Bank Investment Contract (BIC)

What Is a Bank Investment Contract (BIC)?

A bank investment contract (BIC) is a security or portfolio of securities that offer a guaranteed rate of return. A bank offers such a deal to investors for a predetermined period, usually one to 10 years, although some contracts can be for only a few months. 

These contracts typically yield lower interest rates but at a lower level of risk, which makes them suitable for investors seeking to preserve rather than grow their wealth. Pension and retirement funds are some of the biggest buyers of bank investment contracts. If you are an employee who invests through your employer's 401(k) plan or pension fund, you might indirectly be investing in a BIC through your retirement plan.

Understanding a Bank Investment Contract (BIC)

Bank investment contracts are similar to guaranteed investment contracts (GICs), which are issued by insurance companies. Although these contracts usually include relatively low-risk securities, they are very illiquid, which means they cannot be easily sold or exchanged for cash. Investors who buy these contracts are generally required to leave the money they invest in them for the duration of the contract.

One advantage to BICs is that unlike certificates of deposit (CDs), bank investment contracts often allow subsequent incremental investments, with those deposits earning the same guaranteed rate.

Requirements for a Bank Investment Contract

In exchange for a bank’s customer agreeing to keep deposits invested for a predetermined, fixed period, the bank, in turn, guarantees a specific rate of return. Payments of interest, as defined in the contract, and the return of principal invested happens at the contract expiration.

Although certificates of deposit (CDs) offer similar guarantees and a low-risk profile, they differ from BICs because BICs often allow for ongoing deposits. A CD requires one lump sum investment to receive a specific rate of return. A BIC, however, usually includes a “deposit window” of a few months. During this window, subsequent deposits can be made and receive the same guaranteed rate. Limits may exist on the total amount invested.

A BIC would generally be considered a “buy-and-hold” investment because there is no secondary market for such contracts. They tend to yield more than savings accounts and CDs because they are not Federal Deposit Insurance Corporation (FDIC) insured deposits. They also generally generate more than Treasury notes and bonds because the U.S. government does not back them.

BICs may allow for early withdrawals under specific conditions before the contract expires. These may include the depositor becoming disabled or suffering financial hardship. In some cases, pension plans may also be allowed to receive an early withdrawal of funds invested in a BIC. However, early termination of such agreements often requires fees to be paid to compensate the bank for administrative services and interest rate risk the bank may face when approving an early withdrawal.

As with most types of bank deposits, the guaranteed rate of return for BICs is higher for more substantial deposits and over longer time frames. For example, $100,000 invested for 10 years can be expected to earn a higher interest rate than $20,000 invested for five years.

Advantages and Disadvantages of Bank Investment Contracts

BICs are well suited for an investor looking for a conservative investment that prioritizes relative safety with modest, predictable returns.

Advantages

BICs are backed by the assets of the bank or financial institution issuing them. Pension plans will frequently use BICs as part of a diversified portfolio that includes a mix of low-risk, medium-risk, and growth investments. BIC investors benefit from a guaranteed rate of return that aims to outperform fixed-income investments, such as CDs, savings accounts, and Treasury notes.

Other advantages of BICs include the ability of investors to make investments over a period of time rather than in one lump sum. Many BICs include a deposit window of a few months where the investor can make investments in the BIC and receive the guaranteed interest rate for the contract duration.

Disadvantages

BICs have several limitations that make them less attractive to some investors. The three main risks of BICs are interest rate risk, inflation risk, and liquidity risk. Should interest rates rise during the holding period, the BIC investor will still only receive the lower rate specified in their contract. An increase in inflation undermines a BIC's returns through a decline in purchasing power.

BICs are illiquid and cannot be sold on a secondary market should the investor need to raise cash quickly. BICs are not FDIC-insured or government-backed. An investor can lose money with a BIC should the issuing bank or financial institution fail to meet its commitments to investors.