Reciprocal brokered deposits, bank risk, and recent deposit insurance policy

• Reciprocal brokered deposits (RBDs) expand deposit insurance coverage.
• Theory predicts higher risk for banks using RBDs due to moral hazard.
• We test for such higher risk in more detail than in prior studies.
• We use Granger tests to assess evidence of causality.
• We test for effects of the FDIC's new pricing of RBDs.

This study provides new evidence regarding reciprocal brokered deposits (RBDs), regulatory responses, and bank risk, contributing to prior studies in four ways. First, using updated financial Call Report data and bank failure data through 2012, we re-examine the moral hazard hypothesis that banks using RBDs exhibit higher risk. Second, we uncover a previously overlooked positive association between RBDs and banks’ cost of failure. Third, we apply Granger causality tests; and finally, we test whether the FDIC's recent revision of its pricing discourages the use of RBDs and weakens its association with bank risk. The findings provide a more precise and nuanced understanding of banks’ use of RBDs.