FDIC guarantees that up to $100,000 of every depositor’s money is protected, even if the bank or thrift that holds it goes out of business. While the protection is reassuring for many depositors, it can be problematic for people and companies with more than $100,000 at stake.
Small business owners, for example, must spread their deposits in segments of $99,999 or less across multiple banks if they want to guarantee FDIC coverage for all their money. That’s something very few of today’s business owners have time to do.
Three years ago, another option became available. The Certificate of Deposit Account Registry Service (CDARS) provides diversity and FDIC protection for those with deposits that total up to $20 million, without requiring the depositors to manage multiple banking relationships. CDARS is a deposit-placement service available only through banks that are members of the Promontory network. When a customer makes a large deposit with a network member, the bank works through CDARS to place the funds with other network members via a sophisticated matching system.
The banks that receive deposits through CDARS issue certificates of deposit in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC protection. Most CDARS transactions are reciprocal, meaning that a bank placing funds through CDARS will receive the exact same amount from other network members that also are placing funds. This enables a bank to make the full amount of customers’ deposits available for lending in the bank’s community.
With the customer’s permission, a bank also has the option of placing funds through CDARS without receiving matching funds. In either case, deposits up to a current limit of $20 million are eligible for full FDIC protection.
CDARS offers short- and longer-term options to accommodate depositors’ needs without disrupting their cash flow. A company could deposit $1 million for three months and another $1 million for six months, ensuring ready availability while also guaranteeing the money is insured in the meantime.
Each member bank sets its own rates, which are subject to market fluctuations. When accounts mature, depositors may renew them, change the amounts or use the money for other purposes. While depositors cannot select the banks that will receive their funds, they can stipulate that certain banks be excluded. By ensuring that deposits placed through CDARS aren’t placed in banks where they have existing accounts, depositors can maintain their banking relationships without negating their FDIC coverage.
Additionally, depositors benefit from consolidated reporting in areas such as 1099 and bank account statements.
Another advantage to CDARS is speed. Depositors can immediately use the network as an interest-bearing, insured parking place for large sums of money while they decide how the funds will ultimately be used. A company that wins a $20 million lawsuit, for instance, can use CDARS to place the award into CDs with duration ranging from four weeks to three years, while considering alternatives such as other investment options or weighing capital improvements.
With all its advantages, CDARS is not designed for the truly rate-conscious those who are willing to do the research, legwork and monitoring required to obtain the very best rates, and those who will spread their own money across numerous banks will get those rates. For depositors who appreciate safety and convenience and who want to establish and maintain a relationship with a specific bank or banker, however, CDARS is an alternative whose time has come.
Sue Tellerino is regional manager and vice president in retail banking at MB Financial Bank. Reach her at (708) 442-3501 or firstname.lastname@example.org.