The Banking Sector

A Better Option For Banks: Excess Deposit Bonds

Enabling banks and credit unions nationwide to help attract larger deposits

by Melissa Neis

Melissa Neis is Vice President of Chicago-based Parr Insurance Brokerage of Chicago and has been crafting insurance solutions for financial institutions for the past 15 years. She has experience developing policy forms unique to the needs of community banks. She holds a BFA from Illinois Wesleyan University and an MBA from the University of Notre Dame. Neis can be reached at 773.489.3001 or melissa@parrinsurancebrokerage.com.

Volatile markets. Inflation. Supply chain issues. Competition. All are ever-changing. What’s not changing is the need for public officials – from school district administrators to town and city leaders, park district commissioners and more – to protect taxpayer funds, particularly when large, long-term deposits are made.

Growing deposits while limiting funding risks is a clear priority for financial institutions of all sizes. However, as a result of the Great Recession of 2008, today’s banks face many more regulations regarding how they fund their balance sheets. Many have been forced to focus on utilizing traditional funding sources and increasing diversification. Banks cannot be over-reliant on brokered deposits. Securitization options have been limited to pledged securities, letters of credit, FDIC insurance and reciprocal deposits.

Since the crisis, additional protections have been put into effect through modified deposit assessments, new regulatory constraints and increased unexpected stress testing that focuses on liquidity position. Banks also must have clear funding strategies in place.

All these restraints have made it more difficult for financial institutions to grow deposits. While total deposits at domestic commercial banks rose 35% from end of 2019 through end of Q2 2022, that surplus is expected to wind down in the near future. Simultaneously, the Federal Reserve has enacted two interest rate hikes this year, which will in turn impact CD rates. Both factors will have a direct impact on a bank’s ability to retain core deposits.

How many bankers understand how easy it is to increase their business by working with experts who understand and have developed specialized Excess Deposit Bonds (EDB)? These instruments afford much more flexibility than traditional financial products and allow municipal leaders to adhere to fiduciary rules that require protecting these funds. They also release banks from indemnity.

An EDB is a guarantee from an insurance provider that a financial institution will perform its obligation to the depositor. In the event of a bank default, the EDB can be utilized, and the insurance provider will make the depositor whole in principal and interest.

Benefit Of Excess Deposit Bonds

An EDB is an easier way for financial institutions to attract new customers and retain their most valuable customers while also meeting their funding needs...

EDBs are an efficient option to attract new depositors that in the past may have not been accessible due to collateral constraints. Most banks limit the number of brokered deposits they take because examiners generally view these deposits as risky. As a result, we launched an EDB program with comprehensive protection that shifts indemnity to the insurer and streamlines the process for banks and credit unions to manage much greater sums of cash and better serve their clients.

The EDB program, with robust limits available based on a review of an institution’s financial metrics, enables banks and credit unions nationwide to help attract larger deposits, avoid pledging securities and facilitate compliance with state regulations designed to protect publicly raised funds. EDB features an easy approval process; premiums based on limits used, not on limits available; and, with its competitive rates, is more cost effective than alternative solutions.

For depositors, in addition to a robust maximum limit, the EDB maintains insured status and the right to file a claim and offers a certificate of insurance issued in the depositor’s name. The new product is available for all depositor types and accounts, including money market or CD.

An EDB is an easier way for financial institutions to attract new customers and retain their most valuable customers while also meeting their funding needs. In turn, the EDB offers a guarantee to government entities including municipalities, school districts, park districts and others that the substantial sums of cash they often generate via referenda and bond issues will be protected.

When it comes to securitization, EDBs are one of the more efficient methods. Unlike some forms of securitization, EDBs are not affected by market price fluctuations, settlement date limitations and third-party custody requirements. With an EDB, the timeline for application through issuance can be achieved quickly. And, when factoring in operational cost, functionality, and regulatory diversification, EDBs can be more cost effective and a competitive alternative for financial institutions.

Conclusion

These are unprecedented times for banking, as the aftereffects of COVID-19, rising inflation, interest rate risk, cyber risk, and geopolitical factors all project volatility in the marketplace. Maintaining a stable core deposit portfolio will be critical to the health of a bank’s balance sheet. An EDB program, with robust limits available based on a review of an institution’s financial metrics, enables banks and credit unions nationwide to help attract larger deposits, avoid pledging securities and facilitate compliance with state regulations.

 

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