CDARS: Beat the $100,000 FDIC limit

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In October 2008, the FDIC insurance limit was raised to $250,000 from $100,000, effective until Dec. 31, 2013.

When Joan Delaney’s elderly father began losing his sight and hearing, he decided to sell his house and downsize his lifestyle. The sale, along with a lifetime of smart financial management, left him with a sizable amount of money to invest. Given his advanced age, the stock market was out; certificates of deposit were in.

Delaney was put in charge of depositing the money in various banks so that it would all be FDIC-insured.

“He was always saying, ‘Don’t put more than $100,000 in any one bank,'” Delaney remembers. “But it’s time-consuming running from bank to bank. I was trucking Dad around to the banks to sign power of attorney cards. And back when CD rates were high he wanted things moved from one bank to another.”

The law changed in April 2006 to allow certain retirement accounts to be covered up to $250,000 by the Federal Deposit Insurance Corp., the $100,000 limit still applies to ordinary accounts. In addition, there’s a program that might have solved Delaney’s problem. It allows you to keep up to $50 million — should you be so fortunate — invested in CDs at one bank, and have it all covered by FDIC insurance. It’s called the Certificate of Deposit Account Registry Service or CDARS, pronounced “cedars.”

Here’s how it works.

Sally Jones has $130,000 she wants put in CDs in bank A. Bank A gives her CDs worth $95,000 — leaving a little room for interest — and sends Sally’s remaining $35,000 to a company that knows bank B will issue Sally a CD for the remaining $35,000. In return, bank B buys $35,000 in CDs for its customers from bank A.

The company in the middle is Promontory Interfinancial Network. It acts as a sort of clearinghouse, matching deposits from one institution with another so funds that a bank places with CDARS essentially remain on the bank’s balance sheet.

“Prior to CDARS, if you wanted to insure more than $100,000, you had to do it through (different categories of legal ownership.) Now you can title it any way you want and we can cover it through the CDARS program,” says Russell Pemberton, vice president at Pulaski Bank.

Your bank sets the interest rate for the CDs bought through other banks. If Sally wants her excess money to buy a two-year CD and her bank, bank A, is paying 2 percent on that maturity, then bank B will issue the CD at 2 percent even if they’re paying more or less.

“From the customer’s perspective it’s invisible,” says Promontory’s President Mark Jacobsen.

“If I’m paying more for your customer’s money and you’re paying less for mine, we swap the difference at present value. Say the difference is $250, you’d give me the $250 up front and then it’s like we’re issuing CDs at the same rate.”

One drawback to the convenience of CDARS is that you can miss out on higher CD rates offered by banks other than your own. If you’re willing to do a little extra legwork, you could get around that by finding a bank in the CDARS network that you believe consistently offers higher rates and open an account with them specifically for CDs.

Another factor is that banks pay a fee to join the network and then pay transaction fees. Some banks pass those costs on to CD buyers by reducing the interest rate, says Angela Baker, treasury officer at Allegiant Bank.

“We set CD rates every Tuesday and we’ve built in those transaction fees for CDARS. We reduce the baseline interest rate by 15 basis points across all maturities.”

Pemberton says customers are willing to pay for the convenience.

“We price CDARS (interest rate) a little bit less than one of our weekly CD specials. The value with CDARS is the extended FDIC coverage. You’re going to pay a little something for that. People have been very receptive; they understand the value.”

Adding to CDARS value is the convenience factor of one consolidated statement from your bank detailing your CDs. But while you know exactly where your money is, the other banks don’t know you by anything other than an account number. The only institution, other than your own bank, that sees your personal information is the Bank of New York, which handles the CD transactions for all the banks in the CDARS network, according to Jacobsen.

Eventually, you should be able to place a CDARS order any business day, but for now, orders are placed once a week. The minimum order is $10,000. In other words, you’d need $100,000 on deposit in your bank and at least $10,000 for deposit in another bank within the network.

There are more than 2,000 institutions currently in the network, primarily community and regional banks. Promontory is run by three former banking regulators who, according to Jacobsen, former chief of staff of the Office of the Comptroller of the Currency and also of the FDIC, wanted to help smaller banks compete on the national level.

“It’s done by developing the notion of synthetic size. It’s a way to help banks work together, work more effectively. Most of these institutions don’t have direct access to the capital markets. They have higher cost of funds, and more of a need to raise funds locally. When a Bank of America borrows, it gets money (at a very low rate). Most of our banks can’t even fathom that.”

Joan Delaney says the CDARS program may mean CD investors will be better informed about protecting their money through FDIC insurance.

“Every time I would go to a bank and move things around I would specifically ask about FDIC insurance. They never said anything to me like, ‘Are you aware that cumulatively you have more than $100,000 in this bank and you’re not insured?’

“After all, they give better rates on jumbo CDs. I wouldn’t say they lie. It’s just if you don’t ask the right questions, they don’t volunteer.”

Check the
CDARS Web site for a list of banks participating in the CDARS program.

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