the agent or nominee maintaining the account and to the beneficial owner of the insured funds. The principal or beneficial owner of the account must be a member of the receiving FICU or otherwise eligible to maintain an insured account for NCUA to honor share insurance coverage on the account. 

As an example: Betty Smith is a customer of XYZ Bank with $400,000 in deposits, all in a single ownership account with only $250,000 of insurance coverage. XYZ Bank participates in a reciprocal deposit network, which Betty Smith would like to utilize to place and receive insurance on her $150,000 in funds that exceed the insurance limits for her account at XYZ Bank. ABC FICU participates in the same reciprocal deposit network. In order for ABC FICU to be able to receive the $150,000 through the reciprocal deposit network, and for the funds to be eligible for NCUA Share Insurance, one of the following must be true:

• Ms. Smith meets the field of membership requirements of ABC FICU and becomes a member; or
• ABC FICU is an LID credit union (and thus can accept nonmember deposits from any source).

(There are other exceptions related to accounts for state and local governments; the example should be taken as illustrative and does not substitute legal advice.)

NCUA regulations at 12 CFR § 745.2(c) outline the recordkeeping requirements necessary for NCUA to provide share insurance coverage. A prudent FICU considering offering a reciprocal deposit program or participating in a brokered deposit relationship will develop an understanding of the applicable regulations and requirements first. 

As a general matter, the account records of the FICU must be conclusive as to the existence of any relationship, such as a custodial or agent relationship as part of a reciprocal deposit network, pursuant to which the funds in the account are deposited and on which a claim for insurance coverage is founded. If the account records of a FICU disclose the existence of a relationship which may provide a basis for additional insurance, the details of the relationship and the interest of other parties in the account must be ascertainable either from the records of the FICU or the records of the member, maintained in good faith and in the regular course of business by the member or by some person or entity that has undertaken to maintain such records for the member. Importantly, the NCUA retains discretion to determine when records are maintained on behalf of a member, in good faith and in the regular course of business. Ultimately, the NCUA must be able to establish ownership interests in the account by following the chain of records maintained by parties at each level of the relationship from the account records maintained at the FICU. 

Brokered and reciprocal deposits can provide an efficient way for FICUs to provide additional share or deposit insurance coverage to members and to raise funds. However, overreliance on brokered and reciprocal deposits can increase a FICU’s risk profile, particularly if its financial condition weakens because brokered and reciprocal deposits can be a more expensive and less stable source of funding. 

For this reason, the NCUA Board may prohibit undercapitalized institutions from accepting all or certain nonmember deposits under the requirements of 12 CFR § 702, Subpart A. 

For all parties to enjoy the benefits of either reciprocal deposits or brokered deposits, the participating FICUs must ensure the beneficial owners of all accounts it holds or considers holding are members who meet the field of membership requirements or are otherwise able to maintain permissible nonmember accounts as defined by law.