Definition of Core Deposits

Core deposits are bank deposits that are believed to be a stable set of funds for a bank. As it's currently used by banking regulators, the term excludes deposit amounts greater than $250,000 and also excludes what are called brokered deposits, placed with a bank by a third party.

Banks traditionally take in money from depositors and use some of those funds to make loans to other customers. Besides fees for various services, banks make money based on the difference in interest rates they charge to borrowers versus what they pay to depositors. Under what's called fractional reserve banking, banks are only required to hold a fraction of what customers deposit and can essentially lend out the rest. This fraction is usually 10 percent in the United States.

That means that if every customer demanded his or her money bank from a bank at once, it often wouldn't be able to pay, since it is only required to have 10 percent of deposits on hand. To reduce that risk and keep the banking system stable and people's money safe, a federal agency called the Federal Deposit Insurance Corporation insures people's bank deposits up to $250,000. Even if a bank fails, the FDIC will ensure that depositors get their money back up to at least that amount.

Often the deposits will be transferred to another bank, which sometimes acquires some of the branches as well, but the FDIC may still have to make up the difference. In addition to insuring bank deposits, the FDIC is one of several federal agencies with regulatory over banks.

The idea behind the notion of core deposits is that certain kinds of bank deposits can form a stable backbone for a bank to build a portfolio of loans, while other kinds may be more likely to leave the bank more quickly.

Core deposits generally include ordinary bank accounts, such as checking accounts, savings accounts, money market accounts and certificates of deposit, opened at the bank directly by customers up to the FDIC's insurance limit.

Other financial products available and managed through banks, such as bonds and mutual funds, don't count as core deposits, nor do deposits placed indirectly through organizations called deposit brokers.

Deposit brokers essentially take money from investors, pool it together and negotiate a good rate with banks interested in accepting their deposits. Regulators consider them a less stable source of capital since it's relatively easy for them to move their funds to another bank, though banks value them for the large amount of funds they bring all at once.