Securing Large Deposits

January 12, 2015

alphabet soupShould you put your money into a TBTF (TBTC) SIFI or into TGTR with CDARS and ICS? Let me take you on a swim through alphabet soup to find the answer.

Most people are aware that the Federal Deposit Insurance Corporation (FDIC) insures bank deposits for up to $250,000 for each depositor in each bank. Since 1933 it has been very effective in protecting smaller depositors. As the FDIC is fond of saying, no depositor has ever lost a penny in an insured bank account. The FDIC insurance fund is actually funded by banks, and not taxpayers, and is backed by the full faith and credit of the United States.

Depositors who want to protect larger sums from bank failure need to find strategies to protect their assets. One approach is to divide deposits between multiple banks to take advantage of separate insurance limits at each bank. This works, but can be burdensome to manage. It can be completely impractical for a business organization that is constantly depositing revenue from sales and must also make ongoing payments to suppliers, employees, and investors.

The default solution for many larger depositors is to bank with one of the Systemically Important Financial Institutions (SIFI) that are considered Too Big to Fail (TBTF). Actually, TBTF is not really accurate. SIFIs can fail, but they are Too Big to Close (TBTC). Instead, bank regulators, the Federal Reserve, and the Treasury Department have intervened to prevent sick SIFIs from damaging the financial system. The obligations of a failing SIFI, including large deposits, in effect are backed by the government (a.k.a. the American taxpayer).

This is one reason that deposits have flowed downhill into the nation’s largest banks. The Fed’s accommodative monetary policy has pushed even more liquidity into them. The SIFIs are bursting at the seams with cash, so it’s no wonder that they aren’t interested in more deposits and that their rates are pitifully low.

On the other hand, smaller banks that are active lenders are eager to grow deposits, and generally pay better rates for CDs, savings and money market accounts. So how can a large depositor enjoy the service advantage and higher rates offered by these more competitive banks and still maintain the safety of their assets? By using a bank that participates in the Certificate of Deposits Account Registry System (CDARS) and the Insured Cash Sweep (ICS) program administered by Promontory Interfinancial Network.

Back in 2002 a group of financial industry heavyweights, including Eugene Ludwig, former Comptroller of the Currency, and Alan Blinder, former Federal Reserve governor, founded Promontory to help banks serve their larger depositors. They created a network, now consisting of around 3,000 banks, that allows large deposits into one bank to be split up into amounts less than $250,000 and held on the books of other institutions. Instead of having to maintain separate accounts at multiple banks, a depositor can now deal with one bank of their own choosing, receiving just one statement. Each bank in the network sets its own rates, introducing an element of competition that is missing when dealing with SIFIs that are TBTF/TBTC!

Fully insured deposits can be placed as certificates of deposit (CDARS), or in demand accounts or money market savings accounts through the ICS program. Business Bank of Texas now offers all of these alternatives to its customers, making it Too Good to Refuse (TGTR). Our customers can now experience responsive service and competitive rates from a bank that values their deposits and their relationship, all while having the peace of mind of full FDIC coverage. Alphabet soup never tasted so good!

For more information on our fully insured deposits programs call your bank officer, or contact Ivonne Villegas at 512-485-7112.

Link to Commercial Certificate of Deposits page

Link to Business Deposit Account page

Link to Deposits rates page

Topics: Featured, Bank Customer Tips, Content Type

Dwayne Kolly

Business Bank of Texas

Dwayne Kolly brings a wealth of financial management and operations experience to Business Bank of Texas. Kolly has served community banks in south and central Texas for nearly 30 years, and is the bank’s CEO and Chief Financial Officer. He is a graduate of the Southwestern Graduate School of Banking at SMU (1993).
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