US banks' total brokered deposits have nearly doubled year over year, and regulators are becoming worried about their increasing use.
Total brokered deposits jumped to $1.205 trillion in the second quarter, a 17.2% increase from $1.028 trillion in the first quarter and an 85.6% increase from $649.23 billion in the year-ago period. They now make up 5.7% of total liabilities, up from 4.8% in the first quarter and 3.0% in the year-ago period, according to an analysis by S&P Global Market Intelligence.
The jump has concerned regulators.
"That's a matter of supervisory attention for us. There has been a significant increase in brokered deposits in the banking system over the past year, and they can present liquidity risk," Federal Deposit Insurance Corp. Chairman Martin Gruenberg told reporters at a Sept. 7 press briefing. The agency is particularly concerned about concentrations because "it can vary considerably from institution to institution," Gruenberg added.
US banks have grown brokered deposits every quarter for at least the five quarters, while non-brokered deposits have shrunk.
Banks are increasingly taking advantage of brokered deposits because they are "a relatively cheaper source of funding as opposed to tapping the markets or issuing debt," Joseph Silvia, a member at Dickinson Wright PLLC who advises financial institutions on M&A and regulation, said in an email.
Still, the increase in brokered deposits has caught regulators' attention, and advisers expect regulators to push banks for details on those deposits.
"To the extent they are brokered deposits, I expect regulators will want to understand how and why they are classified as brokered in evaluating an institution's liquidity," Scott Coleman, a partner at Ballard Spahr LLP who represents banks and bank holding companies, said in an email.
Silvia anticipates regulators will generally ask about this topic, "at least because they are always interested in funding sources."
Banks with the most brokered deposits
Among the 20 US banks with the most brokered deposits at June 30, 14 posted quarter-over-quarter growth in brokered deposits.
JPMorgan Chase & Co. had the most brokered deposits with $90.82 billion at June 30, up $22.10 billion from the first quarter. Brokered deposits made up 2.6% of the company's total liabilities.
Beal Financial Corp. had the highest proportion of brokered deposits to total liabilities among the 20 US banks with the most brokered deposits at 47.3%. Beal Financial is also the smallest company on the list with $32.42 billion in assets at the end of the second quarter.
Growth coming from reciprocal deposits
Some of the growth in brokered deposits has come from reciprocal deposits. The overall growth in the industry's reciprocal deposits is being driven by the bank failures this spring, which brought uninsured deposits into a greater focus than they had been ever before, bank advisers said.
Since the failures, "customers are extremely aware of the FDIC deposit insurance and they are way more aware of the availability of reciprocal programs," Christopher Marinac, director of research at Janney Montgomery Scott LLC, said in an email. "Hence, it is very logical for these reciprocal deposits to rise and frankly I expect this trend to continue well into the future."
Two of the banks caught in the crosshairs of the March bank failures posted the largest increase in reciprocal brokered deposits since year-end 2022.
Western Alliance Bancorp. subsidiary Western Alliance Bank posted the largest increase at $11.37 billion, while PacWest Bancorp unit Pacific Western Bank had the second-largest growth at $7.94 billion.
