Top 3 FAQ on Deposit Reclassification


Although it’s an established process, many financial institutions (FIs) have questions about Deposit Reclassification (AKA, retail sweep programs). Even though the program was permitted by the Federal Reserve in 1994; when most hear of Deposit Reclassification or retail sweep programs - it seems too good to be true. Our family of companies has pioneered Deposit Reclassification and forged the way for this process to be a tried and true solution for banks and credit unions. To clear up some common areas of concern, here are the Top 3 frequently asked questions on Deposit Reclassification:

Q1: Is Deposit Reclassification a legally valid program?

Q2: Are my clients being impacted? Can they see it?

Q3: What is sub-accounting?


Q1: Is Deposit Reclassification a legally valid program?

One of the most commonly asked questions is whether "Deposit Reclassification" is legal and legitimate. Many FI managers are under the false impression that they could get into trouble for creating savings sub-accounts and moving customers’ funds into them just so their depository institution could reduce its reserve requirements. Fortunately, for the doubters and for everyone else, Deposit Reclassification is completely legal and has the Federal Reserve's blessings.(If you still have doubts, click here for details.) That said, one can’t fault the doubters because Deposit Reclassification is a relatively new innovation in the history of retail banking, dating back to just 1994.

History Behind Deposit Reclassification

Here’s some background. After Nicholas Ceto, Jr. retired from consulting firm, KPMG, as National Partner in charge of their Revenue Enhancement Consulting Services, he founded Ceto and Associates, an Atlanta based management consulting firm for banks and credit unions.

One of Ceto’s first independent projects was to look for revenue enhancement opportunities at Integra Bank. Upon examining their business and their books, Nick noticed Integra’s huge balance at the Federal Reserve Bank, and his training and knowledge of the inner workings of the Federal Reserve immediately kicked in.

Nick was intimately familiar with the Fed’s Regulation D (12 CFR 204 Regulation D)and had a breakthrough that Integra could move money from checking accounts (subject to reserve requirements) to savings accounts (not subject to reserve requirements), up to six times a month, and reduce its extraordinarily large Fed balance. So he experimented with a few algorithms to see what would work, and discussed his concept with the Cleveland branch of the Federal Reserve (that encompassed Integra Bank) - to positive feedback. He then proposed a final Deposit Reclassification plan, for Integra, to the Cleveland Fed, and it did comply with all regulations and the Fed gave Ceto and Associates the go ahead. Thus, the first Deposit Reclassification project was born in 1994; it increased Integra’s earnings by $30 million per year, and went on to increase earning assets by billions for financial institutions across the entire US since its inception.

Since then, Ceto and Associates moved the service to its sister company - our firm logicpath, which focuses on providing software to banks and credit unions so they can maximize efficiencies, manage risk and improve earnings through solutions such as retail sweep programs. In parallel, Ceto and Associates continues to focus on providing management consulting and advisory services to the financial industry.

Process & Regulations It Works Within

Deposit Reclassification works within the Federal Reserve’s approved processes and regulations. Before Nick Ceto pioneered Deposit Reclassification, FIs were (and still are) allowed to sweep funds between accounts. The most common practice of sweeps is from business checking accounts into higher interest earning accounts, in what are called “overnight sweeps”. Nick’s genius extends this concept of overnight sweeps - to sweeps between retail transactional checking accounts and non-transactional savings deposit accounts, occurring no more than six times per month, kept the program within full compliance with Regulation D.  To learn more about how Regulation D and Deposit Reclassification work together - see our related blog.

And because Deposit Reclassification extended the concept of overnight sweeps from business checking accounts to retail checking accounts, it came to be called a Retail Sweep Program.

The restructuring of a customer’s transaction account into a transaction and non-transaction account, must work within the bank or credit union’s account holder’s terms and conditions. The contract needs to include that financial institution may make changes to the account after notifying the customer of the change within an outlined time frame. The proposal of Deposit Reclassification includes this framework to make sure customers agree upfront to a) have two legally separate accounts – one transactional and the other non-transactional, and b) allow the bank or credit union to move funds between those accounts in a manner that would not impact funds availability for the customer. However, this is a non-adverse change to a customer’s account and disclosures are sent to existing customers and including in new customer agreements. It has no impact on the definition of the customer’s account or how that account behaves. Deposit Reclassification is completely invisible to the banking customer.

