Banks benefit from FDIC sweep programs: what’s holding you back from participating?
If you’re a bank treasurer or liquidity manager focused on deposits, sweep programs are likely on your radar screen or already part of your funding mix. Approximately 40% of all U.S. banks use brokered deposits as a funding source, according to the latest figures from the FDIC.
How a sweep program works
Insured sweep deposits are a subset of the larger category of brokered deposits. Sweep funding comes from uninvested cash balances held in customer accounts at source companies, such as broker-dealers, registered investment advisors, financial technology firms and corporate trusts. These funds are often highly cost-effective for banks, in part because banks are not required to pledge any collateral. Other benefits include bringing additional diversification and stability to the deposit base.
Put these potential benefits together, and it’s not surprising that FDIC sweep deposit programs continue to experience year-over-year growth. Since banks are currently not required to break out sweep deposits on their call reports, it is hard to put an exact number on the overall size of the FDIC sweep marketplace. However, overall brokered deposits have grown from $655 billion in 2009 to $1.1 trillion at the end of 2019, clearly suggestive, in our view, of the growth in the FDIC sweep portion as well.
Evaluating bank hesitation
So, what about the 60% of U.S. banks that aren’t currently (or yet) taking brokered sweep deposits? In some cases, bank leadership may simply not see a need to diversify its deposit mix. But in other cases, there may be some hesitation due to a misunderstanding of the actual day-to-day management of an FDIC sweep program. This is a topic I’d like to touch on a bit further here.
I’ve been responsible for UMB’s FDIC Sweep Program since 2010 and have developed a clear sense about bank treasurer’s and liquidity manager’s perspectives on the operations of these programs. In my experience, operational simplicity is extremely important. Bank leadership may hesitate to participate in an insured deposit program if they perceive it as a hassle — either during initial setup or just the day-to-day management of these deposits.
UMB’s approach to sweep programs
FDIC sweep programs are administered in a variety of ways. I won’t comment on how others manage their program, but I’d like to offer some insight into how UMB’s program is structured. We utilize a dual account structure with each participating bank opening two omnibus accounts: a money market deposit account (MMDA) and a demand deposit account (DDA). UMB actively manages all the operations and provides daily and month-end reporting through our proprietary platform and dedicated sweep operations team. There will either be a daily incoming wire to your bank or a daily wire out. At month end, your bank will be instructed as to the amount of interest to credit to the DDA.
We built the program this way because, as a bank, we see things through the lens of a bank. Given the clear benefits, I suspect that the percentage of banks utilizing insured sweep deposits will continue to rise. Again, many bank executives are already familiar with these benefits – even to those who are not participating at present. If you are in that group, I encourage you to consider operational simplicity and the importance of building true long-term deposit relationships as you evaluate how best to meet your funding needs.
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UMB Investment Banking Division is a division of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within UMB Financial Corporation. UMB Financial Services, Inc., Member FINRA, SIPC, is a wholly owned subsidiary of UMB Financial Corporation, and an affiliate of UMB Bank, n.a.