How to Safely Exceed FDIC Limits

A banking program can help you spread your money around to different institutions.
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With the banking world back into doom-and-gloom mode, safety is the name of the game for investors and savers.

Many of those looking to keep large amounts of cash safe have fled to 10-year Treasury bonds, which were yielding about 2.18% on Jan. 15. Of course, those investors face some capital risk if they sell the bonds.

To play it even more safely, investors may consider three-month T-bills, but they were only yielding 0.10%. Six-month bills yielded 0.72%.

Meanwhile, on


, you can easily find a six-month CD yielding 3.00% or higher. But what about FDIC insurance?

The Federal Deposit Insurance Corp. has temporarily increased its basic deposit insurance limit for individuals to $250,000, but that is set to expire at the end of 2009. That will be here before you know it. What if you have deposits that exceed those limits?

You could spread your deposits across accounts at different institutions, but that would be an arduous record-keeping chore. And, of course, it would be a hassle to visit several banks or S&Ls. But the Certificate of Deposit Account Registry Service, or "CDARS," can do this for you.

The service, provided by Promontory Interfinancial Network, has been available for six years. About 2,800 banks and thrifts in all 50 states offer the service, which allows CD depositors with balances of up to $50 million to have their entire balances insured by the FDIC. The number of participating institutions has increased 53% over the past year, not surprising when you consider that 25 banks failed last year.

Getting Around FDIC Limits

Here's how CDARS can work for someone with a $1 million CD: First, go to a participating bank or savings and loan (the "lead bank"), and fill out an account application and CDARS agreement. The lead bank will act as the account custodian and, through CDARS, put your deposit in 11 FDIC-insured institutions, making sure you have less than $100,000 in each. If your deposit matures before Dec. 31, 2009, CDARS may place that money over fewer banks, staying under the FDIC's temporary limit of $250,000.

The lead bank will assign you one account number and send you a single account statement showing which institutions are holding the funds. You will also receive a single 1099 statement for your taxes, or other relevant tax statements for IRA accounts.

Bank of New York

, a unit of

Bank of New York Mellon

(BK) - Get Report

, acts as a sub-custodian for the CD, so the only institution that has your personal information is the lead bank.

CDs are available through the program for terms ranging from four weeks to five years. Interest payments can be made to you monthly, quarterly, semiannually, annually or at maturity.

Municipal Deposits

Consumers and businesses aren't the only ones using CDARS. They're also becoming more popular with municipalities. Phil Battey, Promontory Interfinancial's vice president for legislative and public affairs, says this is an important and growing area of the business. "We've had hundreds of municipalities investing billions of dollars through CDARS," he says.

While there are financial institutions participating in CDARS in all 50 states, nine of them -- Washington, Idaho, Utah, New Mexico, Alabama, Indiana, New York, Rhode Island and Delaware -- have restrictions on where municipalities can deposit funds. So depositors such as school districts, for example, can use CDARS in only 41 states and Washington D.C.

To keep local banks from suffering from the flight of municipal deposits, the CDARS Reciprocal Service directs deposits from other CDARS participating banks back to the originating bank in an amount equal to the original municipal deposit.


Depositors using CDARS aren't charged fees to open accounts. Participating banks pay a fee to join CDARS and pay transaction fees to Promontory Interfinancial depending on the size of the deposit.

Like most CD deposits, there are penalties for early withdrawals. For early withdrawals from CDs with maturities of up to 26 weeks, the depositor's penalty is the interest for the entire period of the CD. For longer-term CDs, early-withdrawal penalties are generally the interest for half the CD term.

Promontory Interfinancial Network's co-founder and chairman is Gene Ludwig, former comptroller of the currency. More detailed information on which institutions offer CDARS and other details can be found at

CDARS' Web site


Bottom Line

In this financial environment, you can't be too careful with your cash. Even though most depositors have been aware of the risks of bank failures for some time, there were more than $500 million in losses to depositors with uninsured balances when IndyMac Bank failed and was taken over by the FDIC. The CDARS service helps you sleep better at night and is catching on. Transaction volume in dollar terms has risen four-fold from a year ago, Promontory Interfinancial's Battey said.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.