What's in your sweep account - First Republic edition

msf

The SEC writes in its Investor Bulletin "Bank Sweep Programs",

If you have more than $250,000 in cash in your broker-dealer’s bank sweep program, you may want to consider:

• Public Information about the health of the bank.
  You may want to take advantage of the financial and other information available to consumers on FDIC’s website at https://banks.data.fdic.gov/bankfind-suite/bankfind [corrected]. One relevant consideration when assessing the health of the bank may be the percentage of deposits derived from concentrated sources such as brokered deposits or one or more bank sweep arrangements.
• Your broker-dealer’s affiliation with the bank.
  Your broker-dealer could choose not to limit or end a relationship with an affiliated bank that experiences financial difficulties, even if doing so would be in the best interests of broker-dealer’s customers.

Brokers using affiliated banks include among others, Schwab (Charles Schwab Bank, Charles Schwab Premier Bank, Charles Schwab Trust Bank, TD Bank, TD Bank USA), E*Trade (self-directed accounts are limited to Morgan Stanley Bank and Morgan Stanley Private Bank; other accounts also use Citibank), and Merrill (Bank of America, Bank of America, Calif.; qualified Merrill retirement accounts may also use other banks)

Other brokerages do not have affilliated banks. Vanguard is only now beginning to roll out a couple of FDIC-insured products, Vanguard Cash Deposit (sweep account) and Vanguard Cash Plus Account. But those are pilot programs open by invitation only. Fidelity offers a bank sweep program with slightly different banks for its CMA accounts and for its IRA accounts for its IRA accounts.

Fidelity shows that it uses First Republic Bank, but that the bank is now unavailable in its program. According to Fidelity, that means only that it cannot add new money to First Republic (or presumably its successor bank?). This seems reasonable and responsible, as the moneys deposited there are below the FDIC limit and pulling money out would simply exacerbate the run on the bank. (First Republic is also on Merrill's list of banks for qualified retirement accounts.)

Notable also is that Huntington National Bank is on Fidelity's IRA list of banks but not on its CMA list of banks. Recent change? I don't know. Huntington National Bank is the principal subsidiary of Huntington Bancshares, listed a month ago as a vulnerable bank. More recently, the bank said that it was working to shore up its assets and provided figures to substantiate that.

So long as one's cash in a bank is below the FDIC limit, I don't think there's any reason to be concerned about losing money. The 2014 SEC warning about bank risks due to concentrated sources seems prescient.

fred495

I purchased a CD at JP Morgan Chase through Fidelity several months ago. I also have a CD at First Republic. If, as has been reported, the FDIC were to "persuade" Chase to take over First Republic, the combined value of my two CDs at Chase would now exceed the $250,000 FDIC limit. A sale to Chase would likely mean that all of First Republic’s deposits would become accounts at the acquiring bank.

Curious if, through no fault of my own, the excess amount over the FDIC limit now suddenly becomes uninsured?

Fred

Old_Joe

What a great question!

hank

”When two or more insured banks merge, the deposits from the assumed bank continue to be insured separately, under the FDIC’s general deposit insurance rules, for at least six months after the merger. This grace period gives a depositor the opportunity to restructure the accounts, if necessary.”

Source

yogibearbull

There is a 6-month grace period for bank mergers. So, for the 6 months, the deposits will be covered separately, but not after that.

msf

Continuing from @hank's US Bank source:

CDs from the assumed bank are separately insured until the earliest maturity date after the end of the six-month grace period. CDs that mature during the six-month period and are renewed for the same term and in the same dollar amount (either with or without accrued interest) continue to be separately insured until the first maturity date after the six-month period.

Similar information is contained in an old 2010 press release from the FDIC.
https://www.fdic.gov/consumers/consumer/news/cnsum10/having_deposits_at_two_banks.html

Old_Joe

That's all well and good, but it sounds as if one of the CDs would either have to be sold in the secondary markets, or cashed-in early (likely with substantial penalties) prior to the six month deadline.

Also, let's say the two CDs are each for $200k. So does that mean that one CD is completely insured, but only 50k of the other is insured? If so, which one, and why?

Like I said- a great question.

msf

Now you're going all metaphysical on us

If I have $400K in a bank split between two accounts and the bank fails, I'm covered for $250K. Cash being fungible, does it really matter whether the FDIC covers $200K in my savings account and $50K in my checking account or vice versa?

It's all just numbers in a book (or bits in RAM). Nothing real to begin with.

yogibearbull

There is the POD trick. Each CD with a POD beneficiary is separately covered. So, retitle one of the CDs with a POD, or CD1 with POD1, CD2 with POD2, etc. Note that POD would kick in only if one dies. Bank may need the Social Security number of the POD beneficiary.

Old_Joe

"Now you're going all metaphysical on us"

@msf- no sir, not really- you nicely answered my question (at 12:37): "CDs from the assumed bank are separately insured until the earliest maturity date after the end of the six-month grace period....

... before I asked it at 12:39. Just a timing thing. Stop doing that- it's very confusing.

Derf

@Old_Joe : Thanks for the instant replay !

fred495

Thanks for the very helpful information, guys.

I raised my question on several other investment sites, but got the most useful replies from all of you terrific MFO posters. Much appreciated, and special thanks to msf for his concise answer.

Fred

Old_Joe

Yeah, msf and yogi are our two main go-to guys. Terrific resources, both of them.

fred495

I would like to take advantage of MFO's "terrific resources" and ask the following question with respect to the FDIC insurance limit:

A poster on BigBang recently informed me that at his brokerage firm "I can hold $250,000 for one bank CD in my taxable account, and $250,000 from the same bank in my IRA account, and all $500,000 is insured at that same bank, because they are in different kinds of accounts."

Is that correct? If it is, it certainly is news to me. Somehow, I always thought the $250,000 insurance limit at an institution was based on a customer's Social Security number.

Thanks, again.

Fred

yogibearbull

Yes, because they are differently titled. Individual, joint, IRA, Trust, business a/c have their separate FDIC coverages. I also noted here/elsewhere that CD1 w/POD1, CD2 w/POD2, etc have separate FDIC coverages - POD can be added to existing CDs.

Only similarly titled a/c at a bank are aggregated for FDIC.

Coverage and aggregation rules may differ for SIPC at brokerages.

fred495

Thanks, yogi. Much apprecited.

Fred