Keeping Your Cash Safe: How to Insure up to $50 million in Bank Deposits
By Paul Diamond, Web Editor, Vistage International
As confidence erodes in the U.S. financial system and the government scrambles to create a plan to restore that confidence, many business owners are wondering about the safety of their cash. While treasury bills, notes and bonds are typically viewed as the safest place for cash, there are new insured and convenient bank options.
Currently, the Federal Deposit Insurance Corp. (FDIC) insures up to $100,000 of a personal bank account and the same amount for a business bank account. If your bank were to fail, the FDIC guarantees that you will get up to $100,000 of your money back. Beyond that, historical averages show that claimants typically get back about 73 cents on the dollar. What’s the solution to insuring 100 percent of your business or personal cash that exceeds $100,000?
Enter CDARS (pronounced "cedars"). The Certificate of Deposit Registry Service allows people and businesses to work with one bank—their own bank—and get FDIC insurance on all of their cash, up to $50 million placed in Certificate of Deposits. CDARS is owned by Promontory Interfinancial Network, which has brought together some 2,500 financial institutions in the U.S.
Here’s how it works
If your bank is a member of the CDARS network, it can place your money in CDs at other banks that are members, thus spreading your money across multiple banks to take advantage of the FDIC insurance of $100,000 at each bank. If your bank is not a member, you can most likely find a member in your region.
You earn one interest rate on all the CD investments placed through CDARS. There’s no need to tally disbursements for each CD. You receive one statement that details all of your CD investments. There are no annual fees, subscription fees or transaction fees. You get all of the interest from the CD product that you choose. You can also select from maturity dates ranging from four weeks to five years and choose the terms that best suit your investment needs.
For many businesses, CDARS can be a valuable cash management or long-term investment tool. By providing access to up to $50 million in FDIC insurance through a single bank, CDARS can help simplify your job and improve your business' financial performance.
What’s the downside of CDARS?
The downside is that mostly smaller banks participate in its network. Typically, large national banks like Washington Mutual and Bank of America are not members. Additionally, CDARS makes its money by charging participating banks a transaction fee, so the CD rates you get through CDARS may be lower average CD accounts.
Insured money-market funds
On September 19th, the Treasury said that it will offer insurance coverage to money-market shareholders. It then clarified the announcement on September 21st, saying the insurance was “for amounts held by [money-market investors] as of the close of business on Sept. 19, 2008.” This means that any money investors had in a money-market fund as of the close of business on Sept. 19th, 2008 may be insured, if the money-market fund elects to pay the premiums for the new insurance. This insurance is slated to last for one year.
Money-market deposits made after September 19th are not eligible for coverage. Additionally, investors who lost money in money-market accounts prior to September 19th are not covered by this new insurance. Investors in the Reserve Primary Fund, which saw a 3 percent decline in value on Sept 16th and 17th, will not be covered for those losses by the new Treasury program. Call your money-market account to find out if your funds are covered.
Getting more FDIC coverage without using CDARS
Individuals can get more coverage by designating different ownership categories to their accounts at the same bank. For example, a husband and wife can qualify for $600,000 in total FDIC coverage at one bank by opening the following five account types.
Related articles: What You Should Know If Your Bank is in Trouble
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