WASHINGTON - In response to rising demand from large depositors, Promontory Interfinancial Network is once again raising the level of Federal Deposit Insurance Corp. coverage it offers to customers of its member banks.
Promontory chairman and chief executive Eugene Ludwig is expected to announce today at the American Bankers Association conference in New York that the network will insure deposits of up to $10 million, double the previous amount.
Promontory, of Arlington, Va., began offering the Certificate of Deposit Account Registry Service 20 months ago with coverage of $1.5 million. It went to $5 million in October 2003.
CDARS allows participating banks to offer more than the typical $100,000 FDIC coverage because large deposits are shared with multiple banks. For example, if a customer goes to Bank A with $200,000, Bank A accepts $100,000 as a deposit, and places the rest with Bank B through CDARS.
Bank B will reciprocate by placing $100,000 from another customer with Bank A. The use of multiple banks means much larger deposits can gain full FDIC coverage.
Mr. Ludwig, a former comptroller of the currency, said the increased demand was coming mostly from public entities and other fiduciaries, including nonprofits, which are often controlled by strict investment policies that require collateralization or full deposit insurance coverage.
Municipalities, churches, school boards, even condominium associations are using the system, he said. "It serves a huge need there."
Without the CDARS program, a bank that accepts a municipal deposit often has to buy Treasury securities to back the deposits in case the bank fails.
"The money, in essence, goes out of the bank," Mr. Ludwig said. It "doesn't stay in the community."
Some states prohibit municipalities and other public entities from putting deposits in a system such as CDARS, but Promontory has been working to change those laws.
The program is now explicitly permitted in about 20 states.
Promontory estimates that in the third quarter, 25% of the volume transactions in the system came from individuals. Twenty percent came from "public fund" customers, and the rest from other institutions and businesses.
"We knew that fiduciaries would use it," Mr. Ludwig said. "We didn't fully appreciate that they would be so enthusiastic."
Most of the member banks are community institutions, and banks in all 50 states participate, he said. "A community bank does not want to be the last in its town to have this. These are their potential best customers."
CDARS customers have substantial borrowing potential and often want to make sure their money remains in the community, Mr. Ludwig said.
Banks, in turn, benefit by having more funds that they can loan out.
