Last week a woman walked into Salisbury Bank and Trust Co. in Dayville and deposited her savings of $400,000.
Skittish about the recent federal takeover of IndyMac Bank in California, she was looking for a safe way to protect her entire account with federal deposit insurance, which is typically limited to $100,000 per individual per bank.
Salisbury Bank and Trust has been promoting its membership in the Certificate of Deposit Account Registry Service, or CDARS, which multiplies deposit insurance coverage to up to $50 million by distributing an individual’s deposit in amounts less than $100,000 among participating banks.
“We probably wouldn’t have gotten her business if we didn’t offer the service,” said John Perotti, CEO of Salisbury Bank and Trust. He declined to give more information on the customer to protect her privacy.
Twenty-one of the 57 banks based in the state now offer CDARS. Perotti sees it as a way to enhance customer loyalty and attract larger deposits amid a weakening financial environment.
“Banks grow by increasing their deposit base. The more money we can get, the more we can lend out to the community,” said Perotti.
The primary target of the service is the private individual who deposits an average of between $400,000 and $500,000. But businesses also are customers, making up about one-third of the CDARS client base; municipalities and nonprofits also use the service.
CDARS was created in 2003 by the Promontory Network, a banking organization that has more than 2,000 U.S. financial institution members.
Deposits covered by CDARS have tripled this past year, and doubled since the beginning of 2008 amid a drumbeat of negative news about the health of several large financial institutions.
Recently, that news included the federal takeover of IndyMac Bank in California, which came with images of depositors lined up outside an IndyMac branch waiting to make withdrawals. The Federal Deposit Insurance Corp. is expected to pay out between $4 billion and $8 billion to IndyMac customers. The FDIC currently has $53 billion on reserve, but it is also backed by the full faith and credit of the U.S. government, so it has access to more.
Connecticut Banks Are Sound
Connecticut Banking Commissioner Howard Pitkin said last week that Connecticut banks remain sound.
“The federal takeover of banks has brought about an awareness that not all deposits are insured. That’s a scary realization for most people,” said Bill Attridge, president of Connecticut River Community Bank in Wethersfield, which also offers CDARS. “That’s responsible for the growth [of CDARS] in recent months, especially for people who have more than $100,000 to deposit.”
The extra protection is especially important since the FDIC hasn’t increased deposit insurance coverage since 1981, when the minimum payout was raised from $40,000 to its current $100,000 level.
The next increase won’t occur until 2011 at the earliest, said Phil Battey, a spokesperson for the Promontory Network, creators of CDARS coverage.
When a customer places a large deposit with a network member, the bank arranges for the placement of funds into CDs issued by other network banks.
The deposit is divided into increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC protection.
Customers sign only one agreement and receive a single account statement.
“This lets one bank do all the legwork for you,” Attridge said.
“There are people out there that have over a million dollars to deposit. Unless they want to go from bank to bank to spread it around, they are in danger of large portions of that money going uninsured.”
