We've had a couple of banks pitch products where you can put your money into their bank and that they will farm it out to other banks which will preserve the entirety of your deposit over $250k.

IntraFi/ICS and repurchase accounts would be examples.

Are these products safe in the event of a bank failure for monies over $250k?

Aside from the costs, what are other drawbacks of these products?

Yes - these are safe products. If you're concerned, about your deposits it is a great option.

Let's say you have $1MM - once enrolled in the program, $750,000 would be sent to 3 different banks, effectively providing full FDIC coverage. The cost is 25-30 bps and covers the actual cost of FDIC insurance + profit for IntraFi.

Through IntraFi, you can actually pick the Banks your money is sent to.

The participating banks would send money back to your bank from their clients. That means your Bank doesn't lose deposit balances and you get protection.

Ideally, you'd put a good chunk of those funds in a money market account. Instead of earning 4%, you would get 3.7%.

Brokered CDs also allow you to spread your money across multiple banks where each bank would have 250k coverage. You can ladder the CDs so you have some maturing every week/month/quarter so you still have liquidity to a portion of your funds.

Well I've learned something new today

This is what I've done. Used Schwab to shop CDs. They show terms of 1 month, 3 months, 6 months, 9 months, 1 year, etc. you can setup a CD ladder pretty easily and shop multiple banks at once.

These are safe. My firm has long had $2.5M of capacity through this kind of waterfall program, never had a problem with an underlying bank, or operational issue. Recently they rolled out a $50M capacity program, spread across some 3,000 participating banks.

The only issue I've seen is that capacity is not guaranteed. You could have some amount in it and capacity is reached or exceeded and then some of the funds are no longer able to be FDIC insured. There should be notice, and time to react, but FDIC coverage through these arrangements can't be assured indefinitely.

Further, I suppose quality of the underlying banks matters. While I've not seen a problem, would assume there is a well defined process when an underlying bank does go under and FDIC coverage has to step in. Would assume no practical issue, but just don't know how it works. Seemingly the lower quality the bank the higher the yield in these programs, and more potential for headaches, like anything else.

txaggie_08 said:

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This is what I've done. Used Schwab to shop CDs. They show terms of 1 month, 3 months, 6 months, 9 months, 1 year, etc. you can setup a CD ladder pretty easily and shop multiple banks at once.

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I think I am about to do this exact thing? Is there any risk with Charles schwab?

I usually just check to be sure the bank the CD is going through is FDIC insured and whether or not the CD is callable. If it's callable, the bank may buy out your CD and pay you only the interest you've earned to date (they'd do this in cases where you have a long term CD with a high rate and suddenly the Fed starts reducing rates).

The other risk is if you needed to sell the CD prior to maturity in a rising interest environment. In that case you may not get your original investment back if it's sold for less than original investment. I would just be sure you stick with a term and dollar amount that you're comfortable with and wouldn't need to access in emergency.

txaggie_08 said:

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I usually just check to be sure the bank the CD is going through is FDIC insured and whether or not the CD is callable. If it's callable, the bank may buy out your CD and pay you only the interest you've earned to date (they'd do this in cases where you have a long term CD with a high rate and suddenly the Fed starts reducing rates).

The other risk is if you needed to sell the CD prior to maturity in a rising interest environment. In that case you may not get your original investment back if it's sold for less than original investment. I would just be sure you stick with a term and dollar amount that you're comfortable with and wouldn't need to access in emergency.

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Thank you for the information! So it will be plainly obvious that the cd is callable or not? Or is this something I ask schwab when I place the order?

Yes, before buying you can click on the CD and see whether it's callable, FDIC Insured, Coupon/Interest Rate, Coupon Frequency (monthy, semi-annually, at maturity, etc.), and other info. From what I've seen, it appears you have to purchase a minimum of $1,000, and it goes up in thousand-dollar increments.