BILL ANALYSIS Ó
AB 283
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Date of Hearing: April 13, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 283
(Dababneh) - As Introduced February 11, 2015
SUBJECT: Financial affairs
SUMMARY: Makes permanent, provisions of law that expands the
authority granted to local agencies to use a private sector
deposit placement service to invest up to 30% of surplus funds
into deposits other than certificates of deposits (CDs).
Specifically, this bill:
1)Deletes the January 1, 2017 sunset date that allows a local
agency to invest up to 30% of surplus funds in deposits other
than CDs at a commercial bank, savings bank, savings and loan
association, or credit union that uses a private sector entity
to assist in the placement of deposits.
2)Repeals a code section that prohibits a local agency from
investing more than 10% of its surplus funds in any one
private sector entity that assists in non-CD deposit placement
service, thereby allowing a local agency to invest up to 30%
of surplus funds in one private sector entity that provides
deposit placement service.
EXISTING LAW:
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1)Authorizes a local agency, until January 1, 2017, to invest a
portion of its surplus funds in deposits at a commercial bank,
savings bank, savings and loan association, or credit union
that uses a private sector entity that assists in the
placement of non-CD deposits, provided that the purchases of
deposits, in total, do not exceed 30% of the agency's funds.
(Government Code, Sections 53601.8 & 53635.8)
2)Prohibits a local agency from investing more than 10% of its
surplus funds in any single non-CD placement service.
3)Provides that the following conditions apply for a local
agency to invest its surplus funds in deposits:
a) The local agency shall choose a nationally or state
chartered commercial bank, savings bank, savings and loan
association, or credit union in California to invest the
funds, which shall be known as the "selected" depository
institution;
b) The selected depository institution may use a private
sector entity to help place local agency deposits with one
or more commercial banks, savings banks, savings and loan
associations, or credit unions that are located in the
United States and within the network used by the private
sector entity for this purpose;
c) Any private sector entity used by a selected depository
institution to help place its local agency deposits shall
maintain policies and procedures that require the
following:
i) The full amount of each deposit placed, including
interest, shall at all times be insured by the Federal
Deposit Insurance Corporation (FDIC) or the National
Credit Union Administration (NCUA); and,
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ii) Every depository institution where funds are placed
shall be capitalized at a sufficient level to receive
deposits pursuant to FDIC or NCUA.
d) The selected depository institution shall serve as a
custodian for each deposit; and,
e) At the same time the local agency's funds are deposited,
the selected depository institution shall receive an amount
of insured deposits from other commercial banks, savings
banks, savings and loan associations, or credit unions
that, in total, are equal to, or greater than, the full
amount of the principal that the local agency initially
deposited through the selected depository institution for
investment.
4)Authorizes a local agency to invest a portion of its surplus
funds in CDs at a commercial bank, savings bank, savings and
loan association, or credit union that uses a private sector
entity that assists in the placement of CDs, provided that the
purchases of CDs, in total, do not exceed 30% of the agency's
funds.
FISCAL EFFECT: None.
COMMENTS:
Background
The authorization for local agencies to invest surplus funds in
CDs was put into place by AB 2011 (Vargas), Chapter 459,
Statutes of 2006. Existing law requires local agency funds to
either be protected by federal deposit insurance or secured by
collateral. Prior to the bill, if a local agency wanted to make
a deposit of over $100,000, the FDIC insurance limit at the
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time, the bank had to pledge collateral to secure the deposit.
This collateralization requirement was a barrier to most small
community banks accepting deposits of local agency funds, which
were generally in amounts much greater than $100,000.
AB 2011 (Vargas) allowed local agencies to use a deposit
placement service which takes a bank customer's large deposit
and breaks it into amounts of less than the $100,000 FDIC
insurance limit. These amounts are then placed in CDs at other
banks within its network, ensuring FDIC protection on the
customer's full deposit. The other banks then simultaneously
send an equal amount of funds back to the original bank,
enabling it to have the full amount of the original deposit
available for lending or other purposes. SB 1344 (Kehoe),
Chapter 112, Statutes of 2010, eliminated the sunset date
contained in AB 2011 (Vargas) and permanently authorized local
agencies to use a deposit placement service.
(On July 21, 2010, President Barack Obama signed the Dodd-Frank
Wall Street Reform and Consumer Protection Act, which, in part,
permanently raises the current standard maximum deposit
insurance amount to $250,000. The standard maximum insurance
amount of $100,000 had been temporarily raised to $250,000 until
December 31, 2013. The FDIC insurance coverage limit applies per
depositor, per insured depository institution for each account
ownership category.)
