Transcript Document
Changes to the Banking Regulations
that Impact Your District
Presented by:
Aimee Briles, Wintrust Financial
Julie Conenna, Bank of America
Agenda
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II.
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III.
Regulations impacting treatment of public deposits
Dodd-Frank Act
Basel III
Bank Balance Sheet Implications
Costs of Carrying Collateralized Deposits
FDIC
Collateral
Investment Policy
Partnering with your Bank
The Dodd-Frank Act
Passed by Congress July 21, 2010
Largest regulatory overhaul since the Great
Depression
Includes 385 new “rules” for financial
institutions
At least $866 million in direct compliance
costs – some estimating $1.8 billion to $1
trillion when all is said and done
Bank Impact – Dodd-Frank
Compliance with regulations will require:
Over 2 million employee hours every year
Implementation of new testing & reporting
systems
Changes the way in which banks historically
have covered costs
FDIC assessments are going to remain
elevated
Basel III – Global Regulatory Standards
Tier 1 Capital Redefined
Banks must hold more capital and larger pools of
liquid assets
New Liquidity Coverage Ratio (LCR)
LCR identifies the minimum amount of
unencumbered, high quality liquid assets an
institution must hold to cover an acute 30-day
short term stress
This affects the availability of collateral
Bank Impact – Basel III
Higher capital and liquidity requirements
resulting in:
Depressed returns on assets and lower interest
rates
Higher cost of credit
Lower liquidity value for deposits requiring
collateral
Fewer securities can be pledged as collateral
Cost of Collateralized Deposits
FDIC Regulations and Charges
Collateral Types and Costs Involved
Investment Policy – Friend or Foe?
Changes in FDIC Coverage Limits
FDIC increased the standard insurance
coverage per depositor to $250,000
Unlimited FDIC coverage for non-interest
bearing transaction accounts expired
12/31/12
Increased FDIC coverage for certain
government deposits
FDIC Coverage for Government Deposits
Public funds held in an insured depository
institution within the state the public unit is
located receive:
$250,000 coverage for combined savings
and time deposits (including NOW accounts
and Money Market accounts)
$250,000 coverage for demand deposit
transaction accounts (interest bearing or
non-interest bearing)
FDIC Coverage - Cost to Your District?
Does your bank pass FDIC assessment(s)
directly on to you?
Via hard charge or through compensating
balances?
Does your bank indirectly pass FDIC
assessment on to you?
Via a decreased interest or earnings credit
rate?
Check your analysis statement and talk to your
banker
Securing Deposits with Collateral
Pledged Securities
Held by a custodian bank or trust department
through a tri-party agreement
Obligations issued by the U.S. Federal
Government
Historically have been treasuries and agencies
Movement towards mortgage backed securities
(Fannie/Freddie)
Limited availability of securities and capacity at
the banks (liquidity ratio)
Securing Deposits with Collateral
Letters of Credit
Binding document that guarantees the payment of
an obligation
Public entity is the beneficiary on the LOC
Payable on demand – no delays from selling
securities or FDIC disputes
Usually written by a FHLB (Government Agency)
Currently more cost effective than pledging
securities
Acceptable form of collateral in the Illinois Public
Funds Investment Act if issued by a FHLB
Collateral – Cost to Your District?
Costs to banks to secure your deposits have
changed
Indirect cost for bank to own low-yielding
securities (not included in banks liquidity ratios)
Administrative cost to pledge and monitor
collateral is 25 bps
Type and amount required will affect yield and
who is willing to hold deposits
Collateral has become a commodity
Additional Thoughts on Collateral
Collateralization is not required in Illinois, but
is recommended by GFOA
Pooled collateral is allowed in many states
Collateral options are governed by the
District’s Investment Policy Statement
Takeaways
Collateralized Deposits are less valuable to
Banks because they are liquidity neutral
FDIC costs are going to remain elevated to
replenish FDIC fund
School Districts are best to position
themselves to consider a wide array of
collateral options
Investment Policy
Does your District have an Investment
Policy in place?
When was the last time it was updated?
What should be included in the policy?
Investment Policy - Definition
A document drafted between a portfolio
manager and a client that outlines general
rules for the manager.
The Policy helps ensure that your District’s
investment strategy accurately reflects your
risk tolerance and liquidity requirements,
while providing guidance to the professionals
managing your cash portfolios.
Investment Policy - Features
Specific information of your District’s risk
tolerance, liquidity requirements and return
objectives.
Allowable securities (and those to be avoided)
Guidelines for the construction and
management of your investment portfolios
Mechanisms to promote ongoing compliance
with the policy
Investment Policy
Best Practices
Updates
Policy should be reviewed at the least every 2 years
Policy should be reviewed if major changes occur
Personnel
Investment committee
Economic environment
Policy vs. Procedure
Policy – overall intention and direction
Procedure – specific way to carry out an activity or
process
Investment Policy
Share Updated Policy
Send to your Banks / Portfolio Managers
Post on District’s Website
Partnering with Your Bank
Managing your banking relationship
Relationship Reviews
Fees vs. Compensating Balances
Managing Your Banking Relationship
• What you should expect from your bank
– Focused expertise
– Full range of services and products
– Acumen, accuracy, approachability
– An annual review of your banking
relationship
Managing Your Banking Relationship
A checklist for building a strong, ongoing banking
relationship
– Stay in touch
– Talk to your bank about best business practices
– Make your bank an essential part of your
finance team
– Review the fees your bank is charging you
– Remember all banking relationships are
different
Relationship Reviews
Review should be done at least once a year
Have the right people in the review
Make sure that the district’s banking goals are
shared with banking partners.
Review current services/products & account
structure
Complete a Diagnostic check with how satisfied
you are with bank’s services and coverage team
Discuss areas to build on relationship
Direct Fees vs. Compensating Balances
Direct Fees
Requires budgeting
Requires additional monitoring of collected
balances
Requires active investing
Compensating Balances
Potentially higher yield than interest bearing
account
Investment Policy’s outline of required
collateral might impact ECR rate (cost of funds)
Questions?
Thank you!