• Clarification of CDARS Deposits Sought by ABA
  • August 13, 2008 | Authors: Steven S. Dunlevie; Elizabeth O. Temple; Richard A. Hills
  • Law Firms: Womble Carlyle Sandridge & Rice - Atlanta Office ; Womble Carlyle Sandridge & Rice - Greenville Office ; Womble Carlyle Sandridge & Rice - Atlanta Office ; Womble Carlyle Sandridge & Rice - Winston-Salem Office
  • On July 29, 2008, in response to several member institutions' requests, Edward C. Yingling, President and CEO of the American Bankers Association ("ABA"), sent a letter to Ms. Sheila Bair, Chairman of the Federal Deposit Insurance Corporation ("FDIC"), asking that she clarify the status of deposits obtained through the Certificate of Deposit Accounts Registry Service ("CDARS") available through Promontory Interfinancial Network, LLC ("Promontory"). Specifically, the ABA requested a determination of whether 12 U.S.C. 1831f, as implemented by 12 CFR 337.6, should classify deposits obtained through CDARS as "brokered deposits." Under current interpretation, banks have to obtain waivers to receive deposits obtained via the CDARS program if the bank has a Prompt Correction Action ("PCA") capital category of "adequately capitalized."

    In a typical reciprocal CDARS transaction, at the request of its customer, a bank that is a member of the Promontory network sends its deposits of over $100,000 to Promontory’s agent, the Bank of New York. The Bank of New York, acting as Promontory’s agent, then distributes the funds in amounts not exceeding $100,000 among other bank members of the Promontory network. As such, all of the deposits are under the $100,000 FDIC insurance coverage. In a reciprocal CDARS transaction, the bank making the excess deposit delivery to Promontory receives exactly the same amount from other banks in the network as deposits.

    It is Mr. Yingling's position that "these deposits are 'sticky,' having an average reinvestment rate of 87%” according to Promontory’s research. Moreover, Mr. Yingling adds, “the cost of funds for these deposits is below the cost of typical brokered deposits, with CDARS reciprocal costs averaging 40 basis points cheaper than a bank’s comparable costs for typical brokered deposits.” Thus, these deposits obtained via a reciprocal CDARS transaction should not be classified as brokered deposits.

    The complete text of Mr. Yingling's letter can be found at www.aba.com. If the FDIC determines that these deposits will not be considered brokered deposits, it will greatly reduce many banks’ reliance on brokered deposits. Finally, banks whose PCA capital category is adequately capitalized or lower may still be able to participate in the CDARS program.