When AB 2011 became law, only one national network, the
Certificate of Deposit Account Registry Service (CDARS),
Promontory Interfinancial Network, LLC, offered a qualifying CD
placement service. In 2010, Promontory Interfinancial
introduced Insured Cash Sweep (ICS), similar to CDARS, but
allows for more liquid types of deposits like money market
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accounts, in amounts that qualify for FDIC insurance. These
cash sweep services utilizing demand deposit and money market
accounts are offered by other private sector entities (including
Charity Deposits Corporation, Money Market Account Xtra; and
Reich and Tang, Demand Deposit Marketplace).
Most recently, AB 279 (Dickinson), Chapter 228, Statutes of
2013, extended a local government's authority to access these
types of cash sweep services. AB 279 expanded the types of
deposits local agencies can invest surplus funds into, beyond
CDs, to include money market or demand deposit accounts. AB 279
also contains several safeguards to require that a private
sector deposit placement service adheres to the federal rules
governing FDIC pass-through insurance.
Existing law allows, but does not mandate, a local agency to
deposit up to 30 % of their overall surplus funds with a
depository institution that uses a private sector placement
service. These local agency funds may be deposited into a CD or
a demand deposit account. Utilization of a placement service
allows the depository institution to accept a deposit from a
local agency exceeding the FDIC standard insurance limit of
$250,000 (per depositor) while maintaining full insurance
coverage over the entirety of the local agency's deposit.
Typically, depository institutions utilizing a placement service
are community banks operating within the geographical region of
the local agency.
Procedurally, the depository institution selected by the local
agency (the "selected depository institution") serves as the
custodian of the funds and may use a placement service to place
deposits in excess of the FDIC insurance limit with other
participating depository institutions within the placement
service's network. Existing law mandates that the full amount of
each deposit must be insured at all times and that every
depository institution where funds are placed must be
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sufficiently capitalized.
Participating depository institutions receiving a portion of the
local agency's deposit from the selected depository institution
reciprocate to the selected depository institution deposits
equal to that placed with the participating depository
institution. This process, memorialized in California statute,
provides full insurance coverage for the local agency's surplus
funds and allows the local agency to identify one depository
institution for which they wish to do business. Without this
process, a local agency with surplus funds exceeding the FDIC
insurance limit would have the obligation to identify multiple
depository institutions to participate out their deposit in
order to achieve full FDIC insurance coverage.
For CDs, no more than 30 % of the local agency's overall surplus
funds may be deposited into a depository institution where a
placement service is used relative to the local agency's
deposit. However, for demand deposit accounts, existing law
limits the deposit of a local agency's overall surplus funds to
no more than 10 % of the agency's funds into any one placement
service used by a depository institution relative to the local
agency's deposit.
Need for the Bill:
The expanded authority granted by AB 279 (Dickinson) contained a
January 1, 2017, sunset date and prohibited local agencies from
investing more than 10% of the agency's fund to any one private
sector entity that assists in deposit placement service. This
bill repeals those two provisions, therefore, permanently
extending the authority granted in AB 279 to allow local
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agencies to invest up to 30% of surplus funds into non-CD
deposits at depository institutions that use a private sector
entity that assists in the placement of deposits. This bill
also removes the limitation on investing authority which
prohibited local agencies from investing more than 10% of funds
to any one private sector entity that assists in deposit
placement service. The overall cap of 30% of surplus funds as
well as several other safeguards in current law would not be
impacted by this bill.
The changes proposed in AB 283 accomplish two goals: aligns the
statutory treatment of demand deposit accounts to certificates
of deposit relative to the maximum percentage of surplus funds
that may be deposited with a depository institution using a
placement service so that each deposit product shall not exceed
30 % of the local agency's surplus funds and eliminates the
sunset provision on the code sections permitting a local
agency's deposit into a demand deposit account with a depository
institution using a placement service.
Previous Legislation:
AB 279 (Dickinson, Chapter 228, Statutes of 2013) authorized
local agencies, until January 1, 2017, to invest up to 30% of
their surplus funds through a private sector deposit placement
service, as specified.
SB 1344 (Kehoe, Chapter 112 Statutes of 2010) deleted the sunset
date on current law provisions that allow local agencies to
invest up to 30% of surplus funds in CDs with a commercial bank,
savings bank, or credit union. Additionally, provides that only
a local agency with existing legal authority to make investments
may invest surplus funds in CDs.
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AB 2011(Vargas, Chapter 459, Statutes of 2006) allowed a local
agency to invest specified funds into multiple CDs under certain
circumstances.
Double Referral:
This measure previously passed out of the Assembly Local
Government Committee on Consent.
REGISTERED SUPPORT / OPPOSITION:
Support
California Bankers Association (Co-Sponsor)
California Independent Bankers (CIB)
Opposition
None on file.
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081
AB 283
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