Fed Board of Governors’ Opinion Ratifies Retail Sweep

On multiple occasions, banks and credit unions have sought clarification from the Federal Reserve on what they can and cannot do under Deposit Reclassification, and staff from The Board of Governors of the Federal Reserve System have issued staff opinions and informal staff guidance (in 1995, 2005 and 2007) with respect to the requirements of an acceptable retail sweep program, with the latest such opinion issued in May 2007.

Impact of Deposit Reclassification - $55 Billion Reclassified at Credit Unions Alone!

Since its creation in 1994, most U.S. based depository institutions that held Fed balances have implemented Deposit Reclassification to free-up assets and boost profits. And logicpath has implemented Retail Sweep solutions at over 2,000 of these Fed balance carrying banks and credit unions.

In the credit union’s 5300 Call Report, the National Credit Union Administration has a line item for credit unions to report the amount of share drafts kept in savings sub-accounts; the line item is titled “Dollar Amount of Share Drafts Swept or Money Market Accounts as Part of Official Sweep Program with the Federal Reserve”. A total of that line item for the Q2 2017 NCUA 5300 report stated that as much as $55 billion was swept into non-reserve status accounts through deposit reclassification programs, and that’s just for credit unions alone!

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Q2: Are my clients being impacted? Can they see it?

The short answer is “No”.

Customers are not negatively impacted, in any way, by either the establishment of two separate accounts or the transfer of funds between them, and have no visibility into the transfers or the amounts transferred between their sub-accounts. When customers view their statements or log in to their accounts online, they only see their total account balance.

Moreover, customers always have access to the full amount of the funds that they put into the account, regardless of how the funds are divided between the two sub-accounts. So a customer’s banking experience or access to funds is not restricted in any way because funds are still immediately available from Non-Interest Checking Accounts. Further, the customer remains fully insured through FDIC or NCUA insurance on the account, and bears no insurance risk due to Deposit Reclassification.

That said, per FIs’ terms and conditions, customers must be notified. Such notifications must include a complete description of changes.

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Q3: What is sub-accounting?

Financial institutions implement Deposit Reclassification through sub-accounting by:

i) Creating two customer sub-accounts - a transactional sub-account subject to reserve requirements (typically the customer’s checking account) and a non-transactional sub-account not subject to reserve requirements (a specially created savings sub-account), and

ii) Moving funds back and forth between these two sub-accounts, no more than six times each month.


deposit reclassification retail sweep process


Source: logicpath

This allows the bank or credit union to move a portion of the customer’s funds from a transaction account to a non-reservable status savings sub-account. The checking sub-account is funded at a level that covers a customer’s normal pattern of daily activity such as typical weekly withdrawals and bi-weekly paycheck deposits. If the customer depletes funds in his checking sub-account, the Deposit Reclassification application automatically transfers funds to the checking sub-account from the savings sub-account in a manner that does not adversely impact the customer’s access to funds. At the sixth transfer, the Deposit Reclassification application moves the entire balance in the savings sub-account to the checking sub-account to comply with Regulation D and not adversely impact the customer’s banking experience.

In summary, a retail sweep program is a Federal Reserve Board acknowledged practice, established over 20 years ago, and used at most financial institutions as an excellent way to free up reserve balances from the Fed to spur investments in core banking activities and boost an FI’s margins.

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Now that you know that Deposit Reclassification (retail sweep program) is not too good to be true - find out your exact benefits implementing Deposit Reclassification with our ROI calculator.

Curious to know how other banks and credit unions reclaimed their Fed balance?

Read their Case Studies

United Federal Credit Union Venture Bank
Traditions Capital Bank Richfield-Bloomington Credit Union
Biddeford Savings Bank