BILL ANALYSIS �
AB 2481
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ASSEMBLY THIRD READING
AB 2481 (Morrell)
As Amended March 29, 2012
Majority vote
BANKING & FINANCE 11-0
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|Ayes:|Eng, Achadjian, Charles |
| |Calderon, Fuentes, Gatto, |
| |Harkey, |
| |Roger Hern�ndez, Lara, |
| |Morrell, Perea, Torres |
| | |
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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 : This bill makes a clarifying change to current law
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
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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.
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.
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,
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representing approximately 80% 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
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), Chapter 913, Statutes of 2000, allowed the
Treasurer to receive letters of credit from the FHL Bank of San
Francisco. The measure applied to 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 San Francisco, California. 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.
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Federal Home Loan Banks are jointly and severally liable for
their combined obligations. If any individual FHL Bank would
not be able to pay a creditor, the other eleven FHL 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.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0003440