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- Daily Deposit 3.23.2023
GM. This is the Daily Deposit. The newsletter that helps bankers get better, not worse, everyday
Japan beats USA in the WBC, but we're not taking L's here. Let's talk about sweeps and protecting deposits.
Today in Banking
Extending the bidding deadline for SVB could help the FDIC secure a larger return on the sale. More time for due diligence = more bargaining power for the FDIC
Small Banks protected if Contagion Risk Exists: “Federal regulators would provide similar protections for uninsured depositors at smaller banks as they did at Silicon Valley Bank and Signature Bank, if there is evidence the failures of those smaller banks would pose a larger contagion risk” -Yellen
Banking 101
What is a sweep network, and why is that relevant right now?
A sweep network is a way for customer deposits to be spread across a network of banks. It is not an investment fund, but rather a way to balance cash flow between banks and provide increased FDIC insurance on deposits.
The sweep network allows banks to negotiate with partner banks to increase maximum coverage, and it also bakes redundancy into businesses through account diversification. IntraFi, the most widely accepted sweep network, is a consortium who can provide insurance up to about $150M for some customers. Boy that would've been nice for some of those SVB deposits… But guess who didn't participate in the network?
How does this actually work?
IntraFi offers a couple of different products. CDARS (Certificate of Deposit Account Registry Service) and ICS (Insured Cash Sweep). CDARS enables banks to offer customers access to multi-million-dollar FDIC insurance on CD investments through a single account relationship. More importantly, ICS provideds banks with access to a network of more than 3,000 FDIC-insured banks to help optimize deposit yields and FDIC coverage.
CDARS:
1. A bank signs up with IntraFi to participate in the CDARS program.
2. The bank determines how much of a customer's funds should be allocated to CDs and enters the amount into the IntraFi system.
3. The IntraFi system then automatically spreads the customer's funds across multiple CDs at different banks in the network, up to the FDIC insurance limit of $250,000 per bank.
4. The customer receives one consolidated statement from the bank, simplifying account management.
5. In the event of a bank failure, the FDIC insures the total amount of the customer's funds across all participating banks, eliminating the need for the customer to track the insurance coverage at each individual bank.
ICS:
Basically the same process as CDARS, but focuses on cash deposits rather than CDs.
Not only does this maximize coverage on deposits, it saves businesses time and money. Who really wants to juggle a dozen or more different banking relationships to access more insurance? Instead, they get to deal with their 1 homie bank and reap the benefits of multiple accounts.
These programs have to be disclosed to customers, who must opt into the program. Banks using the network will typically provide a list of banks where funds were located on their monthly account statement. Caution! Review this list prior to opting in. Wouldn't want deposits flowing into someone like First Republic or PacWest right now…
None of this actually changes the way customers bank. The primary bank will remain the main point of contact, and business can be conducted as usual with every dollar in the account(s).
Is IntraFi the only option?
Yes and No… There's 2 others in this space. StoneCastle and MaxMyInterest
StoneCastle
Runner up in size at more than 800 FDIC-insured banks in the network is StoneCastle. They are a leading provider of cash management solutions for banks, and help them optimize their deposit yields and FDIC coverage. The flagship product is StoneCastle Cash Management (SCCM). SCCM offers a proprietary sweep algorithm (fancy) that auto-sweeps excess cash money to the highest-yielding deposit accounts within the network.
MaxMyInterest
Brutal name, and a network size to match. Only ~100 banks participate in this one. MMI also offers a cash management solution for individuals and institutions. Same deal as StoneCastle but smaller.
How do they compare? IntraFi primarily serves banks and their customers, while StoneCastle and MaxMyInterest serve both individuals and institutions. The other key difference is the size of their bank networks. IntraFi's network includes over 3,000 banks, while StoneCastle's network includes over 800 banks, and MaxMyInterest's network includes over 100 banks.
In light of liquidity crises and depositor panic over protection, I really wish I had some stock in IntraFi. They solve a lot of the immediate pain points we're seeing in the market right now. Banks across the country are scrambling to participate in the sweep network. Those banks already part of the gang are updating disclosures, blogs, and marketing for their customers, who just want to be swaddled in the warmth of a cozy sweep blanket.
Till next time banksters…
LULZ
reply with a Cold Stone bowl score… did you:
a) like it
b) love it
c) gotta have it