Who is the CDARS?
The Certificate of Deposit Account Registry Service, or CDARS, uses a network of banks across the country to provide the additional FDIC coverage needed. But all of this is done behind the curtain. What the depositor sees is one account at their bank with one account number and the depositor gets one Form 1099-INT for interest at tax time. Using CDARS as much as $50 million can be covered.
The program is managed by Promontory Interfinancial Network, LLC. [1515 North Courthouse Road, Suite 800, Arlington, VA 22201, 866-776-6426]. Although they have only been around a few years they boast a heavyweight board and management team that includes as their CEO former Comptroller of the Currency Eugene Ludwig.
How Does CDARS Work?
The way it works is every dollar over the $250,000 coverage limit is placed in another bank and that bank deposits an equal amount of money in the first bank. So, if a consumer had $300,000 the first bank might retain $240,000 (to keep under the $250,000 limit after earning next year's interest) and put the remaining $60,000 in the second bank. Since the consumer now has less than $250,000 at each bank the entire $300,000 is FDIC insured. The second bank would then deposit $60,000 from a different customer's account back to the first bank to balance up the books. If the consumer had $600,000 three banks would be used, and that individual with $1 million would have their money on deposit at five different banks.
What's The Catch With CDARS?
The catch is the bank will take a little more off the yield paid to the consumer to cover the extra costs of the CDARS program. However, because of the national network of over 600 banks used the consumer could still wind up earning more with CDARS than if they left all the money in their local bank.
Another point is CDARS network banks tend to be small or medium sized financial institutions, the vast majority of the banks are not affiliated. But it might get your banker's attention if you threaten to withdraw your "mega CD" unless they provide CDARS.
CDARS had been endorsed by American Bankers Association. More information is available at their web site www.cdars.com