PROTECTING ASSOCIATION FUNDS
THE PROBLEM: Three U.S. banks failed within the space of two weeks in March. What can boards do – and what should they do – to ensure that the association funds they deposit in financial institutions are safe?
OUR SOLUTION: The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 in bank savings and checking accounts, bank CDs and bank money market account. With the three U.S. banks that failed U.S. regulators quickly promised to guarantee all deposits, above the FDIC limit. They might respond the same way to future failures, but you can’t count on that. So associations should take several steps to ensure that associations funds are protected, primary among them:
Don’t deposit more than $250,000 in a single depository institution.
It is important to understand that the $250,000 FDIC insurance cap is an aggregate, per customer limit that applies generally to all the accounts a customer has in a bank. Opening different types of accounts in a single institution won’t work; if your association has a $100,000 CD, a $100,000 checking account and a $100,000 money market account in a bank, only $250,000 of that $300,000 total would be insured.
If you have deposits totaling more than $250,000, you have several options:
Open accounts equaling no more than $250,000 in multiple banks.
Open accounts in state-chartered Massachusetts depository institutions, which insure deposits above the $250,000 FDIC limit, with no cap, through the Depositors Insurance Fund (DIF), a private fund financed by mandatory contributions from participating institutions.
Invest some of your funds in Treasury securities, which are backed by the federal government (hard to get much safer than that) and available in a variety of maturity levels that you can choose to match the association’s liquidity needs. The securities do carry some interest rate risk – if you have to sell a security before maturity when rates are rising, you will lose money on the investment (Silicon Valley Bank failed in part because of this). But with shorter term investments, interest rate risks are not a huge concern.
Keeping track of deposits in multiple banks can be difficult, but there is a solution – deposit funds in a bank that belongs to a deposit swapping network, which can separate large deposits into smaller ones that are deposited in other network banks. IntraFi Network Deposits – deposits the funds in CDs; the Insured Cash Sweep (ICS) service deposits them in money market accounts. Although you deal with only one bank and receive a single statement listing all the accounts, you have the insurance benefits of having deposits at several institutions.
Due Diligence
Boards have a fiduciary obligation to protect association funds. This means that boards should exercise due diligence when selecting the financial institutions with which they do business.
Avoid troubled banks. Boards aren’t required to be banking experts, but they should pay attention to press reports indicating problems. They should also consider that the bank offering outsized interest rates may also be taking outsized risks.
Make sure the accounts you open are FDIC-insured; bank money market, savings and checking accounts have that insurance; stock funds and other vehicles offered by non-banks are not FDIC-insured.
Monitor association accounts. Make sure they remain within the federal insurance limits. Interest earned on an account could push it over that line.
Pay attention to investment returns. Boards have a fiduciary responsibility to ensure the safety of association funds, but they also have an obligation to earn a reasonable return on them if the return is virtually risk free. That doesn’t’ mean you should invest in junk bonds or oil futures, but it does mean you should not let funds languish in an account paying 1 percent when other, equally well-run banks or Treasury securities are paying a lot more.
Consider the association’s liquidity needs. Funds invested in longer-term vehicles will earn a higher return, but they also may not be available when the association needs the money.
Make sure the board’s decisions about where to deposit association funds and how to structure the deposits are thoughtful and well-documented.
Consider consulting an investment professional. This isn’t essential, but depending on the expertise and comfort level of board members, it may be helpful.
For advice on protecting association funds, contact Richard Brooks.