To face competition from the big banks, which have taken advantage of the recent crisis to attract customers, small US establishments are offering to guarantee deposits well above the regulatory ceiling, dividing them among themselves.
Insured funds up to $250,000
The back-to-back failures of Silicon Valley Bank (SVB) and Signature Bank in early March reminded Americans that in the United States, funds were only insured up to $250,000 per client and per institution, even if, in the case of these two banks, the American authorities decided, exceptionally, to guarantee the entirety, to reassure public opinion.
In the mess, many clients took refuge in the big names in the market, which saw their deposits jump, in a week, by 120 billion dollars, taken almost entirely from smaller institutions.
To counteract this trend, some no longer hesitate to communicate about a service that until now was relatively confidential, which allows you to distribute your deposits among several banks and never exceed, in any of them, the limit of $250,000.
Leader Bank offers to cover up to $100 million
The mechanism thus multiplies the guarantee, to the point that Leader Bank, a small Massachusetts cartel, offers to cover up to 100 million dollars.
Specifically, the establishment keeps only $250,000 and distributes the rest through a network set up by the technology company IntraFi, on a reciprocal basis.
The formula attracted Jennifer Klepper, co-founder of startup incubator Early Works.
Last fall, he began looking for “two things” for his company: a better interest rate and putting our money in protected accounts, he says.
If IntraFi, American Deposit Management (ADM) or even Wintrust and its MaxSafe system, all competitors in this niche, comply with the legislation, they are not immune from criticism.
Risks transferred to the FDIC
These platforms “make profits and transfer all risks to the FDIC”, the Deposit Guarantee Fund, denounced this week the former head of this government agency (from 2006 to 2011), Sheila Bair. She had already accused these services of “circumventing the system” in the past.
For Jay Tuli, president of Leader Bank, the practice tends, on the contrary, to “reduce risks because it avoids the concentration of large deposits in a small number of banks.”
Another counter-argument, that of Tom Geiger, CEO of Heritage Bank, according to which clients who benefit from the mechanism know all their guaranteed money and “do not have to give in to a bank run”, such as the one that resulted in the fall of SVB unable to cope with massive withdrawal demands.
Since the beginning of the banking crisis, several elected members of Congress, both Democrats and Republicans, have suggested reviewing the operation and scope of deposit insurance by the FDIC.
Democratic Sen. Elizabeth Warren called for an increase in the ceiling, without giving a number.
A subject still taboo for many
Most banks that are members of a deposit distribution network, also called reciprocal deposits, still refuse to talk about it.
It does educational work, as does Leader Bank and a handful of others, who have even dared to use it as a promotional tool.
“As soon as SVB’s bankruptcy was announced, we started publicizing it,” recalls Jay Tuli. The operation paid off and Leader Bank captured, in a week, about 100 new business accounts, its specialty, or “the equivalent of six months of activity,” according to the manager.
As in 2008, during the financial crisis, the generally avoided issue of deposit guarantees is once again exciting.
“We talk about it a lot, especially among start-ups,” according to Jennifer Klepper, because young companies, some of which have come close to disaster at SVB, are often less financially strong.
A few months ago, “it was difficult to find information” on the distribution of deposits, “but now we see that more banks are raising it.”
Source: BFM TV
