securing large commercial deposits
TRANSCRIPT
Securing LARGE
DEPOSITS
Franklin D. Roosevelt signs the Banking Act of 1933 creating the Federal Deposit Insurance Corporation
FDIC DEPOSIT INSURANCE
• Created to restore confidence in banks during the great depression
• FDIC insurance is funded by assessments on insured banks and thrifts
• Backed by the full faith and credit of the United States
• 1934 deposit insurance limit was $2,500 per customer
• Current basic coverage is $250,000 per depositor per bank
• During the great recession FDIC extended unlimited coverage to demand deposits TAGS
OWNERSHIP CATEGORIES
An individual can insure larger amounts by using different ownership categories.
Example - A revocable trust account with one owner naming three unique beneficiaries can be
insured up to $750,000
• Electronic Deposit Insurance Estimator (EDIE)• Deposit Insurance FAQs• Deposit Insurance Brochures
FDIC website tools structure accounts to help maintain deposit insurance
The key to establishing deposit insurance coverage is in the documentation and record keeping of the financial institution.
Should you really care about deposit insurance?
• Uninsured deposits have been at risk in only about 5% of bank failures since 2000
• Of 540 banks that failed since 2000, the all but 31 were acquired by another bank
• Very large banks (“systemcally important financial institutions”) will not be allowed to fail
• The financial industry has stabilized, few banks are in danger of failure
Some Reasons to Care
• When the next financial crisis comes, depositors will start to worry again.
• CFOs, money managers, fiduciaries have a duty to safeguard money in their care.
• State and local governments are required to make sure their funds are insured or collateralized.
Annoying Method #1
Divide funds between multiple institutions in amounts less than $250,000
Annoying Method #2
Deposit in a bank that is too big to fail• Big banks pay lowest rates• Big banks charge higher fees,
sometimes charge for excess balances
Annoying Method #3
Enter into a repurchase agreement• Works like a bank deposit.• In theory, bank sells “depositor” a marketable
security from its portfolio, with agreement to repurchase at a future date. Interest rate is imputed in the “repurchase”.
• Marketable security that collateralizes the funds is held by a safekeeping agent.
Annoying Method #3 Continued
• Repo agreements require monitoring and confirmation of collateral to make sure the funds are secured.
• Banks don’t like them as much because they tie up liquidity.
Somewhat Less Annoying Method #4
• Enter into a sweep arrangement where excess funds are swept into a money market mutual fund.
• Considered safe, not FDIC insured.• In rare circumstances, money market funds have
broke the bill and seen the NAV fall below peg.
CDARS & ICS:NEW WAYS TO INSURE
LARGE DEPOSITS
Program to syndicate large deposits among multiple banks to maintain FDIC coverage on
multi-million dollar balances.
• Founded in 2002 by a group of financial heavyweights.
• Administers program to distribute and account for funds placed into the network by depositors.
• Certificate of Deposit Account Registry CDARS program provides for fully insured multi-million dollar time deposits.
• Insured Cash Sweeps ICS program provides for fully insured million-dollar demand and savings deposits.
How CDARS Works
1. Sign a CDARS Deposit Placement Agreement and a custodial agreement, and then invest money with a member of the CDARS Network (a relationship institution).
2. Funds are placed using the CDARS service.
3. CDs are issued by other members in the CDARS Network.
4. Receive confirmation of your CDs from your relationship institution.
5. Receive consolidated interest payments and statements through your relationship institution.
How Insured Cash Sweep Works
1. Sign an ICS Deposit Placement Agreement and a custodial agreement, and then invest money with a member of the ICS Network (a relationship institution).
2. Identify an existing transaction account (or set up a new one) to be used with each ICS option.
3. Your funds are placed into deposit accounts with other members of the ICS Network in accordance with the Deposit Placement Agreement.
4. You can check balances and see where your funds are at all times using an online tool specifically develop for Insured Cash Sweeps
5. You receive consolidated interest payments and statements for each service option through your relationship institution.
What We Love About CDARS & ICS
• Promontory provides the necessary recordkeeping to establish FDIC coverage
on all funds.
• Depositors receive one statement and deal with one bank.
• Each member bank can set its own rates.
• Promontory vets its membership to reduce the chance of a par?cipa?ng bank failing.
• Failures have occurred, FDIC has always honored deposit insurance on network funds.
• CDARS and ICS accounts are permissible investments for government en??es in Texas per state code and legal opinion.
• Statements show how much is on deposit at each bank.
• ICS depositors can see their deposit in real ?me through ICS depositor portal.
• Each bank sets its own rates, preserving compe??on.
• Depositor deals with just one bank, receives one comprehensive statement.
• Depositor may exclude a bank if they desire.
Let’s ConnectDwayne Kolly, CFO Business Bank of Texas 1901 W. Braker Ln Austin, TX 78758 (512) 835-‐6600 [email protected]
For more insights, check out the Business Resource Centerhttp://www.businessbankoftexas.com/business-resource-center
Additional Resources
Deposit Insurance in the United States https://www.fdic.gov/bank/historical/brief/brhist.pdf
Electronic Deposit Insurance Estimatorhttps://www.fdic.gov/edie/
Deposit Insurance Brochureshttps://www.fdic.gov/deposit/deposits/brochures.html
“Access to Multi-Million-Dollar FDIC Insurance”http://cdars.com/
“ICS – Bank Safe, Bank Smart”http://www.insuredcashsweep.com/