BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 1344 (Kehoe) Hearing Date: April 21, 2010
As Amended: April 5, 2010
Fiscal: No
Urgency: No
SUMMARY Would delete the sunset date on a provision of law
that allows local agencies to invest up to 30% of their surplus
funds in certificates of deposit at depository institutions, in
such a way that the full amount of each local agency deposit is
federally-insured.
DIGEST
Existing law
1. Defines a local agency as a county, city, city and county,
school district, community college district, public district,
county board of education, county superintendent of schools, or
any public or municipal corporation (Government Code Section
53600);
2. Authorizes local agencies that do not pool their money in
deposits or investments with other local agencies with separate
governing bodies, and that have money in their treasuries that
is not required for their immediate needs, to invest any portion
of the money they deem wise or expedient in selected investments
specified in law, and places limitations on the percentage of a
local agency's surplus that may be invested in some of those
investments (Government Code Section 53601);
3. Includes negotiable certificates of deposit (CDs) among
allowable investments, provided they are issued by a state- or
nationally-chartered depository institution, and the local
agency's investment in the CDs does not exceed 30% of the
agency's surplus (Government Code Section 53601);
4. Until January 1, 2012, authorizes local agencies to invest up
to 30% of their surplus funds in CDs at depository institutions
that use a private sector entity, which assists in the placement
SB 1344 (Kehoe), Page 2
of CDs, as long as the full amount of the principal and interest
that may be accrued during the maximum term of each CD is
insured at all times by either the Federal Deposit Insurance
Corporation (FDIC) or the National Credit Union Administration
(NCUA) (Government Code Sections 53601.8 and 53635.8).
Additional requirements are as follows:
a. The depository institution which receives the funds from
the local agency is called the "selected" depository
institution;
b. The selected depository institution is required to serve
as a custodian for each CD that is issued with the placement
service;
c. At the same time the local agency's funds are deposited,
and CDs are issued, the selected depository institution must
receive deposits from other depository institutions in an
amount that is equal to or greater than the amount of
principal that the local agency initially deposited through
the selected depository institution for investment.
This bill
1. Would delete the sunset date on the provision of existing
law described in Existing Law Number 4, above.
COMMENTS
1. Purpose of the bill To ensure that CD placement services
remain available for use by local agencies and depository
institutions in California, and, in doing so, continue to
facilitate deposits of local agency funds into community
banks in California.
2. Background The CD placement service that is at the heart of
this bill works, because of FDIC insurance. The FDIC
currently insures all depository accounts of the same person
at the same depository institution, up to $250,000. There
is no limit to the number of different institutions into
which a person can deposit funds that are eligible for FDIC
insurance; each depositor is eligible to obtain up to
$250,000 in FDIC insurance at every different bank into
which it deposits money. However, all of the accounts of
the same depositor at the same bank, including all branch
SB 1344 (Kehoe), Page 3
offices of the bank, are added together, to count toward the
$250,000. Thus, if an insured bank has branch offices, a
depositor cannot increase its insurance coverage by placing
deposits at different branches of the same insured bank.
Similarly, deposits held by the Internet division of an
insured bank are lumped together with funds deposited with
the "brick and mortar" branches of the bank for FDIC
insurance purposes, even if the Internet division uses a
different name.
Under the provisions of AB 2011 (Vargas), Chapter 459, Statutes
of 2006 (the bill whose sunset date this bill would
eliminate), a local agency with more than $250,000 to invest
may go to a bank (the "selected" bank), which belongs to a
CD placement service. At the request of the selected bank,
the CD placement service splits up the local agency's
deposit into chunks, each of which is valued at $250,000 or
less. Each of these chunks is then parceled out to banks
throughout the country, which are members of the placement
service, and which issue CDs. In that way, the full amount
of the local agency's deposit is FDIC-insured.
One of the unique aspects of the CD placement service whose use
is authorized by this bill is its reciprocity element. At
the same time the local agency's funds are deposited with
the selected bank, and then parceled out to member banks
within the CD placement network in amounts of $250,000 or
less, the selected bank must receive deposits from other
members of the placement service, 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 the same amount of money on
deposit that it received from the local agency; however, the
full value of the 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.
3. Why does this bill help small, community banks? Banks are
required to collateralize any amount of money they hold in
excess of $250,000 per account. This requirement hampers
the ability of small banks to accept large deposits,
because, unlike much larger banks, the small banks lack the
necessary collateral to accept the large deposits. This
bill provides small banks that join a CD placement service
an opportunity to receive public funds in insured increments
SB 1344 (Kehoe), Page 4
of $250,000 or less. Local governments have used the
provisions of AB 2011(Vargas) to invest their surplus funds
into their local banks.
