i amimagine you The dealer is on a vast card table. There are 3,000 players, each with a different number of cards in their hand. Some have thousands; A handful of others. Each will keep some cards and return the rest to you. Your job is to shuffle the deck and deal it again so that each player has the same number of cards they had before, but the same number of cards they didn’t deal. At any given time a player may recall a particular card that was once held.
It’s a nightmare task for a poor man, but a trivial task for the whizzy algorithms running the business of managing “reciprocal deposits,” where one bank deposits with another and gets the same amount back through some largely unknown medium. Technology companies. These quiet giants of financial plumbing reallocate large amounts of deposits. About $1trn-worth is swapped through the platform, of which about a fifth is swapped in mutual arrangements. That’s a big chunk of the $18trn in total deposits parked with American financial institutions at the end of last year.
Deposit-swaps mean banks can offer more insurance to their customers. After the failure of Silicon Valley Bank in March, where nearly 93% of deposits were uninsured, this became a priority for customers and institutions. The insurance cap — a regulatory guarantee that money will be paid out in the event of a bank failure — is $250,000 per account holder. Wealthy individuals and businesses often retain more than that. About 45% of deposits in the American banking system were uninsured at the end of last year.
Those seeking more protection once had to plod from bank to bank themselves. If an institution wanted to offer more deposit insurance by placing deposits elsewhere, it would have to abandon the use of deposits as funding. But the concept for mutual deposits was invented in 2002 by Eugene Ludwig, who previously ran the Office of the Comptroller of the Currency, a regulator. The firm he and his co-founders set up, IntraFi, allows banks to sign up to place deposits around the system so they’re all insured, while sending the same value of deposits from other places back to the bank.
IntraFi was the first firm to do so, and by far the largest. It has 3,000 banks on its platform. However, it has been joined by a handful of other companies rAndt Deposit Solutions, the second-largest settler with about 350 banks in its network, and smaller players including ModernFi and StoneCastle Cash Management. These companies are now experiencing something of a boom. By Kevin Bannerton rAndt said the value of his company’s mutual deposits has risen more than 30% since the start of March. He reports that new institutions are clamoring to sign up. IntraFi boss Mark Jacobsen said the company saw “significant” growth in its mutual deposit business over the same period.
All of this raises questions about whether it makes sense to maintain the deposit-swap federal cap. The private sector has come up with a clever solution to offer more deposit insurance than is mandatory. It’s conceivable that, with hundreds of thousands of banks in the network, one account could offer deposit insurance for hundreds of millions of dollars. In fact, Stonecastle offers an account with $125m of deposit insurance.
But there is a difference between a private-sector job and a public-sector mandate. It’s hard to match banks today to all be able to offer such high limits (most offer only a few million dollars of insurance), and mutual deposit companies also charge fees. Institutions pay for federal-deposit insurance, which they apply on top of charges between 0.05% and 0.32% of the value of total liabilities.
Repealing the cap would raise insurance prices across the system; These higher costs will almost certainly be passed on to consumers in the form of lower interest rates. Still, if enough depositors seek insurance by spreading the deposits, the costs may be higher anyway. ■
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