The Case for Offering Reciprocal Deposits Over Collateralization

In the final two books of the “Harry Potter” series, Harry discovers that Lord Voldemort has hidden seven pieces of his soul in other objects and beings, called horcruxes. The biggest value of the horcruxes is that they act as a type of insurance against his death — while horcruxes exist, Voldemort can’t truly be killed. This means that in order to defeat Voldemort, Harry and his friends have to seek and destroy all seven horcruxes first. While depositors at your institution aren’t creating arcane magical objects to hide bits of their souls in, those with high net worths might be looking for help splitting up something else that’s valuable: large deposits. Banks can use a reciprocal deposit network to make large deposits eligible for millions in aggregate FDIC insurance across network banks, replacing the need for collateral or repos. By introducing options for reducing collateralization, a bank can earn the appreciation and loyalty of these customers and gain greater control over its balance sheet. Community financial institution (CFI) customers making large deposits typically want FDIC insurance beyond the limit of $250K per account. Banks have historically responded with collateralized deposits or repos. Reciprocal deposit networks are a modern alternative for deposit safety and efficiency.Reasons To Use Reciprocal DepositsA reciprocal deposit network breaks a deposit of more than $250K into pieces and deposits them across a network of multiple banks. Because each chunk is less than $250K, the total is eligible for aggregate FDIC insurance, while keeping the customer with his or her primary bank. The failure of Silicon Valley Bank in March 2023 marked a turning point in how banks and depositors think about uninsured balances. While reciprocal deposit networks existed well before that moment, the event accelerated awareness of concentration risk and deposit stability.In the years since, banks — particularly small and midsized institutions — have increasingly turned to reciprocal deposits as a way to provide expanded FDIC coverage without relying as heavily on collateralization or repos. Reflecting that shift, reciprocal deposit balances grew from $156B in 2022 to $422B in 2025, with small and midsized banks leading the way.Traditional Collateralization vs. Reciprocal DepositsCollateralization is the older, traditional approach that banks have taken for deposits that are too large to qualify for FDIC insurance. 
The CFI holds collateral and, if the bank fails, the depositor can claim that collateral to recover their funds. Collateralization has some associated challenges, including:

Reciprocal deposits, by contrast:

Banks need only participate in a network and keep good records. One Minnesota bank reduced its pledged municipal deposit collateralization from 60% to 5%, while maintaining depositor relationships and safety.Balance Sheet Impact and Strategic GrowthReciprocal deposits have multiple potential benefits. They can help attract and retain high-value customers: municipalities, businesses, nonprofits, and high-net-worth individuals. CFIs that use them can lend more, which often suits both banks’ bottom lines and the needs of their communities. Customers get one relationship, streamlined reporting, and the security of full FDIC protection. It’s a virtuous cycle in which stable deposits strengthen balance sheets, fund more loans, and help the bank grow.Implementation and Best PracticesTo implement reciprocal deposits, CFIs generally start by joining an established network that supports pass-through FDIC insurance, ensuring the program fits their capital category and internal policies. Operationally, banks must maintain accurate records that link each underlying customer and deposit to the network placements so that FDIC coverage can be properly recognized in the event of a failure. On the customer side, effective marketing focuses on simple explanations: the customer keeps a single relationship, statement, and point of contact, while the bank uses the network behind the scenes to extend FDIC protection and reduce the need for collateral.Conclusion: Balancing Deposit Safety, Efficiency, and Community ImpactReciprocal deposits give CFIs a way to offer large balance customers expanded FDIC insurance without tying up valuable assets in collateral or complex repo structures, easing pain points around both deposit safety and collateral management. By freeing balance sheet capacity and potentially improving liquidity metrics, they also can help support more lending into local businesses, governments, and households. For community bank leaders reassessing funding strategies in a post-SVB, rate-sensitive environment, reciprocal deposits are one option to consider as part of a customer-centric deposit and funding strategy.