BILL ANALYSIS �
AB 2481
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Date of Hearing: April 30, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2481 (Morrell) - As Amended: March 29, 2012
SUBJECT : Financial Institutions.
SUMMARY : Allows the Treasurer to receive letters of credit
issued by any Federal Home Loan Bank (FHL Bank) as security for
demand and time deposits.
EXISTING LAW requires the Treasurer to receive as security for
demand and time deposits, letters of credit issued by the FHL
Bank of San Francisco that includes the following terms: the
treasurer shall be the beneficiary of the letter of credit and
the letter of credit shall be clean and irrevocable.
�Government Code, Section 16522]
FISCAL EFFECT : None.
COMMENTS :
AB 2481 makes a clarifying change to current allow specifying
that the Treasurer can receive letters of credit issued by any
FHL Bank as security rather than just the FHL Bank of San
Francisco. This bill will address a problem if a bank is
headquartered in another state but wants to issue a letter of
credit to the FHL Bank of San Francisco, it can do so under this
measure.
According to the sponsor, the California Bankers Association,
"This provision will allow depository institutions that are not
chartered or domiciled in California to use these letters of
credit to secure public deposits, thus allowing California to
expand its access to these reliable and stable sources of
collateral and potentially increase competition for its deposits
among depository institutions. FHL Bank letters of credit
provide the following benefits when used as collateral for
public deposits:
No Market Risk- the value of letters of credit do not
fluctuate based on market conditions, consequently, loss of
value is never a concern for the beneficiary, of an federal
home loan bank letter of credit.
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Irrevocable and unconditional- FHL Bank letters of credit are
irrevocable once issued, which guarantees that they will be
available to be drawn upon during the state term.
No liquidity risk-funds are payable upon demand and can be
assessed quickly in times of need.
No Costs to Draw- no third party custodians are required which
results in increased cost savings and operational efficiencies
for California as the beneficiary of the collateral."
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FHL BANKS
Currently, 12 FHL Banks are established. They are in: San
Francisco, California; Seattle, Washington; Dallas, Texas;
Atlanta, Georgia; Des Moines, Iowa; Chicago, Illinois; Boston,
Massachusetts; New York, New York; Pittsburgh, Pennsylvania;
Cincinnati, Ohio; Topeka, Kansas; and, Indianapolis, Indiana.
The FHL Banks are cooperative banks that U.S. lending
institutions use to finance housing and economic development in
their communities.
Created by Congress, the FHL Banks have been the largest source
of funding for community lending for eight decades.
Financial institutions rely on the FHL Bank system as a stable
source of funds through all market cycles. FHL Banks are
regionally focused and controlled. This structure allows each
FHL Bank to be responsive to the specific community credit needs
throughout its region, while the 12 FHL Banks collectively use
their combined size and strength to obtain funding at the lowest
possible cost for their members. This cooperative structure
means that the lender member owners can advance credit to
communities at competitive prices.
More than 8,000 lenders are members of the FHL Bank System,
representing approximately 80 percent of the insured lending
institutions in the country. Community banks, thrifts,
commercial banks, credit unions, community development financial
institutions, and insurance companies and state housing finance
agencies are all eligible for membership in the System. Members
have branches throughout the 50 states and the U.S. territories.
Members range from some of the largest financial institutions in
the world to banks with just a single branch. To become a
member of an FHL Bank, a financial institution must purchase
stock in the FHL Bank system. The stock is held at par value and
not traded. The FHL Banks are entirely privately owned by these
member-owners. FHL Banks do not have the pressure for high rates
of return as do publicly traded companies.
The primary purpose of the FHL Banks is to provide their members
with liquidity. Liquidity funding addresses a key risk of bank
management, the unexpected need to fund new assets and deposit
withdrawals. Financial institutions are limited in how they can
meet liquidity needs.
They can raise new deposits, cut expenses, sell assets, limit
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new lending, or access credit markets. It takes time to attract
deposits and it can be prohibitively expensive. Smaller
institutions especially rely almost entirely on their local
customers to do so. The FHL Bank system is the only source of
credit market access for the majority of their members. Most
community institutions do not have the ability to access the
credit markets on their own.
The regulator charged with overseeing the FHL Banks is the
Federal Housing Finance Agency
(FHFA), created by Congress in the Housing and Economic Recovery
Act of 2008.
AB 2805 (Papan, Statutes of 2000) allowed the Treasurer to
receive letters of credit from the FHL Bank of San Francisco.
The measure stated only the FHL Bank of San Francisco, not
specifically to limit the use of the letters of credit, but
simply because it was assumed that California state or licensed'
banks would be members of the Home Loan District servicing
California, San Francisco. Several banks are headquartered
elsewhere, so the FHL Bank of San Francisco is not available to
that bank if the headquarter is elsewhere out of the San
Francisco district.
Federal Home Loan Banks are jointly and severally liable for
their combined obligations. If any individual Bank would not be
able to pay a creditor, the other eleven Banks are required to
step in and cover that debt. This provides another level of
safety and leads to prudent borrowing throughout the FHL Bank
System. In 2001, the Government Accountability Office noted,
"Joint and several liability for the payment of consolidated
obligations gives investors' confidence that System debt will be
paid."
A letter of credit is a letter from a bank guaranteeing that a
buyer's payment to a seller will be received on time and for the
correct amount. In the event that the buyer is unable to make
payment on the purchase, the bank will be required to cover the
full or remaining amount of the purchase.
PREVIOUS LEGISLATION
AB 2805 ((Papan) Chapter 913, Statutes of 2000) added specified
letters of credit issued by the Federal Home Loan Bank of San
Francisco to the list of securities that may be received as
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security for demand and time deposits of state funds.
REGISTERED SUPPORT / OPPOSITION :
Support
California Bankers Association (CBA) - Sponsor
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081