The bank failures in the 1930s may
be hard to remember for some
today, but the failures of savings and loans and banks in the 1980s are
not. Unsuspecting depositors were left
with losses on accounts above the
insured limits.
But today, there’s actually a way to
safeguard against that. It’s called the
Certificate of Deposit Account Registry
Service (CDARS®), a network of 1,733
banks that allows a single client to
insure up to $50 million in CD deposits
by distributing them throughout the network.
Smart Business spoke with MB
Financial Bank Vice President Paula
Sheffield about what advantages a commercial client can experience through
using CDARS.
What is CDARS?
CDARS stands for the Certificate of
Deposit Account Registry Service. It’s a
computerized process that allows a
company’s large CD deposit to be distributed among multiple banks in
amounts below the insured limit, therefore ensuring that all the money is
insured by the FDIC. The FDIC doesn’t
guarantee accounts over $100,000, so
anything under that limit per bank
would be insured.
As opposed to going around town to
open accounts in multiple banks, everything is done by computer. Plus, the
client receives one statement and one
rate on all of its CDs. The client only has
to deal with one bank, and that makes
the whole process more convenient
because it avoids the hassle of opening
and tracking multiple accounts.
The CDARS network includes 1,733
banks, which allows it to insure up to
$50 million in CD deposits per person by
distributing them throughout the network. It was started by a company
called Promontory Interfinancial Network, which was founded by Eugene Ludwig, former comptroller of the currency and current company chairman.
The vice chairman is Alan Blinder, former vice chairman of the Federal
Reserve. The president of the company,
Mark Jacobsen, is a former FDIC chief
of staff.
What are the maturity options?
A client’s CD can be opened in maturities ranging from four weeks, 13 weeks,
26 weeks, one year, two years and three
years. Four weeks is pretty liquid, so
even if a client needs the money soon, it
doesn’t have to wait too long. But if a
client breaks out of any of the sub-CDs,
the penalties are steep. The client would
lose all of the interest it would have
earned on a four-week or 13-week CD.
For CDs with longer duration, it would
lose half of the interest it would have
earned.
No matter how the money is spread
throughout the network, all the CDs
bear the same maturity date and rate.
And the client receives one regular
statement detailing the balances of all the individual CD accounts and interest
earned.
How does CDARS work?
Let’s say a client has $5 million to
deposit in the bank. If the client’s bank
is part of the CDARS network, it will use
the network to distribute portions of the
cash — maybe in 60 smaller chunks to
stay under the insured limit per bank of
$100,000 — to other bank members of
the network, saving the client the time
to open different accounts at different
banks.
Every time the bank purchases a CD
for the client, the other banks in the network simultaneously deposit precisely
the same amount back into the client’s
main bank in separate accounts, where
it will fall under the $100,000 insurance
limits. The money never really leaves
the client’s main bank, but now it’s all
insured.
Are there any fees the depositor has to pay
for the service?
Banks pay a one-time fee based on
their size to join the network and a small
fee for each CDARS transaction. The
client does not pay any fees. The CD
rate offered by the initial depositing
bank is the same CD rate received by
the client, no matter where the smaller
segments of money are deposited.
Banks participate in the network
because having the ability to distribute
the insured deposits allows them to
attract larger deposits, retain them and
keep important customer relationships
intact.
Who are members of CDARS network?
Go to www.cdars.com and click on
‘Where to Find CDARS’ for a state
locator.
PAULA SHEFFIELD is vice president of MB Financial Bank in Chicago. Reach her at (847) 653-2403 or [email protected].