Smart Way to Manage Cash Safely

BY STEVE DINNEN

In these heady up-and-down market days, it could be wise to keep some cash set aside. But then what? Do you just expose a $1 million deposit at one financial institution to risk because federal insurance only goes to $250,000 in the event of a failure?

Granted, bank failures are rare. But when they happen, any money over that FDIC insurance limit can be lost. Luckily, there are a few ways around the $250,000 insurance cap. At Bankers Trust Co., Rebecca Moomey, vice president in private banking, said it’s easy to open several accounts and title them properly. For a married couple with children, dad can set up an account, mom can set one up, and then they can set up accounts for the benefit of children—using their Social Security numbers (FDIC caps go by Social Security numbers on accounts). So if there are three children, you can have five separate accounts, and get $1.25 million of insurance. “We don’t see a lot of that,” said Moomey, but it’s an easy way to grab that insurance.

With, say, $2 million, you could track down eight banks and open eight separate accounts. But why go to all that effort when just one bank that participates in CDARS—Certificate of Deposit Account Registry Services—will do the shopping for you?

This is how CDARS works: You go to a participating bank with this $2 million. The bank opens a certificate of deposit with no more than $250,000 in it, then links up to hundreds of other CDARS banks and automatically divvies up the remainder in $250,000 increments. The lead bank handles all paperwork, and there is no service charge for it.

A number of banks in Iowa offer CDARS, such as First American in Clive, or Lincoln Savings Bank, which has Des Moines-area branches. It’s kind of a win-win for both depositor and bank, as CDARS is used by many banks both to attract deposits and to service high net worth individuals.

“It works fine,” said Doug Gulling, executive vice president at West Bank, another CDARS provider. He said accounts can be structured as CDs, or interest-bearing checking accounts, or money market accounts. A version called ICS covers sweep accounts.

Yet another way to gain security on cash deposits is a repurchase agreement (neither Bankers Trust nor West Bank offers them). Banks keep U.S. Treasury securities in their portfolios, and some will pledge these against deposits that exceed the FDIC insurance cap. Note that these “repo” agreements typically are done only for corporate accounts.