WSJ Warns on Brokered Deposits
The Wall Street Journal writes that, "`Banks Load Up on $1.2 Trillion in Risky 'Hot' Deposits." It explains, "At midyear, Zions Bancorp reported holding $8.5 billion in brokered deposits, an obscure but costly banking industry product that is drawing attention from regulators. At this time last year, the Salt Lake City-based bank had practically none. Many industry players view brokered deposits as a double-edged sword. They can be a quick and easy way for a bank to shore up its balance sheet. The deposits are typically much more expensive because banks have to pay higher interest rates to lure in those customers, along with other fees. Regulators and bankers say they are also a type of 'hot' money that is prone to disappear when a bank hits a rough patch, since these yield-seeking customers don't tend to be loyal. U.S. banks collectively held more than $1.2 trillion in brokered deposits in the second quarter, according to a Wall Street Journal analysis of data from the Federal Deposit Insurance Corp. The total marked an 86% increase from a year earlier. Brokered deposits are what they sound like: A bank can go to a third-party broker such as Morgan Stanley or Fidelity to find customers to invest in the bank's high-yielding certificates of deposit. That allows the bank to get big influxes of money at once, rather than customer by customer. Lots of banks are loading up on them -- a sign of the distress that continues to afflict many lenders who now must compete for customer funds they long took for granted. `Brokered deposits nearly doubled at Citizens Financial and Ally Financial in the second quarter, compared with a year ago. They were up even more sharply at M&T Bank, KeyCorp and Comerica. Bank of America, Wells Fargo and other megabanks also leaned on them more." It adds, "But at some smaller regional banks, such as Associated Banc-Corp and Valley National Bancorp, brokered deposits accounted for more than 10% of domestic deposits, a level that can make regulators wary. The FDIC can charge higher insurance fees to banks that have high concentrations of brokered deposits. When rates were low and pandemic stimulus was at its peak, customers flooded banks with their idle cash. But now that rates are high, and expected to stay that way, customers have been parking their money elsewhere for higher yields."
