In our update of November 3, 2008, we reported on key aspects and strategies related to the U.S. government’s FDIC banking insurance system. That report was limited only to the FDIC and similar government subsidized banking insurance. This report will outline the structure and benefits of a private banking insurance service, specifically the Certificate of Deposit Account Registry Service, or CDARS. Using CDARS, a corporation or individual can insure up to $50 million in deposits through one bank in the United States.  

I. History of CDARS

CDARS is the product of three finance industry veterans: Eugene Ludwig, former Comptroller of the Currency; Alan Binder, former vicechairman of the board of governors of the Federal Reserve; and Mark Jacobsen, former chief of staff at the FDIC. In 2003, these individuals launched the CDARS network seeking to level the playing field for smaller banks, particularly in the deposit insurance arena.  

As a result of the current economic turmoil, CDARS is experiencing significant growth. At the time of this Update’s publishing, nearly 2,500 banks in the United States participate in the CDARS system.  

II. How CDARS Works

To begin, CDARS, as its name indicates, only insures Certificates on Deposits, or CDs. Using the Promontory Interfinancial Network, CDARS takes a depositor’s CD and spreads the funds to numerous other banks in the network, effectively keeping all these broken up portions of the CD under the FDIC insurance cap. As an example, a corporation depositing $1 million into a CD at a local bank participating in the CDARS service could use CDARS to set up CDs with other participating banks to diversify the $1 million. Each of these CDs is entitled to FDIC protection. Thus, the $1 million would be covered by FDIC insurance in full via a number of CDs holding amounts under the FDIC insurance limits at different banks. This same protection would be available for a CD up to $50 million. It is important to note that because CDARS employs FDIC protection, CDARS is only available to banks in the U.S.

To initiate CDARS protection, a depositor simply needs to find a participating bank to open the initial CD. A listing of participating banks is available at www.CDARS.com. This bank is known as the depositor’s “home bank.” When opening the CD, CDARS depositors are able to choose between maturities ranging from four weeks to five years. A single rate of interest set by the home bank applies to the entire deposit regardless of where the portions of the total deposit actually end up. Conveniently, after opening the initial account, depositors receive just one monthly statement from the home bank listing all of the banks in which their divided up deposit is held. Technically, there is no extra charge to the depositor for CDARS protection. However, CDARS does charge each bank to participate. Consequently, it is common for banks to offer lower yields to CDARS depositors as compensation.  

III. Conclusion

For those with significant cash assets, CDARS may be a very good deposit strategy. But bear in mind, these CDARS protected deposits are limited to CDs. As a result, once the funds are in the initial CD, they are usually not accessible without bearing a fiscal penalty until the CD fully matures. Accordingly, depositors should not deposit funds that must be readily accessible into CDARS accounts. Nevertheless, for those entities seeking greater insurance protection for their deposited funds, CDARS is a viable option.