Iimagine you Is the dealer on a huge card table. There are 3,000 players, each holding a different number of cards. Some have thousands; others have few. Everyone will keep some cards and return the rest to you. Your job is to reshuffle and deal the cards again so that each player has the same number of cards they were holding before, but none of the cards they turned over. At any time, a player can recall a specific card it once held.
A nightmarish task for a poor human shuffler, but a trivial one for the ingenious algorithm that manages the business of “reciprocal deposits,” in which a bank Make a deposit with another bank and get back the same value tech companies through some little-known means. These quiet financial plumbing giants redistributed massive amounts of deposits. About $1 trillion in value was shuffled through these platforms, about a fifth of which was exchanged in reciprocal arrangements. That’s a sizable chunk of the $18 trillion in total deposits held at US financial institutions at the end of last year.
Deposit swaps mean banks can offer more insurance to customers. After Silicon Valley Bank collapsed in March, about 93% of deposits were uninsured, which has become a priority for customers and institutions. Insurance is capped at $250,000 per account holder. Wealthy individuals and businesses often hold more than that. About 45% of deposits in the U.S. banking system were uninsured at the end of last year.
Those looking for more protection used to have to make their own way from one bank to another. If an institution wanted to provide greater deposit insurance by holding deposits elsewhere, it would have to forego using deposits as funds. But in 2002, the idea of reciprocal deposits was invented by Eugene Ludwig, who previously ran the regulator, the Office of the Comptroller of the Currency. IntraFi, a company he and his co-founders started, allows banks to sign up to deposit deposits around the system so they are all insured, while also being able to wire deposits of the same value back to the bank from elsewhere.
IntraFi was the first company to do so and remains by far the largest. It has 3,000 banks on its platform.However, it has been joined by a number of other companies, including r&Ton Deposit Solutions is the second largest restructuring agency, with about 350 banks in its network, along with smaller players such as ModernFi and StoneCastle Cash Management. These companies are experiencing a sort of boom right now.Kevin Bannerton r&Ton Since early March, his company’s reciprocal deposits have increased in value by more than 30%, he said. He reported that new institutions were clamoring for registration. IntraFi boss Mark Jacobsen said the firm’s reciprocal deposit business had seen “significant” growth over the same period.
All of these deposit swaps raise the question of whether maintaining the federal cap makes sense. The private sector has come up with an ingenious workaround to provide more deposit insurance than is mandated. It is conceivable that there are thousands of banks in the network, and a single account can provide deposit insurance for hundreds of millions of dollars. In fact, StoneCastle offers an account with $125 million in deposit insurance.
But there is a difference between private sector workarounds and public sector mandates. It’s currently difficult to match banks so that all can offer such high limits (most only offer a few million dollars of coverage), and mutual deposit companies charge fees too. They apply to fees ranging from 0.05 percent to 0.32 percent of the value of gross liabilities that institutions pay for federal deposit insurance.
Removing the cap would make insurance more expensive system-wide; these higher costs will almost certainly be passed on to customers in the form of lower interest rates. Still, if enough savers seek insurance by spreading their deposits, it could lead to higher costs anyway. ■
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