Brokered deposits are one of the main reasons why so many small- and medium-size banks have gone under.
And banks haven’t stopped seeking this hot money, which is made up of bundled deposits from investors around the nation and provided by brokers.
The banks have to offer interest rates higher than their competitors to attract the money. In turn, those high rates make it impossible for the banks to make money without taking outsized risks.
Regulators are trying to curb the practice, but so far banks are prevailing in the lobbying battle, The New York Times reported. Thus, banks continue to go for the hot money.
The results haven’t been pretty. The 79 banks that went under during the past two years possessed brokered deposits at a level 300 percent higher than the national average, according to an analysis by Foresight Analytics for The New York Times.
And the future outlook is no better. The 371 banks on Foresight’s “watch list” for trouble in March had brokered deposits that were twice the national average.
“We went through this golden age of banking, and I just think that everybody lost their compass,” Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., told The Times.
Recent developments confirm the problem. The FDIC shut down four more small banks June 26, lifting the total U.S. bank failures to 44 this year, Reuters reported. And experts say the trend will continue.
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