In the weeks since the sudden collapse of Silicon Valley Bank, other banks, brokers and fintechs have scrambled to roll out increased FDIC insurance solutions to capitalize on the opportunity to attract new deposits. Unfortunately, in the mad rush to roll out something, anything, they are exposing your clients to the very same risks that they should be seeking to avoid.
The collapse of SVB was scary for depositors for two reasons.
First, when a bank fails, any deposits in excess of $250,000 — the Federal Deposit Insurance Corp. limit — leave depositors unsecured, which means they may not get all of their money back.
Second, when a bank fails, even insured deposits can't be withdrawn until the FDIC takes over the operations of the bank or orchestrates a sale.
If you think about why clients hold cash, it's for safety and liquidity. Any solution that puts either safety or liquidity at risk would defeat the purpose of holding cash.
The Problem With Sweep Accounts
For decades, banks and brokerage firms have used sweep accounts (known in the industry as brokered deposits) to earn a spread for themselves on client cash. While these solutions are marketed to clients as a means of keeping cash safe by obtaining increased deposit insurance, if you peek under the hood, you'll find that they expose clients to safety and liquidity risks and are rife with conflicts of interest.
