In the United States, federal regulations require banks to insure depositors’ money against bank failure through the Federal Deposit Insurance Corporation (FDIC). Every depositor’s accounts are insured up to a certain amount, such as $100,000 U.S. Dollars (USD). A service called the Certificate of Deposit Account Registry Service (CDARS) provides depositors a way to enjoy FDIC insurance coverage on deposits of up to $50 million USD.
Deposit insurance is important for anyone who keeps his money in a bank. It provides that a depositor’s money will not be lost, even in the event that the bank becomes financially unviable. This allows people to deposit money with the confidence that they will be able to get it back, come what may. However, deposit insurance is limited. For example, if a person has $150,000 USD deposited at a bank, and the cap for FDIC insured funds is $100,000 USD, then $50,000 USD of that person’s money would potentially be at risk, if his bank were to fail.
CDARS provides a way for people to establish multiple certificates of deposit (CDs) at a single bank, and to have all of that money insured by the FDIC, even if it totals an amount larger than the current FDIC limit. For example, a person may have $150,000 USD which he wants to put in bank A. Bank A gives him CDs worth $95,000 USD, leaving some room for interest to accrue. Bank A then sends the remaining $55,000 USD to a company that knows bank B will issue the person CDs for the remaining funds. In return, bank B purchases $55,000 USD worth of CDs from bank A.
The company in the middle is CDARS, and the above process allows all of the person’s money to remain on bank A’s balance sheet as assets. Prior to CDARS, it was possible to insure more money than the FDIC limit allowed, but it had to be done through different types of legal ownership. This in itself cost the depositor money and effort. But with CDARS spreading a person’s deposits among a network of banks, there is no additional effort on the part of the depositor to be able to have all his money insured.
There is, however, a possible drawback to using the service that CDARS provides. It is possible for a depositor to miss out on higher CD interest rates than the ones being offered by his bank. This risk is generally small, though, and can be reduced if the depositor is willing to do some research to find a bank that offers consistently higher rates. If the bank with the higher rates is in the CDARS network, the depositor can benefit from those higher rates of interest.