A turbulent year for regional banks shows why it’s important to seek more than FDIC insurance.
In early May 2023, Federal regulators seized control of First Republic Bank in the second-largest bank failure in US history. This came after the failures of Silvergate and Silicon Valley Bank and the Federal takeover of Signature Bank earlier this year.
While there were differences between the banks and varied reasons for their troubles, there were some key commonalities. As noted by AP, “These banks had large amounts of uninsured deposits — that is, deposits above the $250,000 limit set by the FDIC.”
Deposits at First Republic were eventually sold to JP Morgan Chase, and for some of the other banks, FDIC extended deposit insurance to deposit amounts in excess of $250,000 for a time. While beneficial for those who had uninsured deposits at those banks, there’s no guarantee this will be offered to depositors at any banks that may fail in the future, meaning uninsured amounts could be lost.
For industries like EB-5 that take in large investor deposits, these issues highlight the importance of being careful about where investor funds are deposited. Regional Center operators need to understand both the requirements for EB-5 deposit accounts and the potential obstacles that may arise so they can select banking and escrow partners that are able to meet their needs.
FDIC deposit insurance and EB-5: How can investors be sure their funds won’t be lost?
FDIC insurance is extended to deposits up to $250,000 for each depositor in a particular financial institution. Above that, amounts are uninsured and at risk. So why would anyone deposit more than $250,000 in any financial institution? And if several regional banks have been in trouble recently, how do you get comfortable working with them?
At a webinar earlier this year, a panel of experts from the world of EB-5 explained (among many other topics) why the industry is particularly vulnerable to these types of failures. Regional banks are often the most widely-used for EB-5 because larger banks don’t want to deal with the regulatory complexity.
“EB-5 is not large enough for them to invest the time to come up with a compliance program that would satisfy regulators,” said JTC’s Jill Jones.
And since each EB-5 investor is required to commit at least $800,000 to their chosen EB-5 project, Regional Centers deal in amounts of money far exceeding the $250,000 limit. Even if fully insured, deposits may be held up in the event of a bank failure, which can have disastrous effects for EB-5 projects.
As the webinar panelists noted, EB-5 investors have more at stake than just their money. Visa applications, and the families relying on them to live in the United States depend on these funds being used in accordance with EB-5 rules, so investors need a Regional Center committed not only to diversification in banking, but the ability to quickly move funds to another bank if something unexpected occurs.
If the depository bank is also your escrow agent, you may not be able to quickly move funds to another institution in the event of a bank failure, change in ownership, or even a problematic policy change. That’s why having an independent escrow agent like JTC offers advantages for EB-5 Regional Centers as they look to keep investor funds secure.
Because JTC works with a large network of banking partners, investor deposits can be spread across several accounts at different banks to achieve 100% FDIC insurance coverage and competitive rates of return. And because we are not tied to a single bank, deposits can be moved if there are problems at any one bank, preventing projects from being held up in the event of a bank failure.
In addition to our independence as an escrow agent, JTC’s banking solutions also offer greater flexibility for Regional Centers so they can use investor funds wisely for the success of both projects and those who invest capital in them.
What makes JTC’s solution different
Issuers responsible for the custody of investor deposits need to be able to mitigate risk. JTC offers issuers access to platforms and programs specifically designed to diversify large deposit balances without being constrained to a single financial institution.
Some banks offer full FDIC insurance through deposit sweep solutions, which provide additional insurance but don’t account for other challenges that come with having a single financial institution in control of the relationship.
It is no secret that the EB-5 industry is subject to frequent changes. If a bank alters its policies and no longer intends to service EB-5, decides not to accept deposits form certain countries, becomes concerned about accommodating changes like amending release triggers, or doesn’t have an offering that meets best practices for EB-5, you’ll want the ability to quickly move funds to another institution and ensure flow of funds continues in accordance with USCIS rules. By utilizing deposit platforms that are independent of any single financial institution, JTC’s solution provides FDIC insurance and mitigates risk, but also grants continuous flexibility when it comes to moving funds.
We’ve mentioned the need for flexibility in the event of a bank failure, but there are many non-emergency reasons why a Regional Center might want to move funds because doing so can be advantageous for project success. JTC’s solution allows issuers to select banks on the platform at which to deposit funds. This means issuers can allocate a portion of funds to specific banks in order to be used as credit toward favorable loan terms. Issuers also have the ability to allocate and reallocate funds to capture the most attractive rates of interest. This flexibility can have a significant impact on issuers’ operations and the success of their projects.
Banks offering deposit sweep solutions often work on a system of reciprocity and may have limited availability when it comes to the number of reciprocal institutions where EB-5 funds can be placed. Banks have to pay to participate in many of these programs, and this cost can be passed on to depositors in the form of fees.
Many banks offering cash sweep products are unable to provide statements with full details on how the funds are allocated in their networks. For those who want greater transparency, JTC can provide monthly statements with full details of balances in the program and where each dollar sits, as well as subaccounting details for each investor.