Why Weren't Silicon Valley Bank Depositors Using CDARS?

Silicon Valley Bank seems to have had large amounts of uninsured deposits from businesses and high net worth individuals. And those uninsured deposits are likely to be impaired in the receivership, meaning that they will not get paid 100 cents on the dollar whenever they do get paid.

But here's the thing:  there are turnkey products that enable depositors to insure much, much larger amounts than the FDIC-insurance cap of $250k/depositor/account type. For years and years there's been deposit brokerage services that spread out deposits at multiple banks, all in amounts under the FDIC insured cap. The best known service is called CDARS-Certificat of Deposit Account Registry Service. It's offered by IntraFi (formerly Promontory). I don't know if SVB participated in CDARS, but it's a pretty straightforward solution to the deposit insurance cap.

Here's how it works. Instead of having, say $10 million in one bank with only $250k insured, it's spread around 40 banks in $250k increments. It would be a pain to have to open 40 bank accounts, however. CDARS solution is to have a bunch of banks in its network: they banks want to join because it's a way for them to get large deposits without having any customer relationship.  So with CDARS, you deposit $10 million in one bank, which then opens up accounts in its name for your benefit at other banks. Even though the accounts at the other banks are not in your name, you benefit from FDIC pass-through insurance on those account.

There are some drawbacks to CDARS. First, the deposits are illiquid as they're locked up in CDs, so if the depositor needs access before the CD matures, it will pay a penalty. Second, CDARS also offers a limited set of term options for the CDS, which can complicate things for depositors whose liquidity needs don't match the term options. Third, the returns on CDARS CDs are lower than market rates because the banks pay a fee for access to the CDARS network. And fourth, CDARS has a $50 million cap, but I believe that's $50 million per depositary bank, meaning that if you wanted to insure $250 million, you'd need to have 5 separate $50 million relationships, each of which would get farmed out. 

UPDATED:

Other deposit brokerage products work differently. For example, IntraFi itself has ICS--IntraFi Cash Service--that does not involve locking funds up in CDs. The point here is that if you want to keep millions of dollars in insured deposits, it's entirely possible to do, but might come with some liquidity costs and (unavoidably) lower investment returns. This is the sort of thing that any corporate treasury professional ought to know about, which raises the question of why so many businesses apparently had large, uninsured deposits at SVB.

I do not know if SVB participated in CDARS (they aren't listed on the IntraFi network, but I don't know if that's a post-receivership change or not), but it's been drawn to my attention that SVB did in fact offer reciprocal deposit services. SVB's 12/31/22 call report (p.33) lists $469 million in reciprocal deposits. That's a small fraction of the uninsured deposit balances. Why SVB wasn't pushing this offering more, or why clients weren't taking it isn't clear. But the mere possibility of a reciprocal deposit brokerage service makes the businesses that got trapped at SVB look a bit less sympathetic.

Comments

[Bob Lawless]

This is exactly my question too. I don't know the CDARS market. My guess is that, at some point, the cash balance is so much that CDARS is not a practical alternative. But, as you point out, you can effectively insure a lot of bank deposits. It still leaves one wondering whether the relative success of our banking system lulled a lot of corporate money managers into complacency. They seem to have forgot the first principle I teach my students . . . you don't have "money in the bank," you have an unsecured promise from the bank to pay you back.

[AJC]

Adam IntraFi Network Deposits, the banks and brokerage firms that participate in the program do a terrible job at marketing this product. Every bank, credit union and brokerage firm should offer this to their clients. IntraFi and the participating institutions act as if this is a super secret program.

[AJC]

I checked the IntraFi Network Deposits website, and Silicone Valley Bank did participate in their program.

[Dwight]

I was wondering about this, thanks. If depositors in SVB (and all banks) each had funds for 3 months payroll protected through FDIC/IntraFi, we wouldn't be hearing how important it is to rush through a bailout for all the people about to lose jobs.

[AJC]

American Deposit Management Company is another option for increasing the FDIC coverage beyond $250,000.00 for a banking account. Why didn't the CFOs know about this?

[TM]

From the trenches of private practice:
1. Not clear how nimble/agile these services are in getting out larger amounts of money (for ex., debt service payments) but this can be managed and should not be a barrier to using these services or other risk management tools.
2.SVB forced a lot of its clients to sign exclusivity agreements in exchange for other services. This use of exclusivity agreements is clearly an issue that bank regulators need to consider.
https://www.cnbc.com/2023/03/12/silicon-valley-bank-signed-exclusive-banking-deals-with-some-clients.html

[Anna Gelpern]

The argument from the unlimited DI folks (see Menand-Ricks op ed) is that split and brokered deposits and cash sweeps are a contorted runaround DI limits. The counter is that it is a clean way to charge for/disincentivize deposit concentration in the existing institutional regime.