Grow and Protect Customer Deposits

By Riley Olson, Investment Operations Rep for Bankers’ Bank

Bankers’ Bank, in partnership with Stratman Solutions, recently hosted an educational seminar on using retail repurchase agreements to grow and protect customer deposits. With the recent bank failures earlier this year, this topic was top of mind for many community banks with depositor balances exceeding FDIC insurance limits. Many banks already utilize tri-party public deposit agreements or their State program for public depositors. The mechanics and compliance for non-public depositors are not as clearly understood.

The repurchase agreement at its core is the selling and buying back of the same securities, at a future time, such as one-day or overnight repos. Banks can utilize repos by sweeping depositors’ funds above insurance limits and securing those deposits with their own security holdings. During the seminar, attendees learned, what makes a better repurchase agreement, from a compliance perspective. It involves the customer, the custodian, and the bank. There are daily requirements of the bank to notify the customer with details of the sweep transaction and to notify the custodian that customer balances do not exceed the market value of securities pledged to the repo.

There are some short comings that a bank may unknowingly have with compliance. Such as not using acceptable collateral for the repo and not having the securities in a segregated account, preventing commingling with other bank holdings. Banks may have agreements in place with the customer for the repo, but may not have the required separate repo agreement in place with their custodian.  The daily market pricing required for the repo holdings is also an area noted for potential compliance issues.

So how do community banks create a better, stronger and more structured repurchase agreement for themselves and their customers? The participating customers can have their collateral interest perfected by adding an agreement between the bank and the custodian. The bank must use only securities issued by Government Sponsored Entities (GSE) or the US Treasury to secure the repo, and have these held in a segregated safekeeping account. They use daily market pricing for the securities assigned to each of their customer’s repo obligation and send repo confirmations to each customer daily. This also includes daily reports sent to the custodian; with the name of each customer, their balance, and the aggregate balance for all customers.  Also detailing all securities pledged, with the daily market value for each and the aggregate balance for all.

Stratman Solutions shared their Bank Sweep Manager (BSM) software, designed to automate the daily repo process for banks. BSM assists banks with collateral selections for each customer and automatically sends the required daily reports to the customers and custodian. BSM can also import extracts of daily market values, all of these greatly reduce the time spent on the repo for their customers.

Contact Bankers’ Bank’s safekeeping department with any questions about retail repurchase agreements.