During the banking turmoil of 2023, banks sought to reassure uninsured depositors by leveraging recent regulatory changes to provide additional coverage. A new report from the Federal Reserve Bank of Cleveland indicates that the use of reciprocal deposits between banks increased significantly following the failure of Silicon Valley Bank in March 2023.
Typically, deposits in a bank account are insured up to $250,000. However, banks can offer extra coverage by exchanging deposits beyond that amount with other institutions. The practice of using reciprocal deposits began to rise in 2019 after regulatory changes and saw substantial growth in 2023. Midsize banks were primarily responsible for this increase, as small banks have fewer large depositors and large banks quickly encounter regulatory limits.
According to Edward S. Prescott and Grant E. Rosenberger, authors of the report, "The next time depositors are worried about bank failures, there will probably be another spike in demand for reciprocal deposits." They added that "this behavior would mean that reciprocal deposits have, in effect, raised the deposit insurance limit."
The Federal Reserve Bank of Cleveland is one of twelve regional Reserve Banks forming part of the US central bank system along with the Board of Governors in Washington DC. The Cleveland Fed plays a role in formulating national monetary policy, supervising banking organizations, providing payment services to financial institutions and the US Treasury, and supporting communities across its district through research and educational activities.
The Cleveland Fed serves an area encompassing Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia through its main office and branches in Cincinnati and Pittsburgh.
For further information or inquiries:
Chuck Soder
chuck.soder@clev.frb.org
216.672.2798
