Insured Cash Sweep® and CDARS®: A Game Changer for Banks and Local Communities
In the past, many large-dollar depositors, such as public entities, institutional investors, and nonprofits, were reluctant to deposit their cash at small banks because their deposits could only be insured up to $250,000. They feared losing money if their bank failed. In effect, small banks were penalized for their size on the mistaken belief that small automatically equaled risky. This changed in 2002 when Promontory Interfinancial Network began offering the first “reciprocal deposit” placement service—CDARS® and, later, another called Insured Cash Sweep, or ICS®.
Now, many institutional and individual investors are embarking on a flight to safety, moving funds out of the stock market and into cash to manage volatility during these challenging economic times brought on by the COVID-19 pandemic. For banks that are part of Promontory Interfinancial Network’s network of banks, this shift represents an opportunity to offer customers access to multi-million-dollar FDIC insurance while using reciprocal deposits as a cost-effective way to build a stable balance sheet, acquire more funds to lend, and help the local community.
Reciprocal deposits are those that a bank receives through a deposit placement network in return for placing a matching amount of deposits at other network banks. This means that a bank that participates in a deposit placement network can attract and retain a greater amount of deposits from local customers. Promontory Interfinancial Network, the inventor of reciprocal deposits, offers the nation’s leading reciprocal deposit placement services, Insured Cash Sweep and CDARS.
How Insured Cash Sweep and CDARS Work
Nationwide, thousands of banks use ICS and CDARS to provide safety-conscious customers with access to FDIC insurance beyond the traditional $250,000 per insured bank, per depositor (for each account ownership category). By splitting a customer’s original deposit into smaller increments—each below the standard FDIC insurance maximum—and placing it into deposit accounts at other banks, Insured Cash Sweep and CDARS enable safety-conscious customers to access multi-million-dollar FDIC insurance through a single bank relationship.
The Insured Cash Sweep service provides access to FDIC insurance on funds placed into demand deposit accounts and money market deposit accounts, whereas the CDARS service provides that access on funds placed into CDs. Reciprocal deposits are “sticky.” (CDARS reinvestment rates are approximately 80 percent1, and banks typically see less than 5% of ICS Reciprocal accounts liquidated in any given month even as total accounts and balances steadily increase.2) And, the institution accepting the deposit maintains a relationship with the depositor—typically a locally-based depositor. The safety-conscious customer is often a government organization (such as a city or county treasurer or a public school district), an institutional investor, a nonprofit, or another depositor that would otherwise
- make a large deposit in a large money-center bank, rather than a community bank (foregoing access to FDIC insurance for most of the deposit and relying on large rating agencies, like Standard & Poor’s and Fitch, and then tracking the ratings over time);
- require that a bank collateralize or otherwise secure the deposit with Treasuries or other ultra-safe, highly liquid government securities (an added cost for the bank that could lead to the customer receiving a lower interest rate if the bank adjusts its rate to compensate for the added cost it incurs); or
- manually split its large deposit among multiple banks (which requires negotiating different interest rates, signing multiple agreements, receiving multiple statements, etc.).
Bank customers enjoy peace of mind and the convenience of working through one institution. Participating banks can grow relationships and deposits from a local customer base without losing either to larger institutions, without the added costs or tracking burdens associated with ongoing collateralization requirements, and with the ability to lend the amount of these relatively low-cost funds locally. At the end of the day, it’s a win-win for banks and their customers.
Most Reciprocal Deposits Are Considered Core Deposits
In recent years, community banks have received relief from certain rules and regulations through the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among the law’s many provisions, most reciprocal deposits are considered core deposits. The nonbrokered status of most reciprocal deposits presents an opportunity for banks to grow core deposits, attract high-value relationships, and make cost-effective funding available.
Reciprocal deposits held by an FDIC-insured depository institution are considered core as long as:
- The bank is well capitalized and has received an “outstanding” or “good” on its most recent examination; and
- The total amount of reciprocal deposits held does not exceed the lesser of $5 billion or 20% of the bank’s total liabilities.
A bank that drops below well capitalized can continue to accept reciprocal deposits without a waiver from the FDIC, so long as the bank does not receive an amount of reciprocal deposits that causes its total reciprocal deposits to exceed a previous four-quarter average.3
Bank-to-Bank Connections – Helping Community Banks Help Each Other
Why would a bank agree to take Insured Cash Sweep or CDARS deposits from another bank, essentially helping that other bank? Because in a reciprocal deposit allocation service, each bank is sending an equal amount of customer deposits to other banks. Exchanges occur on a dollar-for-dollar basis so that each participating bank comes out whole.
This benefits banks and local communities across the United States in several ways, helping Main Street banks to attract and retain the amount of deposits from local customers by
- expanding the availability of deposit funding for such banks;
- providing banks with more funding to make loans within their communities;
- potentially lowering the cost of funding for banks over time; and
- enabling banks to compete more effectively with larger, too-big-to-fail banks for stable funding.
As a result, banks have a larger source of stable deposits. And banks can replace more expensive deposits, like brokered deposits, routinely collateralized deposits, and those from listing services, with reciprocal deposits received by using CDARS and Insured Cash Sweep.
With CDARS and Insured Cash Sweep, banks can help more customers—including businesses, nonprofits, municipalities, financial advisors, and even individuals—safeguard their funds, potentially at even higher levels, while at the same time attracting locally priced, large-dollar deposits, the full amount of which can be used to make loans locally. These are loans that can launch new businesses or help existing ones to expand, creating jobs and providing much-needed services for a community, or that can help individuals to finance a new home, college expenses, and more.
Built on relationships and serving as pillars of the community, Main Street banks are the engines behind small business growth and a key source of stability, helping many individuals not just to weather, but to shine through key events in life, including challenges like those presented by COVID-19. Armed with reciprocal deposits, representing another arrow in their quiver, banks can do more—billions of dollars more—both to help customers meet their desire for safety and to fund additional lending that otherwise might not take place. This helps communities across the United States.
If you are a banker who wants to learn more about reciprocal deposits and how they compare to other funding or deposit-gathering alternatives, please visit https://www.promnetwork.com/solutions/banks/grow-franchise-value-with-reciprocal-deposits.
Download Printable Version
 Through 3/31/20. Promontory Interfinancial Network calculates the reinvestment rate by determining whether a particular customer’s funds were reinvested within 28 days of maturity.
 Calculated for reach of the 12 months preceding March 2020. The ICS Reciprocal account closure rate for a given month is the number of reciprocal accounts closed during the month as a percentage of the total number of reciprocal accounts at the beginning of the month. The number of reciprocal accounts closed during the month is the number of non-zero-balance reciprocal accounts withdrawn to zero dollars during the month and not returned to a non-zero-balance during the month or the subsequent two months.
 As under current law, interest rate restrictions will apply.