The Core of a Problem
For a long time, banks have been proud of their core deposits, a sign of strong relationships with customers.
Core deposits are defined in the Uniform Bank Performance Report as the sum of all savings and demand deposits, NOW and automatic transfer service (ATS) accounts, money market deposit accounts, and time deposits under $250,000, minus insured brokered deposits under $250,000.
“Core deposits, as an analytical and supervisory tool, are intended to include those deposits that are stable and lower cost, and that reprice more slowly than other deposits when rates rise,’’ according to the Federal Deposit Insurance Corp. in its 2011 “Study on Core Deposits and Brokered Deposits.”
But even the FDIC recognized this is not always the case.
The failures of three large regional banks in the spring of 2023 woke up a lot of people to the swiftness with which so-called core deposits can exit the bank. Additional threats include digitally savvy consumers moving money for higher rates in a world that makes that easier. MaxMyInterest.com, for example, will automatically move money for customers between FDIC-insured accounts to maximize interest payments, keeping levels below the limit for FDIC insurance. “Pretty much across the board, what we have traditionally thought of as core deposits with a fairly long duration, most of that stuff we’ve got to look at as really being very volatile and being rate sensitive,’’ says Don Musso, the founder and CEO of the consulting firm FinPro.
Conversely, brokered deposits ⎯ purchased from third parties ⎯ became a source of strength and liquidity following the bank failures. According to S&P Global Market Intelligence, brokered deposits rose to a three-year high of $1.295 trillion at the end of the third quarter, although the growth rate slowed compared to previous quarters.
Such deposits generally have a term on them, so at least the bank has a good sense of how long those deposits will stick around and how much they’ll cost, unlike demand deposits, which customers can move at any time. But brokered deposits carry risk, too. Regulators restrict undercapitalized banks from getting brokered deposits, because historically, banks with higher rates of brokered deposits tended to fail at higher rates. Also, if the Federal Reserve lowers rates, banks that lock in higher brokered rates could create problems for themselves.
Recognizing these risks, most banks have limits of 20% to 30% on wholesale and brokered deposits as a percentage of their deposit base, even though “some of the wholesale funding in many cases is more stable than retail funding,” Musso says.
• Naomi Snyder, editor-in-chief of Bank Director