Reduce Collateralization: A Path to Greater Efficiency and Depositor Satisfaction

By Joseph Hooker, Chief Sales Officer, IntraFi

How can banks and large depositors reduce the need for collateralization? Through a reciprocal deposit placement network.

Banks can use a reciprocal deposit network to make large deposits eligible for millions in aggregate FDIC insurance across network banks — replacing the need for collateral or repos. Reciprocal deposit placement services can dramatically reduce the high costs and complexities associated with collateral management, help optimize balance sheets, and improve asset liquidity.

Safety-conscious customers are often unaware that they have alternatives to collateralization yet are quick to recognize the benefits. By introducing options for reducing collateralization, a bank can earn the appreciation and loyalty of these customers and gain greater control over its balance sheet. For example, by working with IntraFi—provider of the largest reciprocal deposit placement network—a $640 million Minnesota bank was able to replace collateralized deposits with those eligible for FDIC insurance, reducing the percentage of its investments tied up in pledging municipal deposits from ~60% to ~5% without sacrificing safety.¹

¹IntraFi is not an FDIC-insured bank, and deposit insurance covers the failure of an insured bank. A list identifying IntraFi network banks appears at https://www.intrafi.com/network-banks. Certain conditions must be satisfied for “pass-through” FDIC deposit insurance coverage to apply. To meet the conditions for pass-through FDIC deposit insurance, deposit accounts at FDIC-insured banks in IntraFi’s network that hold deposits placed using an IntraFi service are titled, and deposit account records are maintained, in accordance with FDIC regulations for pass-through coverage.

Challenges of Collateralization and How a Reciprocal Deposit Network Can Help

Traditionally, many banks rely on collateralization to secure deposits and repos and to manage risks. However, collateralization comes with several inherent challenges compared to FDIC-insured deposits, including reduced liquidity, stretched operational resources, and the risk of shortfalls. Benefits of utilizing reciprocal deposits include:

1. Enhanced asset liquidity: When banks no longer have to hold specific assets as collateral, banks gain the freedom to redirect capital toward more liquid, revenue-generating initiatives such as strategic lending or investments in higher-yielding vehicles.
2. Operational efficiency: Reciprocal deposits minimize the need for constant collateral valuation. With large deposits eligible for FDIC insurance, banks can reduce the labor required to track fluctuating collateral values.
3. Risk mitigation: Access to millions in aggregate FDIC insurance across network banks provides a safety net that avoids the risk of shortfalls due to collateral-value deterioration. In volatile markets, providing this added layer of security can be a competitive advantage.

Using reciprocal deposit placement services, banks can not only fortify their balance sheets but also unlock new opportunities to drive revenue, ensure customer loyalty, and maintain a competitive edge in an ever-changing market environment.

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Deposit placement through an IntraFi service is subject to the terms, conditions, and disclosures in applicable agreements. Deposits that are placed through an IntraFi service at FDIC-insured banks in IntraFi’s network are eligible for FDIC deposit insurance coverage at the network banks. The depositor may exclude banks from eligibility to receive its funds. Although deposits are placed in increments that do not exceed the FDIC standard maximum deposit insurance amount (“SMDIA”) at any one bank, a depositor’s balances at the institution that places deposits may exceed the SMDIA before settlement for deposits or after settlement for withdrawals. The depositor must make any necessary arrangements to protect such balances consistent with applicable law and must determine whether placement through an IntraFi service satisfies any restrictions on its deposits. IntraFi, the IntraFi logo, CDARS, and ICS are registered service marks of IntraFi LLC.