What are CDARS Reciprocal transactions?
CDARS Reciprocal transactions provide your bank 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 your bank 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
Why would your bank want to use CDARS Reciprocal?
CDARS Reciprocal transactions can help your bank to:
- Provide customers with easy and convenient access to multi-million-dollar FDIC insurance on CD investments1
- Replace more burdensome and 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 you offer to customers, your bank has the flexibility to raise CDARS deposits at cost-effective levels for your market
- Acquire long-term deposits in today’s low interest-rate environment – CDARS offers a wide range of maturities enabling your bank to ladder, or to structure the equivalent of floating-rate, bump-up, or step-up CDs
With CDARS, your bank can retain existing customers more efficiently and attract new ones if desired. In fact, CDARS Reciprocal
attracts large-dollar deposits from safety-conscious customers, including businesses, nonprofits, government entities, advisors,
and wealthy individuals.2
And, with a reinvestment rate of ~80%3, CDARS customers are likely to stay with your bank, providing ongoing
relationship-building and cross-selling opportunities.
How do Reciprocal transactions work?
Institutions that offer CDARS are members of the Promontory Network. When your 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. Your bank 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.
Of course, if your banks liquidity position changes, your bank, with customer consent, can place customer funds through a
CDARS® One-Way SellSM transaction, which lets
your institution receive fee income instead of matching deposits for its placements.
What else do I need to know?
Customers like CDARS because it lets them work directly with just one bank – yours – for security, convenience, and other benefits.
With all CDARS transactions, you retain complete ownership of the relationship. And, your customer’s confidential information
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 depositors funds through CDARS or a particular
CDARS transaction satisfies those restrictions.
3 As of 6/30/12. 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.
4 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 recently 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.)