Skirting $100,000 FDIC limit

Swapping: A new service allows banks to federally insure accounts of up to $1.5 million.

December 02, 2003|By Paul Adams | Paul Adams,SUN STAFF

As corporate scandals and a sluggish economy sent stocks tumbling in recent years, Cecil Federal Savings Bank in Elkton noticed that jittery investors were eager to put their cash back into the safety of a bank savings account.

But until recently, customers were reluctant to deposit more than the $100,000 limit covered by the Federal Deposit Insurance Corp., depriving the small community bank of a larger share of deposits.

A new service is allowing Cecil Federal and a growing number of small Maryland banks to safeguard funds beyond federal insurance limits by swapping customer deposits through a nationwide network of banks. Less than a year old, the Certificate of Deposit Account Registry Service is helping banks - including eight in Maryland - to insure individual deposits of up to $1.5 million while keeping more of their customers' money circulating in the local community.

"This gives depositors a chance to keep their money in the local community where it can do some good," said Charles F. Sposato, chairman of Cecil Federal. "It helps people in the community to buy houses because banks have money to lend. Businesses, too, so it's a great upward spiral effect."

The idea is the brainchild of Promontory Interfinancial Network LLC, an Arlington, Va., financial services consulting company headed by Eugene A. Ludwig, a former comptroller of the currency. The company has signed up more than 500 community banks nationwide and expects to eventually attract several thousand. The company charges a fee that varies depending on the size of the customer's deposit and other factors, but doesn't disclose its sales.

"For a class of savers, this gives them a convenient way to save, a better way to save and a better rate of interest," Ludwig said.

Bank failures are rare, but customers who deposit more than $100,000 in a single account stand to lose big. During the past decade, the FDIC has returned an average of 73 cents on the dollar for uninsured deposits after banks fail. In 2002, U.S. banks held about $3.8 trillion in domestic deposits, of which about $2.5 trillion was insured.

Under Promontory's registry, an individual customer or business with $500,000 could place the entire deposit in one bank without worry. The first $100,000 would be placed in a certificate of deposit at the customer's regular bank, while the remaining $400,000 would be divided among other registered banks in $100,000 increments.

The other banks would return the favor with deposits from their own customers, allowing the originating bank to receive the full benefit of the $500,000 deposit. In effect, it's as if the $400,000 never left the bank. The service recently expanded to individual retirement accounts.

"They can keep all of their accounts at one bank and have the comfort of knowing they are FDIC-insured," said Jack H. Goldstein, president and chief executive of NBRS Financial, a bank in Rising Sun that has signed on to the registry. "The nice thing is that this puts us on par with bigger institutions."

Historically, customers with large deposits have had to divide their funds among several banks, or open several types of accounts within one bank. Both methods can be complicated, time consuming and inconvenient for those who want to keep track of their funds through one account.

Large banks often back such deposits with collateral or by spreading the deposits among several bank subsidiaries.

Ludwig said a Treasury Department report released earlier in the year showed that 2.5 million U.S. households have more than $100,000 in the bank at any particular time and an equal amount split their deposits among several banks to stay under the FDIC limit.

"I think it's a nice system because it negates the importance of the $100,000 insurance limit, which Congress isn't going to raise anytime soon," said Bert Ely, a banking industry consultant in Alexandria, Va.

Cecil Federal and NBRS Financial have been part of the registry for about a month and each has signed up a half-dozen customers. It generally takes time for deposits in the registry to grow because most customers have their money tied up in long-term certificates.

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