Last October, the Emergency Economic Stabilization Act of 2008 was passed. The act, which, among other things, increases Federal Deposit Insurance Corp.(FDIC) deposit insurance from $100,000 to$250,000 per depositor through Dec. 31, 2009, may lead businesses to reassess how their bank accounts are structured. Under the act, businesses can get more coverage than ever before, including increased non-interest-bearing demand deposit account(DDA) coverage. This is leading businesses to keep more money in their DDAs, since they are fully insured until Dec. 31, 2009.
“Businesses need to take stock of where they have their money and understand how banks can help them protect their funds,” says Tanya Lamothe, a vice president and commercial banking relationship manager for Capital One.
Smart Business spoke with Lamothe about the new FDIC limits and how they’ll affect your business.
How do the new FDIC limits affect businesses?
This new rule allows noninterest-bearing deposits to have unlimited FDIC coverage through Dec. 31, 2009. Each bank has the opportunity to decide whether it will participate in the program and, to do so, it must pay additional premiums for the coverage. Previous limits were set at $100,000 based on account type. For example, if a business has an operating account that is not currently earning interest but typically has balances greater than $100,000, the full amount would be guaranteed by the FDIC instead of just the first $100,000.
What about interest-bearing deposits?
Transaction accounts, such as money markets, and time deposits, such as savings and CDs, are limited to $250,000 in FDIC coverage. New rules apply to Interest on Lawyers’ Trust Accounts (IOLTAs) and certain interest-bearing accounts earning less than 50 basis points that are geared only toward sole proprietors, nonprofits and some governmental entities. Though sweep accounts are typically used to invest idle funds overnight, they are not covered by FDIC insurance at any dollar amount. However, euro sweeps are typically invested in deposits denominated in U.S. dollars held offshore and repurchase agreements in highly rated government securities.
How does a sweep repo work?
At Capital One Bank, at the close of each business day a specified dollar amount in the customer’s deposit account is swept into an account held at the Federal Reserve Bank (fed account), which is used to purchase AAA-rated securities for the benefit of the customer. The funds are held overnight by a custodian and are repur-chased from the customer by Capital One on the following business day. The funds representing the liquidation of the securities are swept back into the customer’s account with interest each morning.
The customer’s interest in the securities is reflected on the custodian’s records. The swept funds are not deposits of the bank, they are not insured by the FDIC and are subject to investment risk while they are invested overnight in the securities. In the unlikely event that adverse developments affect the ability to repurchase the securities and pay the customer’s deposit, the underlying securities or proceeds representing their liquidation value will be delivered to the customer.
Is there a way to protect deposits and still earn interest?
Consider placing idle funds in a bank money market account that is earning a higher interest rate. A money market has limitations that allow only six transactions per month. The money market can be used as a holding account until the funds are needed.
By maintaining the higher balances on the money market account, a client is able to maximize the interest earned on deposits that previously may have been placed in overnight sweep accounts. By having an associated noninterest-bearing account and online capabilities, this allows the opportunity to easily move funds into an account that is fully secured by the FDIC if there are specific triggers within the market that cause concern.
A key factor in all of this, however, is to make sure your bank is participating in the new FDIC coverage for noninterest-bearing deposits. Banks will be required to prominently display whether they are in the program. That way, you will know the amount of deposits covered at your bank.
What other options do businesses have right now?
For longer-term investments, ladder funds in bank CDs or through the Certificate of Deposit Account Registry Service (CDARS). By locking in a rate today in a falling rate environment, you have the ability to potentially maximize your return over a longer period of time. Repurchase agreements (repos) are an alternative as dollars are invested in government-backed securities at a locked in rate for a designated term. Though the return is low, but the funds are considered secure.
TANYA LAMOTHE is a vice president and commercial banking relationship manager for Capital One. Reach her at (972) 855-3646 or[email protected].
