changes to the banking regulations that impact your district presented by: aimee briles, wintrust...
TRANSCRIPT
Changes to the Banking Regulations that Impact Your District
Presented by:Aimee Briles, Wintrust FinancialJulie Conenna, Bank of America
Agenda
I. Regulations impacting treatment of public deposits– Dodd-Frank Act– Basel III– Bank Balance Sheet Implications
II. Costs of Carrying Collateralized Deposits – FDIC– Collateral– Investment Policy
III. 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
PersonnelInvestment committeeEconomic 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!