Against the giants of the sector, small US banks increase deposit insurance

The American bank First Citizens will buy "all deposits and loans" from Silicon Valley Bank (SVB), the American bank that went bankrupt in early March. REUTERS - DADO RUVIC

Text by: RFI Follow

3 min

The collapse of several U.S. banks last month has allowed large banks to attract customers who are more wary of smaller institutions. To keep up with competition, smaller U.S. banks are offering to guarantee deposits well beyond the regulatory cap.

Advertising

Read more

Deposits in the U.S. are only insured up to $250,000 per client per institution. The bankruptcy of SVB and Signature Bank has reminded the Americans of this, even if in an attempt to counter the panic, the authorities have exceptionally extended the guarantee to all deposits in these two banks. Still. In the rescue-who-can, many customers have taken refuge in the big banks. In one week, their deposits jumped by $120 billion, almost entirely taken from smaller institutions.

To reassure customers, some establishments have found a way to multiply this guarantee. Deposits are distributed among several banks without ever exceeding the $250,000 limit in any of them. Thanks to this mechanism, Leader Bank, a small institution in Massachusetts, even offers to cover up to $ 100 million.

The service is not new, but until now it has remained relatively confidential. Most banks that are members of a deposit allocation network, also known as reciprocal deposits, still refuse to talk about it. They fear a counterproductive effect and lead to the following reasoning: "If my banker tells me that I need to increase my coverage, it may be because there is a problem and my money is not safe," says Tom Geiger, CEO of Heritage Bank, who does not share this view.

From now on, some banks no longer hesitate, on the contrary, to communicate. With some success. When it started advertising it, Leader Bank says it attracted about 100 new business accounts in one week, the equivalent of six months of activity.

A mechanism criticized

Although companies such as IntraFi, American Deposit Management or Wintrust and its MaxSafe system, all competitors in this niche, comply with the legislation, the tool is debated. Sheila Bair, former head of the FDIC, the Deposit Guarantee Fund, criticizes these platforms which, she castigates, "reap profits and transfer all risks" to the government agency.

Jay Tuli, president of Leader Bank, denies this. For him, the practice tends, on the contrary, to "reduce risks because it avoids the concentration of large deposits in a small number of banks". Another counter-argument is that of Tom Geiger. According to the CEO of Heritage Bank, customers who benefit from the mechanism know all of their money guaranteed and "have no reason to give in to a bank run", like the one that led to the fall of SVB, unable to cope with massive withdrawal requests.

Since the beginning of the banking crisis, several elected members of Congress, both Democrats and Republicans, have suggested reviewing the operation and extent of deposit insurance by the FDIC.

(

With AFP)

Newsletter Receive all the international news directly in your mailbox

I subscribe

Follow all the international news by downloading the RFI application

Read on on the same topics:

• United States
• Economy