The next banking crisis will develop at some point in the future as the Fed’s security portfolio shrinks and short term interest rates rise sharply. The Fed’s exit from quantitative easing will cause the cost of short-term bank liabilities to rise significantly. Without long term deposits on a bank’s balance sheet, the sharp rise in short term rates will raise deposit costs more rapidly than income from earning assets. A miss-match in assets and liabilities could result in the next banking crisis.

Brokered deposits are an important component of mitigating interest rate risk, extending deposit maturities in the current low, short-term interest rate environment. These extended deposit maturities can provide a proper asset-liability mix in the event of a sharp rise in short term interest rates. Banks will also want to become more asset sensitive to prepare for those rate increases by increasing the level of their short term earning assets repricing in relation to their deposits. Brokered deposits, simply, can help a bank avoid the potential for failure in the next banking crisis, i.e. sharp rise in short-term interest rates.

This article is authored by John E. Rickmeier, CFA. Mr. Rickmeier has over 30 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 16,000 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 also used by the Federal Reserve banks, Fannie Mae, Freddie Mac, Ginnie Mae, insurance and credit card companies, and many states 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 info@idcfp.com Website for IDC Financial Publishing Inc. www.idcfp.com

The Office of the Comptroller of the Currency (OCC) recently absorbed the Office of Thrift Supervision (OTS) due to recent changes in banking law. The major problems for the OTS, causing its absorption, are exhibited by the failure of IndyMac Federal Bank, FSB of Pasadena, CA.

From the end of 2003, to the second quarter of 2007, assets doubled from $10 billion to $20 billion. FHLB advances rose from $5 billion to $10 billion, domestic deposits increased from $4.9 billion to $12.1 billion, and brokered deposits rose from $387 million to $1.5 billion (14% of domestic deposits). Regulators at the OTS accepted and encouraged this massive growth with near zero reported loans delinquent 90 days or more, and limited nonaccrual or restructured loans and repossessed assets. Beneath the surface, major problems were occurring.

From December 2004 to June 2007, each quarter experienced negative balance sheet cash flow, averaging 49.7% of Tier I capital. The balance sheet cash drain due to loan write-downs increased interest bearing liabilities as a percent of earning assets from 92% as of March 31, 2004 to 98% on June 30, 2007. As of June 30, 2007, Tier I capital was 8.1% with almost all capital represented by nonearning assets.

IndyMac failed on July 11, 2008. In the last year of operations, major problems arose:

1. Equity capital fell from $2.7 billion in the second quarter of 2007 to $1.1 billion in the second quarter of 2008
2. Bad loans rose from 20% to 236% of Tier I capital in the same four quarters
3. FHLB advances remained at $10 billion
4. Domestic deposits rose in one year from $12.1 billion to $19.0 billion
5. Brokered deposits from June 2007 to March 2008 jumped from $1.5 billion (14% of domestic deposits) to $6.9 billion (36% of domestic deposits). IndyMac accounted for 76% of the increase in all brokered deposits held by banks and thrifts for the one-year period ending March 31, 2008.

The efforts of Federal regulators and politicians to limit brokered deposits all point to the abuse of IndyMac in dramatically growing its brokered deposits in 2007 and 2008, equaling 76% of the total bank and thrift growth in brokered deposits – - all from one thrift. Regulators allowed this abuse and uncontrolled growth by one thrift, and politicians blamed the banking and thrift industry.

This article is authored by John E. Rickmeier, CFA. Mr. Rickmeier has over 30 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 16,000 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 also used by the Federal Reserve banks, Fannie Mae, Freddie Mac, Ginnie Mae, insurance and credit card companies, and many states 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 info@idcfp.com Website for IDC Financial Publishing Inc. www.idcfp.com