CDARS: Certificate of Deposit Account Registry Service

A system that allows depositors to access FDIC insurance on deposits exceeding $250,000 by distributing funds across a network of banks.

The Certificate of Deposit Account Registry Service (CDARS) is a financial service that provides a way for depositors to obtain Federal Deposit Insurance Corporation (FDIC) insurance coverage for deposits exceeding the standard insurance limit of $250,000. It accomplishes this by spreading the depositor’s funds across multiple banks within a nationwide network.

Definition and Functionality

CDARS is a proprietary service developed by Promontory Interfinancial Network. It allows depositors to place large sums of money into certificates of deposit (CDs) through a single bank, which then distributes the funds across various member banks in the CDARS network. Each participating bank issues a CD, ensuring that no more than $250,000 is placed with any single institution, thereby maximizing FDIC coverage.

Mechanism

• Single-Bank Relationship: Customers work with only one bank, regardless of how many institutions are involved through CDARS.
• Distribution of Funds: The customer’s funds are broken into amounts less than the FDIC-insured limit and distributed to different banks within the network.
• Aggregate Reporting: While funds are distributed across multiple banks, the originating bank provides consolidated reporting, making it easier for the depositor to manage their investments.

Example

Imagine a depositor with $1 million. By using CDARS, this individual can:

• Place the $1 million deposit with one participating bank.
• The bank will then spread this amount across CDs in four different FDIC-insured banks within the network.
• Each bank would hold $250,000, fully insured by the FDIC.

Historical Context

CDARS was introduced in 2003 to address growing concerns over the safety and liquidity of large deposits, especially in scenarios where traditional FDIC insurance limits were insufficient to cover substantial sums. Its creation has since allowed institutional and retail investors to ensure their large deposits without splitting their relationships among multiple banks manually.

Applications

• Institutional Deposits: Large organizations, public entities, and non-profits often use CDARS to safely manage large deposits.
• High Net-Worth Individuals: Individuals with substantial assets can utilize CDARS to maximize insurance coverage without the need for multiple banking relationships.
• Reduced Administrative Burden: CDARS simplifies otherwise complex procedures of managing multiple accounts for better insurance coverage.

Comparison to Alternatives

CDARS vs. Traditional CDs

• FDIC Coverage:

  • CDARS: Allows coverage beyond $250,000 using multiple banks within the network.
  • Traditional CDs: Limited to $250,000 per depositor per insured bank.

• Complexity:

  • CDARS: Consolidated reporting simplifies tracking of multiple CDs from various banks.
  • Traditional CDs: Requires managing multiple banking relationships.

CDARS vs. ICS (Insured Cash Sweep)

Both CDARS and ICS distribute funds across a network of banks to maximize FDIC insurance; however, ICS primarily deals with demand deposit and money market accounts, while CDARS is focused on certificates of deposit.

FAQs

Is CDARS safe?

Yes, CDARS is safe as it leverages the standard FDIC insurance limits across multiple banks to protect large deposits.

How many banks are in the CDARS network?

The CDARS network comprises thousands of banks across the United States, enabling a robust distribution of funds.

Are there any fees associated with CDARS?

Fees, if any, are determined by the participating bank where the depositor initiates the service. These fees are typically outweighed by the benefit of increased FDIC insurance coverage.

References

1. FDIC: “Certificate of Deposit Account Registry Service (CDARS) – Fact Sheet.”
2. Promontory Interfinancial Network: “How CDARS Works.”
3. Financial Industry Regulatory Authority (FINRA): “Investor Alerts on Large Deposit Safety.”

Summary

CDARS offers a sophisticated yet straightforward solution for managing large deposits while ensuring each portion is adequately insured by the FDIC. This service, designed for both institutional and individual depositors, simplifies the complexity of spreading funds across multiple banks by providing a single point of contact and consolidated reporting. Through CDARS, depositors can maintain higher-level safety and manage large deposits efficiently.