Sunday, September 28, 2008

Chronicles Of Depression 2.0: #262: CDARS

Life after your bank fails
For small businesses with six-figure sums socked away, a bank failure can be a devastating blow.
NEW YORK ( -- When recruiting consultant Fran Quittel heard on her car radio one Friday afternoon in July that her bank, IndyMac, had been seized by federal regulators, she was surprised but unworried. An IndyMac customer for five years, Quittel had both personal accounts and business accounts at the bank, but she was confident her accounts contained less than the $100,000 insured by the Federal Deposit Insurance Corp.

But as Quittel delved into her banking details that weekend, she got an unexpected shock. Her business savings account was temporarily sheltering a chunk of funds awaiting deposit into her 401(k), and her business checking account still contained the money for an uncashed payroll check. The combination pushed the total stored in her business accounts over $100,000 - and when federal regulators closed IndyMac, Quittel immediately lost access to a portion of her uninsured funds.

The ABA also recommends that small companies consider tapping CDARS, a five-year-old system designed to offer FDIC protection for amounts far greater than the standard $100,000 limit.

CDARS, which stands for Certificate of Deposit Account Registry Service, is a financial service created by the Promontory Interfinancial Network in Arlington, Va. CDARS works by farming out large deposits across multiple banks within its network. Funds are then invested incrementally in multiple CDs, with no single bank holding more than $100,000. If any individual bank fails - as several CDARS members have - the CDs it holds will be of a low enough value to be fully covered by the FDIC.

CDARS is free to depositors, and can insure deposits of up to $50 million. Member banks pay a one-time fee to join the network and thereafter pay transaction fees on the funds they pass through CDARS. Most of the network's 2,500 banks are small community banks - the average asset base of members is $250 million, according to Mark Jacobsen, president and COO of Promontory Interfinancial Network.

Businesses make up the bulk of CDARS customers, accounting for 37% of its volume. Individuals, public entities like local governments, and banks themselves are also major customers.

Emphasis added by me.

Quittel is hardly alone in being caught out: 10,000 depositors at IndyMac had uninsured deposits, totaling $1 billion. More broadly, about 37% of the $7.07 trillion on deposit with U.S. banks at the end of 2008's first quarter is uninsured, according to a Wall Street Journal analysis of data reported to the FDIC.

Emphasis added by me.

Trillions uninsured!

If you own a small business that has more than $100,000 in deposits, click the link to be led to CDARS.

It's not fail-safe in a crisis like we're facing, but it's better than relying on the FDIC.

No comments: