Q: What is a bank network?
A: In a bank network, a participating bank places funds at other participating banks through the network in order for its customer to receive full insurance coverage. For example, if a customer deposits $1 million into his or her institution, the customer’s bank retains the deposit insurance limit (that is, $250,000) and places the excess of $750,000 at three other institutions in insured increments of $250,000.
In more complex arrangements, the customer’s bank may be part of a deposit placement network that is managed by a third-party network sponsor. In this situation, when the customer deposits $1 million, the customer’s bank sends the uninsured portion to a settlement bank, which then places the funds at other banks within the network at the direction of the network sponsor.
At its most complex level, the network sponsor is facilitating the placement of millions of dollars in excess funds for all of the banks in the network. Often, these placements are made through reciprocal arrangements, in which institutions within the network are both sending and receiving identical amounts simultaneously (reciprocal deposits). This reciprocal arrangement allows the bank to maintain the same amount of funds it had when the customer made his or her initial deposit, while ensuring that deposits in excess of the $250,000 deposit limit are fully insured.