Sweep Repos – Quenching Depositors’ Thirst For Protection

Many years ago our family fell in love with “Iron Chef” and “Iron Chef America.” If you are not familiar with these TV shows, it was a pretty simple concept – under strict time constraints, chefs competed to create gourmet delights that had to include a special ingredient.

I don’t’ know that anyone has pitched a banking competition show to Bloomberg Television, CNBC or Fox Business Network, but after 35 years in banking, I do see some similarities between these shows and what is surely taking place today in bank management meetings. Banking has staples like deposits and loans, but we are also in a continuous race against time to mix in new ingredients. Right now, the required special ingredient is protection for deposits over $250,000.

A great deal has been written recently about retaining deposits in excess of FDIC insurance limits by making sure they are protected. Launched in 2003, EDIE is a great tool to help consumers structure their accounts to maximize deposit insurance coverage. Another great tool, reciprocal deposits, were introduced that same year, combining technology and multiple bank charters to expand insurance protection for both retail and business customers. In our rush to satisfy our depositors thirst for protection, I wonder if we have left an older and simpler solution in the dark corner of our pantries.

Over forty years ago, sweep accounts utilizing overnight repurchase agreements (sweep repos) were created to get around the prohibition against paying interest on business checking accounts. While that ban was lifted in 2011, sweep repos still provide another, albeit originally unintended, benefit – protecting customer deposits.

You see, sweep repos are not uninsured deposits. In fact, they are not deposits at all. Sweep repos are a secured bank borrowing. Sweep repos make customers happy because their funds are fully collateralized by government securities and if their bank fails, the FDIC’s own regulations direct the sweep repo customers to be paid. Sweep repos make bankers happy because theirs customer can safely provide the bank with protected funding limited solely by the amount of otherwise unpledged government securities it owns.

As much as has been recently written about retaining uninsured deposits, perhaps even more has been written recently about the incredible volume of U.S. Treasury and Agency securities on bank balance sheets. Their decline in market value is giving a sour taste in many a banker’s mouth. But since those government securities are already on our balance sheets and are eligible to be pledged as collateral in a sweep repo program, why not use those “lemons” to whip up some delicious lemonade.

The clock is ticking. Customers want safety sooner rather than later. Quickly adding old-fashioned sweep repos to offerings that may already include EDIE and reciprocal deposits ought to really please our judges – customers with deposit account balances greater than $250,000.

So now community bankers, I say unto you in the words of Takeshi Kaga: “Allez cuisine!”

Joe Slavens is the President & CEO of Northwest Bank & Trust Company, a $240 million community bank headquartered in the Quad Cities, USA, and is a nationally recognized expert of Overnight Repurchase Agreements. Stratman Solutions, LLC (www.stratmansolutions.com), a wholly owned subsidiary of the bank, has licensed Bank Sweep Manager and Stratman Sweep Manager, turnkey sweep repo solutions, to banks and credits unions since 1996.