Individual Account Owners

Individual Account Owners have several options to protect deposit balances:

• Open Accounts at Multiple Banks. Note that it needs to be a different bank, and not just different branches of the same bank. Each new account is insured up to $250,000.
• Open Accounts with Different Owners. For example: Open an account in each spouse’s name individually (so two accounts, each with a single owner), and open an account with the spouses as joint owners (each joint owner obtains $250,000 in protection). These three accounts would therefore have up to $1,000,000 in total insurance coverage.
• Open Accounts with Trust/POD [pay-on-death] Designations. For example: Father opens an account in his name, and four more accounts, in which each account has a different child listed as POD. This results in five accounts, each with up to $250,000 in coverage, or $1,250,000 in total possible insurance coverage.
• Open a CD Account, or Money Market Account, with a bank that offers IntraFi (formerly CDARs) services. These accounts automatically spread the depositor’s funds among several banks and maintain a balance at each depository bank of less than $250,000. The process is seamless to the bank customer, who deals only with his or her local bank—all the hard work is done by the IntraFi Network.

Business Entity Account Owners

Business entities, especially those using treasury management services of a bank, have several options for protecting account balances that total over $250,000.

• Open Accounts at Multiple Banks. Note that it needs to be a different bank, and not just different branches of the same bank. Each new account is insured up to $250,000.
• Open Accounts with Different Owners. For example: Parent corporation opens one account, and each of seven subsidiaries (each its own legal entity) opens an account in the name of the subsidiary. This results in eight accounts, each insured up to $250,000, for $2,000,000 in insurance available.
• Open a CD Account, or a Money Market Account, with a bank that offers IntraFi (formerly CDARs) services. These accounts automatically spread the depositor’s funds among several banks and maintain a balance at each depository bank of less than $250,000. The process is seamless to the bank customer, who deals only with his or her local bank—all the hard work is done by the IntraFi Network.
• Have the Depository Bank Establish a Sweep Facility for the Depositing Customer. There are several types of sweep accounts, and the results will vary in effectiveness depending on the facts of how the depository bank operates the specific sweep facility and the timing of any bank failure. The FDIC tries to close banks after the close of business on a particular day but may do a mid-day closure under certain very dire circumstances. Mid-day closures likely will not facilitate the use of sweep accounts to avoid insurance limits.

Sweep accounts generally operate as follows: At the end of business day, the depository bank moves funds from the deposit customer’s account to an investment vehicle that is not a deposit account. These investment vehicles include:

• Foreign Branch Accounts (which, while not a U.S. deposit, may still not effectively protect the depositor if the foreign branch fails also).
• Money Market Accounts (either internally to the bank, or external). Some of these sweep accounts are done at the end of business day, and some sweeps are done “next-day.” A next-day sweep will not protect the balance on the day of closure but would protect funds moved that day in response to the previous day’s balance. A same-day sweep can operate to protect day-of-closure amounts.
• Repo-Sweep Accounts. This is probably the safest method for using sweep accounts, from an insurance limit standpoint. At the end of day, all funds in a bank account in excess of some target amount ($250,000 or less) are swept out of the account to fund a transaction in which the depository bank sells to the account-owner one or more securities, or an undivided interest in a large denomination security (typically US treasuries). The securities are then repurchased (the “repo” part of the transaction) the next morning. If the depository bank fails to open the next morning because the regulators closed it, then the FDIC treats the bank customer as the owner of the securities and the amount of cash in the deposit account remains at the designated target amount.
• Loans. If the depositor has a loan from the depository bank, and the loan obligation and the deposit account have identical ownership (that is, the exact business entity both owes the money to the bank, and the bank account is established in borrower’s name), then the depositor may claim an offset to the loan of whatever balance (even if in excess of $250,000) is in the deposit account. In a similar fashion, the bank customer can establish a sweep function every night, in which the bank sweeps all cash in excess of a target amount ($250,000 or less) and uses those funds to pay down the amount the bank customer owes to the bank on its borrowings from the bank. The next morning the bank reverses the transaction, restoring the cash to the deposit account and restoring the balance owed under the loan(s).
• Caution: There are a variety of ways that banks offer and manage the solutions describe above. For instance, sweeps to money market accounts can be to an external provider of money market securities, or to a money market fund maintained by the bank; and cash could be deposited to an internal account at the bank for purchase of the money market securities (whether for an internal or external fund) or to an account outside of the bank. Further, the timing of when funds are moved, and how that matches or does not match with the time that the FDIC uses for determining deposit account balances, is complex and dependent upon variables the depositor (and even the bank) cannot control. Repo Sweeps and off-setting loans seem to offer the least risk that timing of events would thwart the use of a sweep account to avoid deposit account balances in excess of the $250,000 limit. Note too that in the highly unusual circumstance of a mid-day closure, a sweep account may not provide protection from the insurance limit.

Source:  The National Law Review - 3/18/23