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Competitor Distorts Our Insured Cash Sweep Service

In "Best Substitute for TAG May Be Product Many Banks Wrote Off" (Feb. 4), Joe Slavens discloses that his bank "has a division that sells software and forms for other banks to manage their sweep programs." He assures us, however, that he's "writing as a banker who looked at various solutions to a problem most community banks now face." Then he offers his views of Promontory's Insured Cash Sweep service as if he were a prospective user who had objectively evaluated ICS.

Unfortunately for the reader who actually is evaluating the options, the article doesn't present a very clear picture of ICS. To begin, the author says the cost of ICS to his bank would be 15 basis points. In fact, Promontory offers no-obligation opportunities for banks to use ICS for free through June 30. And when fees do apply, they are only 12.5 basis points for banks that meet relatively low minimum use thresholds. This is one of the lowest fee levels in the industry. Moreover, using ICS does not impose other material costs on banks, such as reduced asset liquidity.

The article goes on to criticize ICS for "sending [customers] to a website other than [the bank's]," implying that ICS interferes with the bank's customer relationships. But the website in question is simply the ICS Depositor Control Panel, a secure site with the name of the customer's relationship bank on it, which the customer can visit to see its ICS balances and related information. By agreement with Promontory, an ICS bank can choose to operate its own Depositor Control Panel if it prefers. So far, though, all ICS banks – 1,000 of them – have chosen to let Promontory do the job, which it does at no additional charge.

The author also dislikes the fact that the names of other banks appear on the statements of ICS depositors. But of course they must. Customers want to know where their money is. More to the point is that the destination banks do not see the customer's name. When a relationship bank places a customer's funds using ICS, the funds are sent from a transaction account at that bank to demand or money market deposit accounts at other member banks in amounts below $250,000. This makes the customer funds eligible for FDIC protection. But while funds are placed with multiple banks, customers work directly with just one – the relationship bank, a bank that acts as the customer's agent and custodian and maintains full ownership of the customer relationship. The relationship bank sets the rate. Customers communicate with only the relationship bank's service team.

The most puzzling part of the article is the author's statement that, even though he is a lawyer, he has "struggled with the complexity of the [ICS] program." To date, none of the many hundreds of banks that participate in the ICS service has reported any such difficulty to us. On the contrary, banks have told us that they find ICS easy to understand and use. Perhaps that's why the amount of outstanding deposits placed by ICS banks is not $1 billion, as the author says he heard, but nearly $8 billion and continuing to grow.

To be sure, repo sweeps have a legitimate role to play, and banks should certainly consider them as part of the range of available options in a post-TAG world. But until now we had not heard the suggestion that these arrangements are less complex than FDIC insurance. Nor is that suggestion easy to square with the detailed guidance and federal regulations on repo sweeps, which include technical requirements (such as for daily confirmations) that, if not met, can entirely thwart the depositor's protection.

We do agree with the article that it's important for bankers to be able to offer their customers peace of mind. We also know, from long experience, that there is no better source of peace of mind than access to FDIC insurance. The American Bankers Association has endorsed ICS. The Independent Community Bankers of America promotes the service to its members.

Phil Battey is the senior vice president of external affairs at Promontory Interfinancial Network LLC.


(1) Comment



Comments (1)
The following comment is from Joe Slavens of Northwest Bank and Trust (this time without formatting errors, hopefully -- Ed.)

I am sorry that Mr. Battey feels that I misrepresented his company in my BankThink submission. That was never my intention. My piece was intended to remind bankers that sweep accounts using overnight repurchase agreements, a product created primarily to pay interest on business checking accounts, are a viable alternative to offering additional security to customers in the wake of the expiration of TAG. I also shared my opinion, as a banker, regarding each of the other three alternatives to addressing this problem.

It appears that Mr. Battey only takes issue with two pieces of factual information I shared, the cost of the ICS program and the current level of participation in it. It was an ICS representative that told us that the cost of the program for our bank would be, as was stated in my article, 15 basis points. It was in that same conversation that an ICS representative told us the current level of participation, both as measured by dollars and institutions. I most certainly would not knowingly put out false information.

The rest of Mr. Battey's article is based on his opinion. I respectfully submit that we both have a right to our opinions and don't feel it necessary to restate mine now as it is fully set forth in my submission. I would, however, like to address one of his concerns.

Mr. Battey expressed apparent concern for my bias since a division of my bank sells a product to help other banks manage their sweep programs. In the interest of full disclosure, I felt it was critical to make the reader aware of our interest in Stratman Solutions(TM) and its product, Bank Sweep Manager(R). So important, it was included very early in the article. That being said, my article reflects my opinions formulated over 24 years as a banker.

Let me share a little history of our bank that may be helpful. Northwest Bank & Trust Company began offering sweep accounts using overnight repurchase agreements in 1982. We developed an internal process that allowed us to manage the accounts in a way that was fully compliant and could be done with minimal time. It even made it easy to send out the daily confirmations to which Mr. Battey referred. One bank examiner that saw what we were doing was so impressed he suggested that we help other bankers that were struggling to be compliant. Our help was well received and another banker suggested we should not give our help away, but package and license it for a fee. Bank Sweep Manager(R) was launched in 1996. The FDIC later sought and received our approval to use our materials when training examiners. I guess that means we were beginning to be considered as experts in this field. Here is the point, our decision to use sweep accounts using overnight repos was not based in selling the product but rather our product was born out of years of offering sweep accounts to our own customers.

I am very pleased that my submission to BankThink has generated discussion regarding how to solve the problem of protecting large depositors and more importantly, that bankers have multiple options to do so.

Joe Slavens
President & CEO
Northwest Bank & Trust Company
Posted by Marc Hochstein, Editor in Chief, American Banker | Wednesday, February 06 2013 at 5:32PM ET
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