After Silicon Valley Bank failed, banks expanded deposit insurance using reciprocal deposits

During the banking turmoil of 2023, banks looking to soothe uninsured depositors capitalized on recent regulatory changes to help them get additional coverage.

A new Cleveland Fed report says the amount of reciprocal deposits exchanged between banks grew significantly following the failure of Silicon Valley Bank in March 2023.

Deposits in a typical bank account are insured up to $250,000, but banks can offer extra coverage by exchanging deposits beyond that amount with other banks.

The use of reciprocal deposits began to increase in 2019, following regulatory changes, and then grew significantly in 2023. Midsize banks account for most of the increase; small banks have fewer large depositors and large banks quickly run into regulatory caps.

The next time depositors are worried about bank failures, there will probably be another spike in demand for reciprocal deposits, according to the report's authors, Edward S. Prescott and Grant E. Rosenberger.

"This behavior would mean that reciprocal deposits have, in effect, raised the deposit insurance limit," Prescott and Rosenberger write.

Read the Economic Commentary:Reciprocal Deposits and the Banking Turmoil of 2023