Protecting Uninsured Deposits
Recent disruptions in the financial and credit markets have once again focused attention on the limitations of federal deposit insurance and the risk to deposits that exceed the insurance cap. Businesses that routinely have substantial sums on deposit in their operating accounts may wish to investigate the potential for protecting the uninsured portion of those deposits by using a repurchase sweep account arrangement.
A repurchase sweep account is a checking account with a special feature: at the end of each business day, the bank withdraws the excess cash and purchases highly liquid securities, typically treasury securities or money market funds. The following business day, the bank repurchases those securities at the same price, plus some interest, and deposits those funds back into the checking account. The amount of cash to be withdrawn and the kind of securities to be purchased are governed by an agreement between the depositor and the bank and by the particular features of the bank's sweep account program. The securities purchased are collateral securing the bank's obligation to repurchase them. The bank, of course, charges a fee for this service.
Historically, sweep accounts have been used by businesses as an investment vehicle to earn some interest on funds that would otherwise sit in non-interest bearing checking accounts. In today's environment, and given the federal government's recent action to insure the value of money market funds, repurchase sweep accounts may be a viable means to help protect the uninsured portion of your bank deposit. It is not a substitute for deposit insurance, and getting access to the securities may be delayed in the event of an outright bank failure, but it may be an appropriate choice for businesses concerned about protecting uninsured deposits.
If you require any assistance, please contact Ted Nowacki, (317) 684-5158, tnowacki@boselaw.com or R.J. McConnell, (317) 684-5194, rmcconnell@boselaw.com in the Financial Institutions Group at Bose McKinney & Evans LLP.
