Why Weren't Silicon Valley Bank Depositors Using CDARS?


Silicon Valley Bank seems to have had large amounts of uninsured deposits from businesses and high net worth individuals. And those uninsured deposits are likely to be impaired in the receivership, meaning that they will not get paid 100 cents on the dollar whenever they do get paid.

But here's the thing:  there are turnkey products that enable depositors to insure much, much larger amounts than the FDIC-insurance cap of $250k/depositor/account type. For years and years there's been deposit brokerage services that spread out deposits at multiple banks, all in amounts under the FDIC insured cap. The best known service is called CDARS-Certificat of Deposit Account Registry Service. It's offered by IntraFi (formerly Promontory). I don't know if SVB participated in CDARS, but it's a pretty straightforward solution to the deposit insurance cap.

Here's how it works. Instead of having, say $10 million in one bank with only $250k insured, it's spread around 40 banks in $250k increments. It would be a pain to have to open 40 bank accounts, however. CDARS solution is to have a bunch of banks in its network: they banks want to join because it's a way for them to get large deposits without having any customer relationship.  So with CDARS, you deposit $10 million in one bank, which then opens up accounts in its name for your benefit at other banks. Even though the accounts at the other banks are not in your name, you benefit from FDIC pass-through insurance on those account.

There are some drawbacks to CDARS. First, the deposits are illiquid as they're locked up in CDs, so if the depositor needs access before the CD matures, it will pay a penalty. Second, CDARS also offers a limited set of term options for the CDS, which can complicate things for depositors whose liquidity needs don't match the term options. Third, the returns on CDARS CDs are lower than market rates because the banks pay a fee for access to the CDARS network. And fourth, CDARS has a $50 million cap, but I believe that's $50 million per depositary bank, meaning that if you wanted to insure $250 million, you'd need to have 5 separate $50 million relationships, each of which would get farmed out. 

Other deposit brokerage products might work differently, but the point here is that if you want to keep millions of dollars in insured deposits, it's entirely possible to do, but will come with some liquidity costs and lower investment returns. This is the sort of thing that any corporate treasury professional ought to know about, which raises the question of why so many businesses apparently had large, uninsured deposits at SVB. I do not know if SVB participated in CDARS (they aren't listed on the IntraFi network, but I don't know if that's a post-receivership change or not). Maybe CDARS just wasn't an option if you were dealing with SVB. And maybe the businesses with large deposits were start-ups without any corporate treasury management experts. But a lot of the problem ought to have been avoidable.