Georgia banks shedding ‘hot money'

By Paul Donsky

The Atlanta Journal-Constitution

During last decade’s housing boom, Georgia banks eager to get in on the action became addicted to “hot money” – deposits from investors who pay brokers to shop nationwide for the best returns.

But the love affair appears to be over as banks, reeling from the rotten economy and increased regulatory oversight, rid themselves of the highly volatile funding stream.

Last year, $8 billion in hot money left the state’s banks, a drop of more than 25 percent.

A once-obscure part of the banking system, hot money – also known as “brokered deposits” – allowed small, start-up banks to lend big money to home builders and developers without spending the time and money to generate home grown deposits in their local markets.

But hot money is considered to be an expensive funding source, requiring high interest rates, as well as  highly volatile – quick to leave should better rates be found elsewhere or if any problems arise at a bank that spook investors.

The pool of hot money in Georgia banks grew from $808 million in 1998 to more than $29 billion a decade later before falling to $21 billion in 2009. The money helped fuel the housing boom but also left a large number of banks vulnerable to the eventual downturn.

Why has Georgia cooled on hot money? For one thing, experts say, several dozen banks that feasted on brokered deposits have failed. But regulatory pressure also plays a role.

Regulators now forbid distressed banks from renewing them or generating new brokered accounts. In Georgia, half to two-thirds of the state’s 300 banks are distressed enough to face regulatory enforcement actions.

Some experts say the regulatory zeal is misguided, at least in Georgia, where intense competition means brokered deposits are often cheaper than locally generated deposits. And forcing cash-strapped banks to shed deposits during a crisis only sets up some troubled banks to fail, said Byron Richardson, an Atlanta banking consultant.

“I think it’s part of what’s putting them in the ground,” he said. “I think it’s accelerating their march to death…. It’s cutting off their lifeblood. Deposits are the lifeblood for the bank.”