Insights
Executive Education
CDARS
An innovative program providing multi-million dollar FDIC insurance on CD investments
he bank failures in the 1930s may be
hard to remember for some today, but
the failures of savings and loans and
banks in the 1980s are not. Unsuspecting
depositors were left with losses on accounts
above the insured limits.
But today, there’s actually a way to safeguard against that. It’s called the Certificate
of Deposit Account Registry Service
(CDARS®), a network of 1,733 banks that
allows a single client to insure up to $50
million in CD deposits by distributing them
throughout the network.
Smart Business spoke with MB
Financial Bank Vice President Paula
Sheffield about what advantages a commercial client can experience through
using CDARS.
detailing the balances of all the individual
CD accounts and interest earned.
T
What is CDARS?
CDARS stands for the Certificate of
Deposit Account Registry Service. It’s a
computerized process that allows a company’s large CD deposit to be distributed
among multiple banks in amounts below
the insured limit, therefore ensuring that all
the money is insured by the FDIC. The
FDIC doesn’t guarantee accounts over
$100,000, so anything under that limit per
bank would be insured.
As opposed to going around town to
open accounts in multiple banks, everything is done by computer. Plus, the client
receives one statement and one rate on all
of its CDs. The client only has to deal with
one bank, and that makes the whole
process more convenient because it avoids
the hassle of opening and tracking multiple
accounts.
The CDARS network includes 1,733
banks, which allows it to insure up to $50
million in CD deposits per person by distributing them throughout the network. It
was started by a company called
Promontory Interfinancial Network, which
How does CDARS work?
Paula Sheffield
Vice president
MB Financial Bank
was founded by Eugene Ludwig, former
comptroller of the currency and current
company chairman. The vice chairman is
Alan Blinder, former vice chairman of the
Federal Reserve. The president of the company, Mark Jacobsen, is a former FDIC
chief of staff.
What are the maturity options?
A client’s CD can be opened in maturities
ranging from four weeks, 13 weeks, 26
weeks, one year, two years and three years.
Four weeks is pretty liquid, so even if a
client needs the money soon, they don’t
have to wait too long. But if a client breaks
out of any of the sub-CDs, the penalties are
steep. The client would lose all of the interest it would have earned on a four-week or
13-week CD. For CDs with longer duration,
it would lose half of the interest it would
have earned.
No matter how the money is spread
throughout the network, all the CDs bear
the same maturity date and rate. And the
client receives one regular statement
Let’s say a client has $5 million to deposit
in the bank. If the client’s bank is part of the
CDARS network, it will use the network to
distribute portions of the cash — maybe in
60 smaller chunks to stay under the
insured limit per bank of $100,000 — to
other bank members of the network, saving the client the time to open different
accounts at different banks.
Every time the bank purchases a CD for
the client, the other banks in the network
simultaneously deposit precisely the same
amount back into the client’s main bank in
separate accounts, where it will fall under
the $100,000 insurance limits. The money
never really leaves the client’s main bank,
but now it’s all insured.
Are there any fees the depositor has to pay
for the service?
Banks pay a one-time fee based on their
size to join the network and a small fee for
each CDARS transaction. The client does
not pay any fees. The CD rate offered by
the initial depositing bank is the same CD
rate received by the client, no matter
where the smaller segments of money are
deposited.
Banks participate in the network because
having the ability to distribute the insured
deposits allows them to attract larger
deposits, retain them and keep important
customer relationships intact.
Who are members of CDARS network?
Go to www.cdars.com and click on
Where to Find CDARS for a state locator.
PAULA SHEFFIELD is vice president of MB Financial Bank in Chicago. Reach her at (847) 653-2403 or [email protected].
Insights Banking & Finance is brought to you by MB Financial Bank
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Smart Business Chicago | February 2008