Federal Reserve Bank of Cleveland
08/13/2024 | Press release | Distributed by Public on 08/13/2024 09:10
Reciprocal Deposits and the Banking Turmoil of 2023
Economic Commentary
Reciprocal Deposits and the Banking Turmoil of 2023
Reciprocal deposits are deposits exchanged between banks to effectively increase deposit insurance coverage. Their use grew significantly during the banking turmoil of 2023. This Economic Commentary describes what they are, their connection to brokered deposits, how their legal treatment has changed over time, and which banks use them the most. It also discusses longer-run trends in uninsured deposits.
The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. The series editor is Tasia Hane. This paper and its data are subject to revision; please visit clevelandfed.org for updates.
We would like to thank Paola Boel for helpful comments.
Introduction
In March of 2023, there was a run on Silicon Valley Bank (SVB) when its depositors, almost all of whom were uninsured, realized that the bank was in trouble as a result of unrealized losses on its securities portfolio. Several other banks also experienced runs, most notably Signature Bank and First Republic Bank. While the panic among US bank depositors subsided when federal bank regulators guaranteed the funds of uninsured depositors at SVB and Signature, the turmoil and uncertainty gave US banks additional incentive to reassure their uninsured depositors of the safety of their funds. One way they did this was to increase their use of reciprocal deposits as a means of effectively increasing deposit insurance coverage.
Reciprocal deposits are deposits exchanged between banks within a network of participating banks. The banks exchange the deposits to provide more deposit insurance to depositors. For example, if a person had a deposit account with a balance of $600,000, only $250,000 of these funds, the standard limit per account insured by the Federal Deposit Insurance Corporation (FDIC), would be insured if the bank failed. The other $350,000 would not be protected. By participating in the network, however, the depositor's bank could exchange $250,000 of this deposit with another bank in the network and $100,000 with yet another bank, and thus all $600,000 of the original deposit would be FDIC insured. Legally, the deposit is spread across three banks, but the depositor interacts with only one bank. The company that runs the network charges banks fees to use reciprocal deposits.
The first reciprocal deposit network was created by Promontory (now IntraFi Network) in 2003 for certificates of deposit (CDs) (Shaffer, 2012), but several other companies now operate networks as well, and the networks now exchange more types of deposits than just CDs. Figure 1 reports reciprocal deposits as a share of domestic deposits over time and broken out by commercial bank size class.1