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May 18, 2004
Matchmaker Boosts FDIC Limit to $5 Million for Community Development Banks
    by William Baue

A new system allows community development banks to trade portions of deposits, upping the amount covered by the Federal Deposit Insurance Corporation to $5 million.

In January 2003, Promontory Interfinancial Network introduced an innovative program allowing banks to spread deposits amongst member banks in order to increase the amount covered by Federal Deposit Insurance Corporation (FDIC) beyond the $100,000 limit. Essentially, Promontory's Certificate of Deposit Account Registry Service (CDARS) is a sophisticated computer match engine that allows banks to break up large individual deposits into chunks under the $100,000 limit and swap them dollar-for-dollar with other banks. Think of it as an electronic "matchmaker" for banks that currently ups the FDIC-insured amount to $5 million.

For example, if Bank A and Bank B each receive deposits for $200,000, both can offer FDIC insurance for up to $100,000 themselves and use CDARS to "swap" the remaining $100,000 in each deposit. Both banks can therefore offer FDIC insurance on each $200,000 deposit, and use that $200,000 to lend to other customers. In other words, all $400,000 is FDIC insured.

Earlier this month, Promontory joined with the Community Development Bankers Association (CDBA) to launch the "Banking on Communities" program, which tailors the CDARS program to community development financial institutions (CDFIs). CDFIs provide loans and financing to communities underserved by mainstream financial institutions, such as low- and middle-income neighborhoods or women- and minority-owned businesses.

Banking on Communities was designed so that the associated social benefits of a large deposit do not leave the community. The entire deposit can be infused into the local economy due to the dollar-for-dollar matching system.

"This promises to be a tremendous opportunity for CDFI-banks," said Robert McGill, chair of the CDBA board and president of San Diego-based Neighborhood National Bank. "We can envision hundreds of millions of dollars of investments flowing into underserved communities to finance housing and to launch new businesses--once potential investors understand they can put their money on a social mission with no danger of loss."

"Our goal is to channel $1 billion in deposits to community development banks in the first two years of this initiative," he continued.

The maximum single deposit Banking on Communities can absorb is $5 million. The $5 million threshold is a function of the number of banks involved and their ability to match deposits, according to Brian Christie, Promontory's vice president for business alliances. The threshold has grown from the hundreds of thousands to the millions since the inception of CDARS, and further growth is limited only by the capacity of the network and the matching system. Currently, there are about 20 CDFI banks in the CDARS system, Mr. Christie told, including 16 CDBA members.

The higher threshold of FDIC-insured deposits appeals particularly to institutional investors, such as nonprofits and faith-based organizations, an increasing number of which are turning to socially responsible investing (SRI).

"For community development banks trying to attract large institutional investments from socially motivated investors, that FDIC limit can be a barrier because people perceive deposits above the limit as more risky," said Jeannine Jacokes, CDBA's spokesperson.

The Banking on Communities program lowers this barrier.

"CDARS enables community development banks to leverage larger deposits from socially motivated institutional investors," Ms. Jacokes told

The Banking on Communities program also makes it easier for non-CDFI banks to earn Community Reinvestment Act (CRA) credits by investing in CDFIs. The CRA, a law enacted in 1977, requires banks to meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. A 1995 revision of the law explicitly identified CDFI investment as a means of earning CRA credits. The CDARS system facilitates, streamlines, and consolidates CDFI investment by allowing for a larger investment in one account with one interest rate and one statement.


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