We are living in a financially dangerous world. Since the inception of the financial crisis in September 2008, the number one question on most people’s minds has been “how do I keep my money safe?” Business owners, chief financial officers, vice-presidents of finance and corporate treasury teams have had to address the same issue. But for companies, the issue is more complex. When investing company funds, there are three considerations at play:
· Safety - is there a government guarantee in case the bank or financial institution goes out of business?
· Liquidity - how easy is it to access the money penalty-free?
· Yield - what return is being earned on the money?
While many companies are increasing their appetite for risk in the interest of increasing yield, safety continues to be the principal concern.
FDIC offers safety for business accounts
As a direct response to the uncertainty created by the financial crisis, the Federal Deposit Insurance Corporation or “FDIC” expanded the protection it offers to depositors at participating institutions. On personal accounts the limit was raised to $250,000 per person per bank. For business accounts, the protection was even broader. Under the Transaction Account Guarantee Program or “TAG”, participating depository institutions are able to offer unlimited protection on qualifying accounts. So if your business has $20 million or $200 million deposited in a qualifying account, it’s fully protected by the FDIC against insolvency.
Qualifying for the Transaction Account Guarantee Program
In order to qualify for TAG coverage, both your account and the institution where you have the account need to qualify. The institution needs to be an FDIC member institution. The account needs to be a non-interest bearing transaction account. For TAG qualification purposes this includes:
· Checking accounts that allow for unlimited deposits and withdrawals without advance notice;
· Interest on Lawyers Trust Accounts (IOLTAs) and their functional equivalents; and
· Negotiable Order of Withdrawal accounts (NOW accounts) that will not pay more than 0.50% interest.
Money market deposit accounts (MMDAs) are specifically excluded.
Recent changes to the Transaction Account Guarantee Program
The TAG program was set to expire in June 2010, but the FDIC recently extended the program until December 2010 and reserved the right to extend it through December 2011 if economic conditions warrant. However, many prominent banks have chosen to opt-out at different times or chose never to participate. The next opt-out date, June 30, 2010, will see many banks leave.
Checking if your bank participates in TAG
Here is a complete list of banks that have chosen to opt out of TAG. If your bank is on one of these lists, then you either do not have this additional coverage or will lose it as of July 1, 2010.
Certificate of Deposit Account Registry Service or CDARS: Alternative to TAG
CDARS are an alternative to TAG protection that allows you to manage your relationship with one banking institution while increasing your FDIC protection to $50 million. Without TAG protection and without using CEDARS, a business owner would have to deposit their company’s cash in increments of $250,000 per owner/beneficiary per bank. If your company has $20 million in cash, that quickly becomes an exercise in futility and frustration. CDARS is a service whereby participating banks (there are over 3,000) work with each other so you can avoid the hassle of going to multiple banks. Basically you go to a bank and tell them you want to participate in the CDARS program. You negotiate a rate and term on the funds you wish to deposit. The bank then spreads the accounts over multiple participant institutions so no single institution holds more than the FDIC account protection limit.
For example if you deposit $10 million on your company’s behalf, then the bank would keep $250,000 and deposit the remaining $9.75 million across 39 participating banks. This process is completely transparent to the client. You never have to deal with anyone other than your bank representative. The yield you earn on the money will be slightly less than what you would earn if only working with one institution, but the protection is worth it. Here is an interview with the CEO of Promontory Interfinancial Network, LLC, the developers and administrators of the CDARS service.
There are a number of financial firms that are developing products that offer the same effect as CDARS but with money market funds. They offer greater liquidity but lower yields and lower maximums. Examples include: USA Mutuals Insured Cash Shelter Account, Evolve Bank & Trust' s Insured Deposit Program and Double Rock’s Liquid Insured Deposits program.
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Mike Periu is the founder of EcoFin Media, LLC an independent producer of financial, economic and entrepreneurial content for television, radio, print and the internet. Over the past 10 years he has started three companies and advised over 50 companies on financial strategies including fundraising. Mike also hosts regular small business webinars on a range of topics relevant to business owners.