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How to Get Around FDIC Limits

A service known as CDARS will spread your deposits across CD accounts at various institutions, keeping each below $100,000.

With problems cropping up at so many financial institutions, investors with large deposits need to be especially careful. My earlier story reviewed how deposit insurance works at banks, savings and loans and credit unions. But what if you have deposits that exceed the Federal Deposit Insurance Corp.'s standard $100,000 limit?

The obvious solution is to spread your deposits across accounts at different institutions, but this can quickly become a record-keeping nightmare. Not to mention the hassle of visiting several banks. A relatively new service, 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 five years. About 1,825 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.

Getting Around FDIC Limits

Here's how CDARS can work for someone with a $1 million CD: First, you go to a participating bank or savings and loan (let's call it the "lead bank"), and fill out an account application and a CDARS agreement. The lead bank will act as the account custodian and, through CDARS, spread your deposit over 11 FDIC-insured institutions, making sure you have less than $100,000 in each.

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 Bank of New York Mellon Corporation Report

, acts as a subcustodian for the CD account, so that the only institution that has your personal information is the lead bank.

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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 catching on 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."

While there are financial institutions participating in CDARS in all 50 states, 12 states -- Washington, Idaho, Utah, Michigan, Indiana, Alabama, Virginia, Rhode Island, Delaware, New York, New Jersey, and New Mexico -- have restrictions on where municipalities can deposit funds. So depositors such as school districts, for example, can use CDARS in only 38 states and Washington, D.C., at present.


Depositors using CDARS are not 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 deposits.

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 the

CDARS' Web site.

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.