Banks Lean On ‘Hot’ Deposits to Shore Up Balance Sheets Brokered deposits are more expensive for banks, but for some the high cost of funding is worth it By Gina Heeb and Ben Eisen July 31, 2023 9:00 am ET 12 KeyCorp has recently increased its brokered deposits, though they remain a small portion of overall funding. PHOTO: JOE BUGLEWICZ/BLOOMBERG NEWS Midsize and small banks in the second quarter largely stabilized or even reversed the deposit exodus they suffered earlier this year. To do so, many had to rely on deposits that flowed through third-party brokers. Brokered deposits are a quick and easy way banks can bolster their balance sheets in a pinch. A bank can go to a firm such as Morgan Stanley or Fidelity to find people to invest in its certificates of deposit, often for large amounts. But brokered deposits are typically much more expensive for banks. They can come with interest rates of 5% or more, putting pressure on profit margins. “Clearly, capital isn’t free,” KeyCorp Chief Executive Christopher Gorman said in an interview. The Cleveland-based bank has recently increased its brokered deposits, though they remain a small portion of overall funding. EXPLORE BUY SIDE FROM WSJ Expert recommendations on products and services, independent from The Wall Street Journal newsroom. What Are Brokered CDs and Should You Buy One? Should You Invest in a Callable CD? Best CD Rates Regulators are wary of banks that operate with high concentrations of brokered deposits, which are viewed as a sort of “hot” money. They are more likely to become flighty in periods of distress, since banks don’t get a loyal customer out of the transaction. Many smaller banks had to lean more heavily on brokered deposits, compared with both the first quarter and a year ago, because higher interest rates have given customers more places to earn good returns. The high-profile collapses this year of several midsize lenders, starting in March, also scared some customers away from all but the most mega of megabanks. The Federal Reserve on Wednesday raised rates yet again, to a 22-year high. Other regional banks that ramped up their use of brokered deposits in the second quarter include Truist Financial TFC -0.32%decrease; red down pointing triangle and M&T Bank MTB -0.72%decrease; red down pointing triangle. So did smaller banks that have been hit hard by the turmoil, such as Western Alliance Bancorp WAL -1.84%decrease; Zions Bancorp ZION -2.27%decrease; and Comerica CMA -0.87%decrease; Banks collectively had more than $1 trillion in brokered deposits in the first quarter, according to the latest available data from the Federal Deposit Insurance Corp. That figure almost certainly increased in the second quarter. Total brokered deposits across banksSource: Federal Deposit Insurance Corp.Note: Changes to FDIC rules in 2021 resulted in fewerdeposits that would have previously been considered'brokered' being reported as such. 2007'10'15'200.000.250.500.751.001.25$1.50trillion “You’ve seen them absolutely explode in terms of growth,” said Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence. Reliance on brokered deposits could grow as the race for customers keeps intensifying. Total deposits still fell at many banks in the second quarter compared with a year earlier—even at megabanks and some of the big regional powerhouses. Some regulators and bankers say brokered deposits can encourage lenders to take excessive risks, such as issuing nontraditional loans to make up for the high cost of this funding. The FDIC can charge higher insurance premiums on brokered deposits, and banks that fall below certain capital levels aren’t allowed to accept brokered deposits. The FDIC has previously tied heavy reliance on brokered deposits to a higher probability of bank failures. For some banks, the cost of brokered deposits can be worth it. The holding company of Peoples State Bank, based in Wausau, Wis., said it recently increased both its brokered deposits and its borrowings from the Federal Home Loan Bank system, another higher-cost source of funding. Brokered and other time deposits made up 8.5% of total deposits in the second quarter, versus 7.2% in the first. CEO Scott Cattanach said that Peoples, with $1.4 billion in assets,turned to high-cost funding because it had strong demand for commercial loans. Despite paying more for the funding, the bank earned net interest income by lending it out at a higher rate. The Federal Deposit Insurance Corp. is doing what it was designed to do when banks like Silicon Valley and Signature go under. Photo illustration: Madeline Marshall “We monitor it closely, but we don’t consider it to be a failure of what we’re trying to accomplish,” Cattanach said. “We consider it another funding source of growth.” Lance Carter, CEO of Bloomington, Ill.-basedHBT Financial HBT 0.23%increase; parent company of Heartland Bank and Trust, said his bank recently turned to brokered deposits as a funding source for the first time in more than 15 years. While Heartland didn’t have an immediate liquidity need, it didn’t want to have to sell securities on its balance sheet that have lost value due to rising rates. “It’s not something we would rely on as a long-term part of our funding base,” Carter said. “Like anything else, in moderation it’s good.” Other bankers are skeptical. Tom O’Brien, CEO of Sterling Bancorp SBT 0.34%increase; in Southfield, Mich., said that years ago, his bank relied heavily on brokered deposits. It recouped the higher interest cost by making unconventional mortgages at lofty rates. After the bank got into regulatory trouble and brought in O’Brien to turn things around, he focused partly on building liquidity. As a result, the bank didn’t need to turn to high-cost funding when the crisis hit in March. “In my experience, all these troubled banks, they fund too expensively,” he said. “And because they fund too expensively, they take too much risk on the assets.”
Given that reserve requirements are currently zero, are they really "Shoring up their balance sheet" or are they immediately turning around and lending this money multiple times over to improve their cash flow at the expense of increased risk?