Back to News & Insights

Unlocking Liquidity: Transitioning from Collateral to Reciprocal Deposits

How Smaller Banks Can Capitalize on a Big Opportunity

September 4, 2025

In today’s volatile environment, liquidity, capital efficiency, and customer retention are more important than ever. For banks, particularly community and regional institutions, reciprocal deposits represent a powerful tool to enhance balance sheet management, reduce collateral burdens, and deepen client relationships.

A Smarter Way to Offer Expanded FDIC Insurance Coverage

Reciprocal deposits allow banks to provide access to expanded FDIC deposit insurance coverage well beyond the standard $250,000 limit by distributing customer funds across a network of participating institutions. While the customer continues working directly with their preferred bank, their funds are placed in insured increments across the participating network, keeping the full balance visible while providing access to expanded deposit insurance.

This solution is ideal for:

  • 1

    High-Net-Worth Individuals

    These clients often maintain large balances that exceed FDIC limits (currently $250,000). In the past, they had to manage multiple bank relationships to access expanded deposit insurance. Reciprocal deposits solve that problem, providing access to expanded deposit insurance coverage through a single trusted relationship.

  • 2

    Commercial Accounts

    Corporate treasury teams value both security and simplicity. Reciprocal deposits enable businesses to access expanded deposit insurance for large cash balances without sacrificing operational efficiency or relationship benefits.

  • 3

    Government Entities

    Public funds often require collateral, such as pledged Government-Sponsored Entities (GSE) securities. This requirement restricts a bank’s ability to use those assets elsewhere. Banks can eliminate collateral requirements by transitioning government deposits to a reciprocal solution, freeing up capital and improving liquidity.

From Collateral to Capital Efficiency

Smaller banks are increasingly the recipients of large public and commercial deposits, but are being required to collateralize the uninsured portion of those deposits, which limits their potential liquidity.

Converting these pledged deposits to reciprocal deposits enables banks to:

  • De-pledge assets
  • Enhance Liquidity
  • Free up capital for lending or investment

In a competitive market, this flexibility is a strategic advantage.

Turning Strategy into Action

So, how can banks put this into action?

  • 1

    Identify eligible accounts

    Focus on deposits currently secured by pledged collateral.

  • 2

    Engage the client

    Introduce the concept of reciprocal deposits and the advantages of expanded deposit insurance coverage.

  • 3

    Review investment policies

    Government and institutional clients may need to update guidelines to allow for reciprocal deposit programs.

  • 4

    Transition with care

    Once approved, conversion is straightforward and minimally disruptive to the customer.

The Key to Adoption: Education

Institutional clients may be unfamiliar with reciprocal deposit networks or hesitant to shift from traditional approaches. Proactive education is essential. Banks must clearly communicate this model’s compliance, safety, and liquidity benefits. 

Bottom Line

Reciprocal deposits offer a practical, high-impact solution for banks seeking to:

  • Reduce reliance on collateral
  • Strengthen customer loyalty
  • Provide access to expanded deposit insurance capacity

For community and regional institutions, embracing reciprocal deposit strategies is a competitive advantage in a rapidly evolving market.