SOME ADDITIONAL COLOR ON RECIPROCAL DEPOSITS AND DEPOSIT MANAGEMENT IN THIS POST-SVB ERA

We have had a number of our clients follow up with us after Monday’s Client Update about the post-SVB era and potential spillover to credit unions.

In that Client Update we talked about the fact that banks have long been authorized by FDIC to structure depositor agreements for what they call “reciprocal deposits” or “deposit management” programs.

We referenced that NCUA needs to authorize such a program for all credit unions. Many of you agreed and told us that you were going to reach out to NCUA in support of such an authorization.

However, to provide more color on the reciprocal deposit issue, we wanted to go more in-depth on what needs NCUA approval and what is already permissible and currently taking place in credit union land as it relates to deposit management programs such as the one we described in the Client Update earlier this week.

So, if you are interested in this very timely issue, let me give you some additional flavor that might be of particular interest to you right now without any additional NCUA action – as long as you are a low-income designated credit union (LICU).

Again, for the record, reciprocal deposits or deposit management programs give depositors with more than the $250,000 insurance limits the option to authorize the bank receiving the deposit to – with the depositor’s approval – split any amount of deposit above the insurance limits into deposits at $250k or less and distribute them to other federally insured financial institutions n need of liquidity.

These programs, which allow the depositor to have access to his/her full deposit with 24 hour notice, are a popular option for bank depositors looking to maximize their FDIC insurance coverage without having to go to a half dozen banks themselves to spread it out.

Also, for the bank, such a program helps get uninsured deposits off their balance sheets. (I could argue that this is a win for the bank regulator as well since….well, see SVB and the problem billions in uninsured deposits is causing.)

In addition, these programs are a great liquidity management tool for the banks involved – some of which need more deposits for liquidity and others need to get deposits off balance sheet.

In short, these banking reciprocal agreement or deposit management programs have been around for decades. Most banks, of all sizes, offer them in some shape or form in partnership with firms like Reich and Tang and several others who have bank clients on both sides of the deposit needs question.

Basically, FDIC has authorized this through regulatory interpretation and enabled banks to make these reciprocal deposit or deposit management programs work well for the industry as a whole.

It has been a win-win in the banking industry.

But, although all credit unions are not able to participate without some NCUA action, it is important to recognize that credit unions are not completely shut out of this opportunity. Low-income designated credit unions are able to engage in these deposit management programs even today as a result of their LICU authority to accept non-member deposits.

So, indeed with the impetus of the SVB failure and the balance sheet issues involved in so many uninsured deposits and the liquidity challenges that rapid withdrawal of those funds could cause, NCUA would be well advised to look at authorizing such a program for all credit unions.

However, even though some regulatory action or interpretation may be required for any and all federally insured credit unions to participate in such deposit management programs. LICUs are already able to do so and a growing number of LICUs are doing so.

This participation in a reciprocal deposit or deposit management program is only certain to increase in credit union land over the months to come.

While it is regrettable that authorization for all credit unions still needs some measure of NCUA blessing through regulation or interpretation, the ability of LICUs to participate in such programs – whether you call them reciprocal deposit programs, deposit management programs or deposit participations – is permissible.

We have credit union clients of ours who are both sending and receiving deposits through daily deposit management programs such as these.  They are all low-income designated and making this work through their non-member deposit authority. NCUA is aware of credit unions utilizing reciprocal deposits in this manner and recognize it as allowable for low-income credit unions as long as certain notifications, tracking and related requirements are met.

Our credit union clients currently utilizing such deposit management programs are having success – whichever need they may have.

Credit unions in need of getting deposits off their balance sheets can do so. And credit unions in need of more liquidity through deposits can bring in those additional dollars through such programs.

As stated earlier, it is a win-win. And, just as it has been for FDIC, it is even a win for NCUA as a federal deposit insurer as it can get a lot of uninsured deposits off credit union balance sheets and mitigate potential risk to the NCUSIF if recent federal government actions insuring deposits above the $250k level continue and is extended to other financial institutions other than SVB and Signature to which extended insurance coverage was granted last weekend during the liquidity crisis for those two banks.

If any of you feel that looking into a deposit management program might be timely at this particular point in time when you may be getting inquiries from depositors with excess uninsured deposits at the credit union, we have been impressed with the deposit management program offered to a number of our credit union clients by Reich and Tang (R&T) out of New York.

There are other vendors that offer deposit management programs to banks primarily so you can look at other vendor options as well; however, we have no experience with other deposit management programs or vendors. We know that R&T serves credit unions and have clients utilizing their program.

If you are interested in evaluating this option for your LICU, we would be glad to provide you with the contact information to Reich and Tang. Again, to make it crystal clear, low-income credit unions are in a good position to participate. Credit unions without the LICU designation are not cleared for take-off at this time.

Hopefully, with the experience of the SVB and the ramifications that are still being felt from this bank failure, NCUA will move swiftly to make such programs available to all credit unions by finding a way to accommodate the membership factor and how deposit insurance follows.

But, with non-member deposit authority up to the established regulatory limits, the opportunity for LICUs to explore an option that is both a liquidity and balance sheet management tool – but also offer a member service to larger depositor members who may be nervous post-SVB – is one that seems both timely and worth potentially exploring.

As a result of a sizable number of you reaching out to us about this reference in Monday’s Client Update, we felt it might be worthwhile to explore the option deeper in this follow-up Client Update. And to also make sure LICUs know that it is a viable option for your credit union today, regardless of whether NCUA acts on the membership/deposit insurance question that would hopefully in the near future open such programs to all credit unions.

Let us know if we can provide you with any additional information of which we are aware that can assist as you look at this issue further or if we can provide an introduction to the experts on reciprocal deposits and daily deposit management at Reich and Tang. Of course, you can contact them directly if you would like at www.rnt.com. Feel free to let them know that you are our client and we provided you with an overview of their program about which you’d like to learn a bit more.

The timing may well be perfect to do so if you are a LICU dealing with the post-SVB fallout.

Until next time.

Dennis Dollar