The rapid failures of three banks – representing the second, third, and fourth largest bank failures in U.S. history – have left depositors on edge. Some large depositors worried about potential risk to uninsured deposits have moved their funds to large institutions or out of the banking system entirely, accelerating an already worrisome trend of deposit outflows.
Reciprocal products, where banks exchange deposits to provide depositors with extended insurance, offer a powerful solution. Depositors using a reciprocal product can benefit from the extended FDIC insurance provided by diversifying their deposits across multiple banks. Importantly, much of the complexity is handled behind the scenes, and the depositor only needs to maintain a single relationship with their home institution.
The use of reciprocal deposits shot up in Q1 2023, growing 40% quarter over quarter from $158bn to $222bn. Reciprocal deposits have grown steadily 35% year over year since they were first reported on call reports in 2018, but the recent focus on insurance has supercharged their use.
We expect the use of reciprocal deposits to continue to grow quickly over the next few quarters. However, there is a huge gap between the $5.1 trillion of uninsured deposits outside of the largest four banks and the $0.2 trillion of reciprocal deposits, suggesting the products are significantly underused by depositors and banks. Current reciprocal products tend to be operationally painful for both the depositor and the bank, limiting their adoption. We believe that reciprocal products can play a significant role in helping banks across the country, but only if they become seamless enough to be the default account for large-value depositors.
Best,
Paolo and the ModernFi Team
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