Deposit Reclassification has existed since the early 90s, but most people don't know the story behind the process that has helped financial institutions reclaim billions of illiquid assets to reinvest in their local markets. Here is the story behind this vital solution.
During his time at KPMG as a National Partner in charge of Revenue Enhancement Consulting Services, Nicholas Ceto, Jr. worked with nearly every major bank in the country. Unfortunately, after more than 18 years at KPMG, Ceto retired at the age of 60 due to company policy. Shortly after retirement, Ceto made another significant mark on the banking industry by creating a process which continues to be adopted by financial institutions of all sizes to bring billions of dollars of profit to banks and credit unions: Deposit Reclassification.
History of Deposit Reclassification
A mere three months after retirement, the CEO of Integra Bank in Pittsburgh, called upon Ceto for his expertise in revenue enhancement so the bank could prepare itself for acquisition. At the time, Integra Bank had 271 branches and profits of $160 million a year. However, Ceto knew he could do more for Integra Bank.
After six months of hard work, the project was a huge success, and Ceto discovered a completely new way to increase profits. He learned that Integra Bank kept $1 billion in the Cleveland Fed, and at the time, the Fed did not pay any interest on the reserve balances. After much thought, Ceto and his team designed a way to release the funds at the Fed and bring them back to Integra Bank to use for mortgage and commercial loans. During this time, money tied up at the Fed was useless and wasn’t helping a main purpose of a bank, to make loans and investments to help the community grow.
After many long nights of regulation research, multiple conversations with attorneys, followed by weeks of negotiation, Ceto and his team developed an algorithm that the Cleveland Fed approved, and after implementation, Integra Bank received millions back from the Fed.
After the success of Integra Bank, Ceto knew he could help banks and credit unions of all sizes increase profitability, so in October of 1994, logicpath’s sister company, Ceto and Associates was born.
Deposit Reclassification overview
Deposit Reclassification is a retail sweep program that helps financial institutions (FIs) improve profitability by quickly recovering its Federal Reserve balance due to reserve requirements. The algorithm suppresses reserve requirements as low as possible and in most cases, FIs can meet remaining reserve requirements with vault cash alone; this allows them to use the freed-up funds to invest and provide more loans to help their community.
To learn more about how Deposit Reclassification works, check out ‘Top 3 FAQ on Deposit Reclassification’
Deposit Reclassification and Legislation
Deposit Reclassification is a piece of history. Reserve requirements all started after the Great Depression – customers lost confidence in the banks. In reaction to this event, the Fed created two key pieces of legislation to ease the minds of consumers.
The first was Regulation D, which requires all financial institutions to keep a certain percentage of its deposits on-hand at the Federal Reserve. It was established to give consumers confidence that they will get their deposits back from the bank in the case of a bank run.
The second, is FDIC insurance. This is another tool implemented to help consumers feel confident and comfortable with banks. However, over time, the government implemented more strict legislation and the banking system increased in stability. Newer regulations make the need for a reserve requirement almost unnecessary, so Deposit Reclassification is tool financial institutions can use to free up the money sitting in the reserve account.
Over the years the Fed opined on retail sweep programs like Deposit Reclassification. They acknowledged that as long as financial institutions follow regulations, create two legally separate accounts, notify its customers, and is able to track the money moving between accounts in the system, then they have no issue with banks and credit unions reclassifying accounts.
As Ceto & Associates grew over time as a bank consulting practice and Deposit Reclassification, the decision was made in 2008 to split the software and application products from the consulting service; logicpath emerged from Ceto and Associates to continue to deliver its premier software solutions, including Deposit Reclassification. Today, more than 2,000 financial institutions have implemented logicpath’s Deposit Reclassification across all 50 states and billions of dollars have been reclaimed from the Fed.
Deposit Reclassification remains a popular software solution for financial institutions of all sizes. In today’s rising interest rate market, it’s highly beneficial for banks and credit unions to leverage this tool to reclaim low-earning Fed balances, and reinvest in their communities.