What is CDARS Reciprocal?
CDARS Reciprocal provides banks with one of several ways to use CDARS to obtain cost-effective funding. By keeping the full amount of funding on balance sheet, CDARS Reciprocal enables banks to easily replace more cumbersome and expensive funding options so your existing relationships are more profitable. And CDARS offers a cost-effective way to attract new, multi-million-dollar customers for those banks looking to grow more profitable relationships.
Why would your bank want to use CDARS Reciprocal?
CDARS Reciprocal transactions can help banks to:
- provide customers with easy and convenient access to multi-million-dollar FDIC insurance on CD investments;1
- replace more burdensome, costly funding options (such as posting collateral, letters of credit, or other means) by repurposing collateral into higher-earning assets;
- control the cost of funds by setting the interest rates offered to customers – a member bank has the flexibility to raise CDARS deposits at cost-effective levels for its market; and
- acquire long-term deposits in today’s low interest-rate environment.
CDARS Reciprocal can help attract and/or retain large-dollar deposits from safety-conscious customers, including businesses, nonprofits, government entities, advisors, and wealthy individuals.2
And, with a reinvestment rate of ~80%, CDARS customers are likely to stay with your bank, providing ongoing relationship-building and cross-selling opportunities.3
How do Reciprocal transactions work?
Institutions that offer CDARS are members of the Promontory Network. When a member bank places a deposit using the CDARS service, that deposit is divided into amounts under the standard FDIC insurance maximum of $250,000 and allocated among other Promontory Network members, making the deposit eligible for FDIC insurance.
With a CDARS Reciprocal transaction, banks receive dollar-for-dollar matching deposits for their CDARS placements, so that each bank comes out “whole.” Banks may choose to use the full amount of these matching deposits to support local lending initiatives that build a stronger community or for other activities in support of its goals. The ability to keep their funds local is a strong selling point for many top-tier customers.
What else do I need to know?
Customers like CDARS because it lets them work directly with just one bank for security, convenience, and other benefits. With all CDARS transactions, relationship banks retain complete ownership of the customer relationship, and the customer’s confidential information remains protected.
1 Limits apply.
2 If a depositor is subject to restrictions with respect to the placement of funds in depository institutions, it is the responsibility of the depositor to determine whether the placement of the depositor’s funds through CDARS, or a particular CDARS transaction, satisfies those restrictions.
3 As of 12/31/16. Promontory calculates the reinvestment rate as the percentage of the aggregate balance of CDARS deposits that are reinvested through CDARS within 28 days of maturity.
Deposits placed through the CDARS service are considered brokered deposits under call report instructions, but that does not mean they are disfavored. Indeed, as the FDIC affirmed, “FDIC examiner guidance states that there should be no particular stigma attached to the acceptance of brokered deposits per se and that the proper use of such deposits should not be discouraged.” (Federal Deposit Insurance Corporation, Study on Core Deposits and Brokered Deposits, submitted to Congress pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Washington, DC, July 8, 2011, at 3.) Further, reciprocal deposits, such as those available through CDARS Reciprocal, are viewed even more favorably than traditional brokered deposits. The FDIC stated in the same study that it “has recognized for some time in the examination process that reciprocal deposits may be more stable than other brokered deposits if the originating institution has developed a relationship with the depositor and the interest rate is not above market.” (Study, at 54.)