Client Affairs

When Financial Storms Build, Consider Excess Deposit Bonds

Melissa Neis, September 22, 2022

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Many wealthy people want to park their wealth in financial institutions to ride out market storms, but there are risks to this option. What tools exist to give peace of mind?

Inflation is at levels not seen for almost 40 years; interest rates are rising and markets are volatile. The geopolitical picture is dark. In that environment, high net worth individuals thinking of making long-term deposits will want to think about insuring the risks. What tools exist? 

The author of this article, Melissa Neis, who argues that the instrument known as the Excess Deposit Bond (EDB) deserves attention, examines the topic in detail that might be unfamiliar to readers. The editors are pleased to share these ideas and invite responses. The usual editorial disclaimers apply. Jump into the debate: email tom.burroughes@wealthbriefing.com

Volatile markets. Inflation. Regulatory questions surrounding cryptocurrency. Uncertainties in the real estate and commercial real estate market. All of this uncertainty is likely to be weighing heavily on high net worth individuals who want to protect financial deposits, especially before making a large, long-term deposit. Given all these challenges, it is likely that many high net worth individuals are looking to park their wealth in financial institutions for a while.

For high net worth individuals, protecting large deposits is paramount – and financial advisors must provide all of the options available. Today’s affluent investors are looking for ways to deposit large sums of money without the constraints of a CD and beyond the FDIC insured limit. One such option that is growing in popularity for insurers is an Excess Deposit Bond (EDB).

How many financial advisors understand how easy it is to increase deposit protection for their clients by working with experts who understand and have developed specialized EDBs? These instruments afford much more flexibility than traditional financial products and allow individuals a safe harbor for large deposits as they wait out market volatility and pursue other investment opportunities. They also release banks from indemnity.

An EDB is a guarantee from an insurance provider that a financial institution will perform its obligation to the depositor. In the event of a bank default, the EDB can be utilized, and the insurance provider will make the depositor whole in principal and interest.

Benefit of Excess Deposit Bonds
EDBs are an efficient option for attracting new depositors who in the past may have not been accessible due to collateral constraints. Most financial institutions limit the number of brokered deposits they take because examiners generally view these deposits as risky. As a result, we launched an EDB program with comprehensive protection that shifts indemnity to the insurer and streamlines the process for banks and credit unions to manage much greater sums of cash and better serve their clients.

The EDB program should be viewed as a lower risk option that wealthy individuals can utilize to benefit from rising interest rates. It also complies with all state regulations designed to protect funds that exceed FDIC limits. EDB features an easy approval process; premiums based on limits used, not on limits available; and, with its competitive rates, is more cost effective than alternative solutions.

For financial advisors, an EDB may be an easier way to attract new customers and retain your most valuable customers while also meeting their funding needs. In turn, the EDB offers a guarantee to high net worth individuals.

Financial advisors will also appreciate that the EDB offers timely claim payment. Should a financial institution fail, the depositor would typically have to go through the FDIC to recoup their money, especially if they’re trying to recoup over the $250,000 FDIC limit. Whereas, with this bond, the payment would be paid out within one to two months.

Additionally, the EDB reduces a financial advisor’s own fiduciary risk to a bank failure that could have resulted from advising a client to use a particular institution.

An EDB also offers several attractive benefits for depositors. In addition to a robust maximum limit, the EDB maintains insured status and the right to file a claim, offering a certificate of insurance issued in the depositor’s name. An EDB product is also available for all depositor types and accounts, including money market or CD.

When it comes to securitization, EDBs are one of the more efficient methods. Unlike some forms of securitization, EDBs are not affected by market price fluctuations, settlement date limitations and third-party custody requirements. With an EDB, the timeline for application through issuance can be achieved quickly. And, when factoring in operational cost, functionality, and regulatory diversification, EDBs can be more cost effective and a competitive alternative for financial institutions.

Conclusion
These are unprecedented times for investors, as the after effects of Covid-19, rising inflation, interest rate risk, cyber risk, and geopolitical factors all project volatility in the marketplace. Offering clients all possible options for protecting their assets is key. An EDB program, which will pay out to a client in the event of insolvency, is available for all account and depositor types, and facilitates compliance with all state regulations, making it an attractive option for protecting large deposits.

 

About the author:
Melissa Neis is vice president of Chicago-based Parr Insurance Brokerage and has been crafting insurance solutions for financial institutions for the past 15 years. She has experience developing policy forms unique to the needs of community banks. She holds a BFA from Illinois Wesleyan University and an MBA from the University of Notre Dame.

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