To date, only one national network (the Certificate of Deposit
Account Registry Service, or CDARS, run by Promontory
Interfinancial LLC) offers CD placement services. CDARS
includes over 3,000 FDIC-insured banks within its network,
but does not accept credit unions. For these reasons, the
CD placement service whose use is authorized by this bill
currently benefits community banks and the single company
(Promontory Interfinancial), which runs CDARS. Credit
unions do not currently benefit. According to this bill's
sponsor, $2.2 billion in California local agency funds have
been invested in CDs at 55 California banks that belong to
CDARS since enactment of AB 2011.
4. Is this the right time to be relying on the FDIC's Deposit
Insurance Fund? In 2006, when AB 2011 was enacted,
California's housing market was soaring, our economy was
strong, and bank failures were far from anyone's mind. At
that time, relying on FDIC insurance to help bolster
deposits at local community banks raised very few questions,
because the FDIC's Deposit Insurance Fund (DIF; the source
of money for claims against FDIC insurance) was fully
capitalized. The time since enactment of AB 2011 has not
been kind to banks or the DIF. Since 2007, a total of 209
banks have failed across the United States, resulting in
payments of $59 billion from the DIF to depositors.
Although the FDIC has gone to great lengths to assure
depositors that it is fully able to protect every depositor
with an FDIC-insured account, the agency has also
significantly increased its assessments on banks, to help
build its back its DIF to fully capitalized levels. By
continuing to authorize the use of CD placement services by
local agencies in California, this bill will continue to
place pressure on the already highly stressed DIF.
Concern regarding the impact of this bill on the DIF is not just
hypothetical. As of March 15, 2010, 84 of the more than
3000 CDARS-member banks had failed. According to this
bill's sponsor, not all of those banks held outstanding
CDARS CDs at the time of their failure (an exact count was
unavailable). However, five of the banks that did hold
outstanding CDARS-placed CDs at the time of their failure
required DIF coverage, which drew down the DIF by an unknown
SB 1344 (Kehoe), Page 5
amount.
5. Support This bill is sponsored by the California
Independent Bankers (CIB), the same organization which
sponsored AB 2011 (Vargas). CIB observes that AB 2011 gave
California community banks an alternative to
collateralization requirements, by allowing the use of a
private sector CD placement service. Prior to enactment of
AB 2011, the collateralization requirements made it
difficult for community banks to compete with larger
institutions for local agency deposits. The Independent
Bankers note that, to date, 55 community banks in California
have received over $2.2 billion in deposits from cities,
counties, water districts, and other agencies. Community
banks use these deposits to make loans to small and medium
sized businesses, which ultimately benefits California's
economy, by helping these businesses grow and create jobs.
CIB's support of the bill was also echoed by a number of
community banks, and by the California Bankers Association.
The California Credit Union league also supports the bill, and
believes that giving local agencies the option to deposit
funds in a local credit union or community bank helps spur
more local investment and local lending. (Staff notes that,
while a private sector CD placement service is not yet
currently available to help distribute deposits to credit
unions, the credit unions are hopeful that one or more
options of this type will become available).
The California Municipal Treasurers Association states that
public agencies appreciate and benefit from the ability to
invest surplus funds in this manner, and would like to have
the option continued permanently.
6. Opposition None received.
7. Suggested Amendments
a. Given concerns about the possible impact of
this bill on the FDIC's deposit insurance fund, lack
of utilization of CD placement services by credit
unions, and the fact that CD placement services are
currently offered by only one private company, staff
recommends extending this bill's sunset date, rather
than deleting it entirely.
SB 1344 (Kehoe), Page 6
A sunset date eight to ten years in the future should
provide the Legislature with ample information about
the impact of this bill, before considering whether to
enact these sections permanently.
8. Prior and Related Legislation
a. AB 2011 (Vargas), Chapter 459, Statutes of
2006: Enacted the provision that this bill would
extend permanently, by deleting the sunset date in AB
2011.
SB 1344 (Kehoe), Page 7
POSITIONS
Support
California Independent Bankers (sponsor)
Borrego Springs Bank
California Bankers Association
California Credit Union League
California Municipal Treasurers Association
City of Santa Rosa
Community Bank of the Bay
Mission Valley Bank
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102