Firms step in as deposit guarantee is scaled back

Frank Sorrentino, of North Jersey Community Bank, is prepared for changes in the FDIC’s deposit insurance.
Benjamin Norman/The New York Times
Frank Sorrentino, of North Jersey Community Bank, is prepared for changes in the FDIC’s deposit insurance.

NEW YORK — On the first day of the New Year, $1.5 trillion of bank deposits will lose an unlimited government guarantee that was granted during the financial crisis to assure skittish customers their cash was safe. For a handful of boutique firms that service banks, it is a boon for business.

The accounts losing the insurance are used by businesses, municipalities, and other entities like nonprofits that are willing to forgo any interest in order to have immediate access to their large pools of cash. These accounts hold about 20 percent of all deposits in US banks. Starting Jan. 1, only $250,000 in each noninterest-bearing account will be backed by the Federal Deposit Insurance Corp.

A scramble is underway to make sure these customers do not pull large sums out of banks, particularly the community banks that have benefited from the guarantee. Because a depositor is barred from dividing up $1 million in four accounts within the same bank, for example, many smaller banks are turning to a handful of specialized cash-management firms that can split deposits into $250,000 chunks and distribute them among a network of banks.


One firm doing this parceling work, Reich & Tang, has seen 25 new banks in the last few weeks sign up for the program. Deposits managed by another firm, StoneCastle Cash Management, have surged to roughly $3 billion from just over $2 billion in September.

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“Interest has picked up dramatically,’’ said Joshua Siegel, managing principal of StoneCastle.

The end of the unlimited insurance, known as the Transaction Account Guarantee, is the latest twist in the government’s effort to scale back its support for the financial system, and the banking industry’s effort to mute the impact of the new lower limits.

Many analysts assume that even with the end of the government guarantee, the vast majority of the deposits will remain in the banks because the government will continue serving as some sort of backstop for most of the $1.5 trillion.

The unlimited guarantee was created in the depths of the crisis by the Federal Deposit Insurance Corp. to stop a migration of customers from smaller banks to larger ones that were viewed as less likely to fail.


Most individual savers keep their money in interest-bearing accounts, which since the crisis have seen their insurance coverage raised to $250,000 from $100,000. Some families have gotten around the insurance limit by dividing money into separate $250,000 accounts under the names of different family members.

Firms like Reich & Tang will do this more systematically for wealthy clients. The end of the unlimited guarantee for corporate and municipal depositors is set to significantly increase business at these firms.

Siegel, managing principal of StoneCastle Cash Management, which runs one of the largest programs, said he has seen a tenfold increase in interest from community banks in the past month.

Before the latest financial crisis wiped out hundreds of banks and left Wall Street teetering on the brink of collapse, many depositors kept large sums in accounts even if there was no government guarantee. But with the memory of bank failures still fresh, customers are more aware of the risks.

Frank Sorrentino, the chairman and chief executive of North Jersey Community Bank in Englewood Cliffs, N.J., signed up with StoneCastle Cash Management to have a product in place to offer any worried corporate clients.


The insurance ‘‘isn’t even dead yet, and it’s just nice to know that we have an answer for any clients that are concerned,’’ he said.