More and More Americans Are Gaming the Deposit-Insurance System
A new report looks at the firms that quietly move billions around the banking industry each day. Reciprocal deposits enable banks to place deposits with another bank and receive the same value back through technology firms, reshuffling approximately $1 trillion through their platforms. This deposit-swapping allows banks to offer customers more insurance, a priority after Silicon Valley Bank's failure, where 93% of deposits were uninsured. At the end of last year, around 45% of deposits in the American banking system were uninsured. Invented by Eugene Ludwig in 2002, reciprocal deposits help banks offer greater deposit insurance without forgoing deposit funding. Ludwig's firm, IntraFi, allows banks to place insured deposits around the system while receiving the same value from other locations. IntraFi, the largest firm with 3,000 banks on its platform, has been joined by r&t Deposit Solutions, ModernFi, and StoneCastle Cash Management. These firms are experiencing rapid growth, with reciprocal deposits' value increasing significantly since March. The story asks: All this deposit-swapping raises the question of whether it makes sense to maintain the federal cap. The private sector has come up with a clever workaround to offer more deposit insurance than mandated. It is conceivable that, with several thousand banks in the network, an account could offer deposit insurance for hundreds of millions of dollars. Indeed, StoneCastle offers an account with $125m in deposit insurance. But there is a difference between a private-sector workaround and a public-sector mandate. It is currently difficult to match banks so that all are able to offer such high limits (most offer just a few million dollars' insurance), and reciprocal-deposit firms levy fees, too. They apply on top of the charges, of between 0.05% and 0.32% of the value of total liabilities, that institutions pay for federal-deposit insurance. Abolishing the cap would make insurance pricier across the system; these higher costs would almost certainly be passed on to customers in the form of lower interest rates. Still, if enough depositors seek insurance by spreading deposits around, higher costs might be the result anyway.
Read more of this story at Slashdot.