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What is the Certificate of Deposit Account Registry Service (CDARS), and how does it work?
As a bank customer, you have the peace of mind that your deposits are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) in case of bank failure. But what if you have more than $250,000 to deposit?
Luckily, there are ways to extend insurance limits to cover more than the typical $250,000. The Certificate of Deposit Account Registry Service (CDARS) is one way of doing so. This service allows depositors to insure millions of dollars by spreading deposits across certificates of deposit (CDs) at multiple member banks — without needing to open several individual accounts.
Learn more about how CDARS works, its pros and cons, and alternatives to consider when CDARS isn’t a good fit.
What is CDARS?
CDARs, run by a company called IntraFi, is a network of over 3,000 banks and financial institutions that allows depositors to insure deposits beyond the typical FDIC limit of $250,000. CDARS does this by spreading deposits across CDs at multiple member institutions.
Rather than having to manage accounts at each of these institutions, you only interact with the bank where you make your deposit. This bank acts as the custodian for your deposits, and Bank of New York Mellon acts as the sub-custodian. For a fee, you can request a statement from Bank of New York Mellon that includes balances and interest earnings from any partner banks to reconcile against statements from your bank.
How does CDARS work?
To use CDARS, you can open a CD at a CDARS member bank and choose a term. You can choose terms ranging from three months to four years. Your bank will then spread your deposit across multiple member banks, depositing less than $250,000 at each to ensure all of your cash is insured.
For example, say you have about $800,000 to invest in CDs. To make sure your full deposit receives FDIC insurance coverage, you could deposit the money into a CDARS member bank, which would then spread the deposits across CDs at multiple member banks. This could look like the following:
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Less than $250,000 at Bank A
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Less than $250,000 at Bank B
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Less than $250,000 at Bank C
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About $50,000 at Bank D
While your deposit will be held across multiple member institutions, it’ll earn interest at a rate set by your bank. As with any traditional CD, you can’t access your deposit until maturity without paying early withdrawal penalties.
If a member bank fails, deposits are usually transferred to another institution. If the FDIC can’t find an institution willing to accept the deposits, they’re typically paid out to the depositor.
Not all individuals need to use CDARS. However, high-net-worth individuals, businesses, nonprofits, governmental organizations, advisors, and institutional investors can all use CDARS to access extended insurance coverage.
Read more: What is a high-net-worth individual?
Pros and cons of CDARS
As a depositor, CDARS has major benefits. But be sure to weigh these advantages with potential downsides too.
Pros
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Extended insurance coverage: Depositors can receive FDIC insurance coverage on deposits beyond the typical $250,000 limit, insuring up to tens of millions of dollars.
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Simplicity: CDARS allows you to reap the rewards of extended insurance coverage without the need to interact with several banks. Instead, you manage your money through a single network bank.
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Low or no cost: You typically don’t have to pay to use this service. However, some banks or custodians may charge maintenance fees.
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Flexible terms: CDARS offers CD maturities ranging from three months to four years.
Cons
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Illiquidity: Money in CDs isn’t accessible before maturity without paying a penalty.
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Potentially lower rates: Banks pay a fee to use the CDARS network, and these fees may cut into CD interest rates.
Read more: Understanding CD terms: How long should you lock in your money?
Alternatives to using CDARS
Not every investor needs access to CDARS, but if you need to insure more than $250,000 worth of deposits, there are other alternatives to explore. Below are some common options:
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Open a joint account: Banks limit FDIC insurance coverage to $250,000 per depositor, per account ownership category. But by opening a joint account with another person, this limit doubles, allowing you to insure up to $500,000.
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Bank at multiple institutions: You can always spread your deposits out yourself by opening accounts at multiple banks or credit unions. If you go this route, make sure you don’t deposit more than $250,000 at each institution. Keep in mind you’ll have to manage multiple accounts and statements, which can get complicated.
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Use a cash management account: Cash management accounts often combine features of checking, savings, and investment accounts. Offered by brokerages, these accounts may also offer extended insurance coverage by sweeping excess deposits across multiple FDIC-insured institutions, similar to CDARS.
Read more: What is a cash management account?
Frequently asked questions
What does CDARS mean in banking?
The Certificate of Deposit Account Registry Service (CDARS) is a service that allows depositors to access extended FDIC insurance coverage by spreading deposits over CDs at several network institutions. While a single bank can typically insure only $250,000 worth of deposits for a single customer, CDARS allows depositors to insure and earn interest on tens of millions of dollars.
How much can you invest in CDARS?
There is no universal limit to how much you can invest in CDARS. Instead, it depends on your bank’s policies. Many banks allow you to invest tens of millions using CDARS, often up to $25 or $50 million.
How much does CDARS cost?
Depositors who use CDARS don’t pay directly for this service. Instead, member banks pay for access to the network and may or may not charge fees to depositors. However, because CDARS puts deposits into CDs, depositors will face early withdrawal penalties if they need to access their money before maturity.
Do credit unions offer CDARS?
No, credit unions don’t offer access to CDARS. Deposits are placed into different FDIC-insured banks to increase depositors’ insurance coverage. But credit union deposits aren’t insured by the FDIC — they’re insured by the National Credit Union Administration (NCUA).
