Iyour imagination They are the dealer on a huge card table. There are 3,000 players, each with a different number of cards. some have thousands; others a handful. They will each keep some cards and return the rest to you. Your job is to rearrange the deck and deal it again so that each player has the same number of cards they held before, but none of the same ones they turned over. At any time, a player may recall a specific card that he once held.

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It’s a daunting task for a poor human defaulter, but a trivial one for the vibrant algorithms that govern the business of managing “mutual deposits,” whereby a bank makes deposits to another bank and redeems the same value, via a few mostly unknown. technology companies. These quiet financial plumbing giants are reallocating massive amounts of deposits. About $1 trillion is traded through the platforms, about a fifth of which is swapped in reciprocal arrangements. This is a large slice of the total $18 trillion in deposits held with US financial institutions at the end of last year.

Deposit swaps mean that banks can offer their customers more insurance. After the failure of the Silicon Valley bank in March, when about 93% of deposits were uninsured, this became a priority for customers and institutions. The maximum insurance—a regulatory guarantee that money will be repaid in the event of a bank failure—is $250,000 per account holder. Wealthy individuals and corporations often own more than that. About 45% of deposits in the US banking system were uninsured at the end of last year.

Those seeking greater protection once had to go from bank to bank themselves. If an institution wants to offer greater deposit insurance by placing deposits elsewhere, it will have to give up using the deposit as financing. But in 2002, the idea of ​​\u200b\u200bmutual deposits was invented by Eugen Ludwig, who previously ran the Office of the Comptroller of the Currency, a regulator. The company he and his co-founders set up, IntraFi, allows banks to sign up to put deposits around the system so they are all insured, with the same value of deposits being remitted from other places back to the bank.

IntraFi was the first company to do so, and it is still by far the largest. It has 3,000 banks on its platform. However, he has been joined by a few other companies, incl s&R Deposit Solutions, the second largest modding company with about 350 banks in its network, and smaller players including ModernFi and StoneCastle Cash Management. These companies are now experiencing something of a boom. Kevin Bannerton s&R He says the value of his company’s mutual deposits has increased by more than 30% since the beginning of March. It is reported that new institutions require registration. Marc Jacobsen, President of IntraFi, says the company has seen “significant” growth in its mutual deposit business over the same period.

All this exchange of deposits raises the question of whether it makes sense to maintain the federal cap. The private sector has come up with a clever workaround to offering more than mandatory deposit insurance. It is conceivable that with several thousand banks in the network, the account could offer deposit insurance for hundreds of millions of dollars. In fact, StoneCastle offers a $125 million deposit insurance account.

But there is a difference between the private sector alternative solution and the public sector mandates. Banks are currently hard to match so everyone can offer such high limits (most offer insurance of only a few million dollars), and mutual deposit companies charge fees as well. It applies in addition to fees, between 0.05% and 0.32% of the value of total liabilities, that institutions pay for Federal Deposit Insurance.

Removing the cap would raise insurance rates across the system; These higher costs will almost certainly be passed on to customers in the form of lower interest rates. However, if enough depositors seek insurance by distributing deposits, the result may be higher costs anyway.

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