Protect Your Company’s Uninsured Deposits

My first accounting job was as the Bookkeeper for the March of Dimes in Seattle while I was in college. We had one big fundraising event that provided most of the cash needed to fund our operations for the year. Our cash balances after that event rose to a few times the maximum government insurance limit for our deposits at one bank. Like many nonprofits, our policies did not allow us to have uninsured deposits. I would open CDs, savings, or MMA accounts at a few local banks to insure all our deposits and maximize the rates we received.

I was cheap labor executing a simple strategy. I received a good workout running around downtown when placing those deposits. However, there are easier ways for companies to protect their deposits. 

Deposit Placement Services

Think of deposit placement as the automated version of having your bookkeeper run all over town to open CDs. In these services, a bank joins a network of other banks that send and/or receive deposits from each other. Any amounts one bank receives from certain customers that exceed the insurance limit are sent to other banks in amounts no greater than the insurance limit.

Here’s an example. You have $700,000 in deposits at your bank. They will keep $250,000 of it. They will send the remaining $450,000 to the network. The network deposits $250,000 in one bank and $200,000 in another bank. Your full $700,000 is insured because you have no more than $250,000 at any one bank. Your bank sends a single statement showing your $700,000 and listing the banks where parts of your deposit were sent. The interest rate you receive is set by your bank, not the other banks. You do not receive marketing or statements from those other banks. Not all banks belong to a deposit placement network and offer this service.

Placement services originally only placed CDs into the network. Now, a customer’s funds can be transferred each night into the network, so other types of deposit accounts are processed by these networks. It’s similar to a sweeps program that I’ll explain later. These networks can be quite large, allowing a single customer to place millions at one bank for distribution to multiple banks.

Brokered CDs

Banks that offer brokered CDs often offer two types of CDs:

  • Direct to depositors via their website or branches like all other banks do
  • Via brokers

A business that wants the latter would ask their investment advisors to find these brokered CDs or would buy these CDs themselves via an online brokerage platform.

All interest payments are received in your brokerage account. They act very much like bonds. The transactions between the issuer bank and the broker and customer account follow the same clearing process (i.e., routed through the same companies and processes) as bonds. The CDs are reflected on your brokerage statement. You don’t receive any mailings, tax forms, or statements from the issuing bank; they come from the broker. You “buy” and “sell” these CDs just like bonds.

Not all banks offer brokered CDs. Those that do often need more deposits than their local market can provide at a reasonable rate. The brokered CD market allows them to tap into the vast capital markets. I’ve issued brokered CDs many times at banks I’ve worked at with strong loan demand.

Brokered CDs have some differences from the CDs that banks offer directly to their customers:

  • You can’t withdraw a brokered CD before its maturity. You must sell your CD if you need the cash before maturity. Like selling a bond, you will sell the CD for a loss if market rates have gone up since you bought the CD. You can sell it for a gain if rates have gone down.
  • It may be easier to find floating-rate brokered CDs than directly from local banks.
  • The rate you receive may be higher or lower than CDs directly issued to bank customers. The two types of CDs are competing for your dollars in two different markets. Those markets have very different efficiencies and supply/demand curves.

You are only insured up to the standard $250,000 insurance limit for each bank issuer. Thus, you must buy multiple brokered CDs from different banks to protect large amounts of money. The efficiency of brokerage accounts makes investing in multiple CDs easy. It’s much easier to pay a small brokerage fee than sending your bookkeeper around town. Labor laws also frown on having your bookkeeper run miles across the state or country to invest in CDs. You can buy brokered CDs from any bank in the country with the push of a button.

Companies may choose brokered CDs instead of bonds because they offer the U.S. government’s full faith and credit protection at rates that are often higher than Treasuries with the same protection. That protection is provided through the brokered CD’s deposit insurance.

Collateralized Deposit Products

Some banks are willing to pledge a portion of their bond portfolio as collateral to depositors who have large uninsured deposits. They only do this for some deposit products. There was more demand for this during the Great Recession. Some banks were willing to provide it. The customer demand for this spikes when there are fears about the banking system. Depositors often receive lower interest rates or have to pay a fee for this product.

Reverse Repurchase Agreements (Reverse Repos)

Larger companies may enter into reverse repurchase agreements, known as “reverse repos,” with or through their banks. In a reverse repo, a company buys securities from a counterparty that agrees to buy back the security in a very short term in the future (i.e., less than 90 days). This short term allows the securities to be classified as cash equivalents.

At the end of the term, the counterparty buys the securities back at a higher price than the company paid. The spread in prices is how the company earns income from the transaction. Those yields may be higher than other deposit options.

Rather than using collateral or insurance to protect their funds, the company directly owns the bonds to protect themselves. These bonds are usually U.S. Treasuries or high-quality bonds. If the counterparty fails to buy back (i.e., repurchase) the bonds, the company sells them via their broker.

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