Banks Lean On ‘Hot’ Deposits to Shore Up Balance Sheets

livemint.com:

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. 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 and M&T Bank. So did smaller banks that have been hit hard by the turmoil, such as Western Alliance Bancorp, Zions