BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 283|
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CONSENT
Bill No: AB 283
Author: Dababneh (D)
Amended: 6/23/15 in Senate
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 6/17/15
AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 7/1/15
AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach,
Pavley
ASSEMBLY FLOOR: 80-0, 4/20/15 (Consent) - See last page for
vote
SUBJECT: Financial affairs
SOURCE: California Bankers Association
California Independent Bankers
DIGEST: This bill deletes the restriction on local agencies
ability to invest their surplus funds in deposits other than
certificates of deposit (CDs), as specified, and extends the
authority of local agencies to make these investments until
January 1, 2021.
ANALYSIS:
Existing law:
1)Authorizes local agencies that have the authority to invest
surplus funds at their discretion to invest up to 30% of those
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funds in deposits at a commercial bank, savings bank, savings
and loan association, or credit union that uses a private
sector entity which assists in the placement of deposits
(Government Code Sections 53601.8 and 53635.8). This
authority applies to investments in two different types of
deposits, as follows:
a) The full 30% of an agency's surplus funds may be
invested in CDs at depository institutions that use a
private sector entity which assists in the placement of
deposits. This authority does not sunset.
b) No more than 10% of an agency's surplus funds that are
invested in deposits other than CDs may be submitted to any
single private sector entity that assists in the placement
of deposits. Authority to invest in deposits other than
CDs sunsets on January 1, 2017.
This bill:
1)Deletes the provision of existing law, which states that no
more than 10% of an agency's surplus funds that are invested
in deposits other than CDs may be submitted to any one private
sector entity that assists in the placement of deposits.
2)Extends, to January 1, 2021, the sunset date on the provision
of existing law granting local agencies the authority to
invest surplus funds in deposits other than CDs at depository
institutions that use a private sector entity to assist in the
placement of deposits.
Background
This bill builds upon authority first granted to local agencies
in California in 2006. In 2006, the California Independent
Bankers sponsored legislation intended to help community banks
attract deposits from local government agencies (AB 2011,
Vargas, Chapter 459, Statutes of 2006). Prior to the 2006
legislation, community banks struggled to attract local agency
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deposits, because of the requirement that local agency deposits
above the Federal Deposit Insurance Corporation (FDIC) deposit
insurance limit be fully collateralized. Unlike their larger
counterparts, small banks lack the necessary collateral to
accept large deposits.
Recognizing that smaller banks would benefit from the ability to
accept multiple deposits in increments up to, but not exceeding
the FDIC deposit insurance limit, a private sector entity
(Promontory Interfinancial LLC) created a CD placement service.
Promontory's CD placement service is based upon the premise that
FDIC insurance is institution-based, and not depositor-based.
Thus, if a local agency with $2 million to deposit places that
money in a single depository institution, only $250,000 of that
deposit is insured by the FDIC. However, if that local agency
splits up its $2 million into eight slices of $250,000 each, and
deposits each of those eight $250,000 slices into a different
depository institution, the whole $2 million will be insured.
Promontory devised a way to save local agencies the need to
manually split their deposits into slices up to, but not
exceeding the FDIC insurance limit, while simultaneously giving
relatively small banks an opportunity to receive public funds in
insured increments of $250,000 or less.
Promontory's CD placement service works, in part because of its
large network of member banks, and in part because of the FDIC's
willingness to insure deposits that are parceled out by
Promontory in amounts up to, but not exceeding the FDIC's
deposit insurance limit. The service works as follows: a local
agency with an amount of surplus funds to invest that exceeds
the FDIC insurance limit (now $250,000) goes to a local
California bank (the "selected" bank), which belongs to the CD
placement service. At the request of the selected bank, the CD
placement service splits up the local agency's deposit into
slices, each of which is valued at $250,000 or less. Each of
these slices is then parceled out to banks throughout the
country, which are also members of the placement service, and
which issue CDs. In that way, the full amount of the local
agency's deposit is FDIC-insured.
At the same time the local agency's funds are deposited with the
selected bank, and then parceled out to banks across the country
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that are members of the CD placement network in amounts of
$250,000 or less, the selected bank receives deposits from other
members of the placement service network, which are equal to, or
greater than, the full amount of the principal the local agency
initially deposited with the selected bank. Thus, the selected
bank ends up with at least the same amount of money on deposit
that it received from the local agency; however, the full value
of that money is insured, because it is held in increments of
$250,000 or less for depositors that originally deposited their
money with other selected banks.
The CD placement service has proven quite effective to date.
Through the end of Q1 2015, approximately $5.8 billion in
deposits have been made by California local agencies into
depository institutions using a private sector CD placement
service.
In 2013, AB 279 (Dickinson, Chapter 228, Statutes of 2013)
authorized local agencies to invest surplus funds in deposits
other than CDs at depository institutions that use private
sector placement services to distribute those non-CD deposits.
Non-CD deposits include demand deposit accounts and money market
accounts.
The logic behind the non-CD depository authority is identical to
the CD deposit authority (i.e., an amount of money above the
FDIC's deposit insurance limit is deposited with a California
bank, a private sector entity facilitates the distribution of
amounts in excess of the deposit insurance limit to other banks
in its network, the same private sector entity facilitates the
distribution of money deposited into those other banks into the
California bank in increments up to, but not exceeding the
FDIC's deposit limit). The only difference between the two
different types of authority is that the money is held in demand
deposit accounts or money market accounts, and not in CDs.
Comments
Unlike the CD placement service, which is only offered by
Promontory, cash sweep services utilizing demand deposit and
money market accounts are offered by multiple private sector
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entities. Promontory Interfinancial Network offers an Insured
Cash Sweep product, Anova Financial Corporation offers a
Reciprocal Exchange Deposit program, Charity Deposits
Corporation offers a Money Market Account Xtra product, and
Reich and Tang offers a Demand Deposit Marketplace.
The 10% limitation that applies to these types of deposits has
proven problematic for depository institutions and local
agencies. Depository institutions are unwilling to advertise
the existence of their non-CD placement services, because of the
relatively small amounts of money the 10% limit allows them to
accept. Most banks have relationships with only one private
sector placement service due to the cost and expense of vendor
management due diligence; thus, the 10% per private sector
placement service has the effect of being a 10% per depository
institution limit. Because depository institutions are not
advertising the existence of non-CD placement services, no local
agency has used the authority granted under AB 279.
AB 283 seeks to delete the 10% limit, with the aim of
encouraging depository institutions and local agencies to use
the authority granted pursuant to AB 279. If AB 283 is enacted,
the 30% cap that applies to deposits in CDs which are placed
using a private sector placement service will also apply to
non-CD deposits that are placed using a private sector placement
service.
Related/Prior Legislation
AB 279 (Dickinson, Chapter 228, Statutes of 2013) authorized
local agencies to invest surplus funds in deposits other than
CDs at depository institutions that use a private sector entity
to assist in the placement of deposits. This authority sunsets
on January 1, 2017.
SB 1344 (Kehoe, Chapter 112, Statutes of 2010) deleted the
sunset date contained in AB 2011, thus permanently extending the
ability of local agencies to use private sector, CD placement
services.
AB 2011 (Vargas, Chapter 459, Statutes of 2006) authorized local
agencies to invest surplus funds in a private sector, CD
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placement service until January 1, 2012.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified7/1/15)
California Bankers Association (co-source)
California Independent Bankers (co-source)
OPPOSITION: (Verified7/1/15)
None received
ASSEMBLY FLOOR: 80-0, 4/20/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,
Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle,
Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden,
Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder,
Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina,
Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen,
Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez,
Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting,
Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
7/2/15 11:41:58
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