Protecting Your Bank Deposits Over $100k
September 14th, 2008 NancyOctober 21, 2008
Note: Lots has changed in the month since I wrote this post! Among other things, the FDIC insurance limit is now $250,000; otherwise, the article below remains current.
Quick, what does FDIC stand for? Most accountants, finance managers and board members know that cash deposits in banks are insured for up to $100,000 per depositor, and the Federal Deposit Insurance Corporation is the insurer. They also know that any deposits in excess of $100,000 are at risk: if the bank fails, you are not likely to get all of your money back.
A year ago, bank failures may have seemed like a remote bad dream. Now, we are watching as large banks go under. Is your nonprofit at risk? Its board or management team may think of their organization as small and cash poor, yet even small not for profits can find themselves with more than the FDIC insured amount deposited in their bank.
If your organization is at all successful in building reserves, it’s likely to have well over that $100,000 amount in cash or money market deposits. If it receives large grants in advance, chances are it’s in the same leaky boat. You can reduce your risk of losing those excess amounts to 0% (yes, zero) by opening accounts at several banks and moving money around when it’s needed. That means, if you have $500,000 in reserves, you’re dealing with at least five different banks. There’s an easier way to get to 0% risk that you may want to consider.
CDARS stands for Certificate of Deposit Account Registry Service, LLC. Banks become members of the Service and then make deposits on behalf of their customers at other member banks. The service makes sure that none of the deposit accounts carries a balance in excess of $100,000. The interest rate you negotiate applies to all the accounts, and they are all presented on one monthly statement to you.
More than 2,200 banks are members of CDARS as of this writing. Most of them are community or regional banks that are too small to be able to compete with big banks in this arena, so it’s likely that there’s a bank in your area that offers access to this system.
I’ve researched CDARS a bit in an attempt to find out what’s in it for the banks on the theory that someone is making money on this set-up. What I’ve discovered is that small banks benefit from having a network to help them with their own cash flow and depository issues, so they benefit directly without charging or - it seems - paying a fee.
The one draw-back to buying CDs through CDARS may also be an advantage. When you sign a CDARS agreement and deposit money with your bank, you will negotiate a CD rate that will apply to all the CDs your money purchases, even if the bank that ultimately ends up with your money would have offered you a higher rate if you had deposited it directly. It’s also true that you might have been offered a lower rate by said bank, in which case it becomes an advantage to be with CDARS. And you haven’t had to spend time making a phone call or visiting a bank or requesting a proposal - and that seems like a true advantage!
You can find a list of banks that participate in CDARS at www.cdars.com, where you can search by state or by bank name.