Over the last couple weeks we have seen that safeguarding your funds is not as easy it seems. To that end, the recent Silicon Valley Bank (“SVB”) and Signature Bank collapse, as well as the regulators taking over of same, is something all industries must take note of – including condominium associations. Looking at the big picture, if an association has $5,000,000.00 in bank funds but can only place $250,000.00 in FDIC-insured banks, this article visits alternative ways to ensure fund safety in an efficient manner (i.e. placing the funds in 20 separate banks is unwieldy).
The issues that have plagued SVB and Silicon Bank stem directly into an association issue – how do HOAs and Condominiums ensure they safeguard and protect their bank deposits?
In spite of some increased fears related to bank failures, it should be noted that these events are relatively uncommon. That being said, if they do happen, there are ways to proactively safeguard against significant repercussions.
In particular, there are some best practices to follow: the biggest prophylactic measures an association could take is to bank with a Federal Deposit Insurance Corporation (“FDIC”) insured bank and ensure that they have less than $250,000.00 of the association’s fund son deposit with that specific bank at any given time. An FDIC bank covers checking, savings, CDs, and money market deposit accounts up to $250,000.00 per account holder and the FDIC is an independent agency of the U.S. Government that insures a bank customer’s deposits up to the legal limit of $250,000.00 if the FDIC-insured bank fails.
Beyond safekeeping in an FDIC-insured bank, you can also ensure your funds are safe by keeping an eye on the market volatility for your bank. For example, you could keep an eye on overall valuation of a bank’s stock, national news of an impending crash, or volatility related to the bank’s stock value. Significant news around any of these variables could be an indication that the bank is in an unstable position or could be soon headed towards a failure. Another measure your association could take is diversifying your FDIC-backed accounts in the funds exceed the $250,000.00 value.
As the FDIC route involves federal U.S. Government backing, there is another option that some banks in Massachusetts offer called Depositors Insurance Fund (“DIF”). DIF is a private, industry-sponsored insurance fund that insures all deposits above the FDIC $250,000.00 limit at DIF member banks. All DIF member banks are also members of FDIC. Of note, DIF has been insuring deposits since 1934 and no depositor has ever lost a penny in a bank insured by both FDIC and DIF.
As a second step, one of the big concerns regarding the SVB and Silicon Bank crisis is user’s ability/efficiency to use one bank but also ensuring protection across large balances (i.e. 10 different banks through one bank account). There are a few options here, such as Certificate of Deposit Account Registry Service (“CDARS”) which provides FDIC protection across large balances, with the personal service and efficiency of a single bank relationship. The main drawback with CDARS is the funds have liquidity problem since CD’s must mature or otherwise a penalty must be paid.
Within CDARS, there is also an Insured Cash Sweep (“ICS”) option which is the transaction account version (i.e. liquid funds) of CDARS. The CDARS service allocates deposits in a way that is similar to the ICS service, but allocates the funds to time deposits (certificates of deposit or CDs) at other Network banks, whereas the ICS service allocates the funds to money market deposit accounts. The presumption is FDIC would honor the deposit record created by the ICS and the product is endorsed by the American Banker’s Association. An alternative to CDARS is American Deposit Management Company (“ADM”) which provides all the benefits of investing in CDARS without the liquidity and term restrictions.
It may be fruitful to discuss these matters with your association’s attorney and lenders to determine the best route. Bottom line is that there are mechanisms that give condominium associations an opportunity to protect every penny in the event of a bank failure and without other drastic measures such as opening bank accounts at numerous locations.
To confirm if a bank is FDIC-insured, you can look for the FDIC sign at your bank or you can use the FDIC’s BankFind tool.
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