BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 2481 (Morrell) Hearing Date: June 27,
2012
As Amended: June 18, 2012
Fiscal: No
Urgency: No
SUMMARY Would expand the forms of security that may be placed
by depository institutions with the State Treasurer and county
treasurers, to enable those depositories to receive deposits of
state and local funds.
DESCRIPTION
1. Would authorize the use of a letter of credit issued by any
Federal Home Loan Bank as acceptable security for demand and
time deposits placed by the State Treasurer (Treasurer) or
any county treasurer with the eligible bank posting that
security. Existing law (see below) restricts acceptable
letters of credit to those issued only by the Federal Home
Loan Bank of San Francisco.
EXISTING LAW
1. Authorizes the Treasurer to deposit state funds in
eligible banks. Defines an eligible bank as a state or
national bank located in this state, selected by the
Treasurer for the safekeeping of money belonging to or in
the custody of the state. In order to be eligible, a bank
must have received an overall rating of not less than
"satisfactory" in its most recent Community Reinvestment Act
evaluation (Government Code Section 16500).
2. Provides that, in order to be eligible to receive a demand
or time deposit from the Treasurer, an eligible bank must
deposit security with the Treasurer as collateral for those
deposits. That security must be in an amount that is at
least 10% greater than the amount the Treasurer deposits
with the bank. However, security is not required for that
portion of any deposit which is insured under any law of the
United States (Government Code Sections 16520 and 16521).
AB 2481 (Morrell), Page 2
3. Lists a variety of financial instruments that may be used
as acceptable security, including (among others) U.S.
Treasury notes and bonds, state and local bonds, bonds and
notes of the California Housing Finance Agency, registered
warrants of the state, certain promissory notes secured by
residential real property, and letters of credit issued by
the Federal Home Loan Bank of San Francisco, as specified
(Section 16522).
4. Provides that, as far as possible, all money belonging to,
or in the custody of, a local agency, including money paid
to the county treasurer or other official to pay the
principal, interest, or penalties of bonds, shall be
deposited for safekeeping in state or national banks,
savings associations, federal associations, credit unions,
or federally insured industrial loan companies in California
by the county treasurer or other official having legal
custody of the money, or may be invested in specified
investments set out in law. In order to be eligible to
receive local deposits from a county treasurer, a bank must
have received an overall rating of not less than
"satisfactory" in its most recent Community Reinvestment Act
evaluation (Section 53635.2).
5. Provides that, in order to secure local agency deposits, a
depository must maintain securities that have a market value
that is at least 10% greater than the total amount of the
amounts deposited, except as otherwise specified (Section
53652).
6. Lists a variety of financial instruments that may be used
as acceptable security by depository institutions into which
local funds are deposited, including (among others) U.S.
Treasury notes and bonds, state and local bonds, bonds and
notes of the California Housing Finance Agency, registered
warrants of the state, certain promissory notes secured by
residential real property, and letters of credit issued by
the Federal Home Loan Bank of San Francisco, as specified
(Section 53651 and 53651.6).
COMMENTS
1. Background and Discussion: The Federal Home Loan Bank
(FHLB) System was established by Congress in 1932, in direct
AB 2481 (Morrell), Page 3
response to the Great Depression, and the desire to keep
banks (then "building and loan associations") afloat, and
provide both liquidity and sources of capital for mortgage
lending. The primary mission of the FHLB System involves
providing member financial institutions with financial
products and services that assist and enhance the financing
of housing and community lending. Their regional
distribution is intended to allow them to focus on the
distinct needs of their individual communities.
Twelve Home Loan Banks comprise the FHLB System, including the
Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines,
Indianapolis, New York, Pittsburgh, Seattle, San Francisco,
and Topeka FHLBs. Each of the twelve FHLBs is structured as
a cooperative, owned and governed by its member financial
institutions. Member financial institutions include banks,
thrifts, credit unions, community development financial
institutions, and insurance companies. Institutions must
purchase stock in order to become a member of their regional
FHLB. In return, members obtain access to low-cost funding,
and receive dividends based on their stock ownership. The
FHL Banks are self-capitalizing. Advances are funded via
the issuance of discount notes or term debt, which are
purchased by FHLB members.
At present, the 12 banks of the FHLB System are owned by over
7,700 regulated financial institutions from all 50 states,
U.S. possessions, and territories. Equity in the FHLBs is
held only by these owner/members and is not publicly traded.
2. Summary of Arguments in Support: The California Bankers
Association (CBA) is sponsoring AB 2481 to allow depository
institutions that are not chartered or domiciled in
California to use letters of credit from their regional FHLB
to secure public deposits of state funds in their
institutions. This will allow "California to expand its
access to these reliable and stable sources of collateral
and potentially increase competition for its deposits among
depository institutions."
According to CBA, FHLB letters of credit provide several
benefits when used as collateral for public deposits,
including:
a. Lack of market risk: The value of a letter of
AB 2481 (Morrell), Page 4
credit does not fluctuate based on market conditions.
Thus, letters of credit are not at risk of losing
value, once issued.
b. Irrevocable and unconditional: Letters of credit
are irrevocable once issued, which guarantees that they
are available to be drawn on during their stated term.
c. Lack of liquidity risk: Funds are payable upon
demand, and can be accessed quickly in times of need.
d. No costs to draw: No third-party custodians are
required to draw on FHLB letters of credit, which
results in decreased costs and increased efficiencies
for California, as the beneficiary of the collateral.
3. Summary of Arguments in Opposition:
a. The California Independent Bankers (CIB), a
trade association representing California community
banks, opposes AB 2481, on the basis that it will give
large banks an unfair advantage relative to small
banks, with respect to access to deposits of funds by
the Treasurer and local county treasurers. According
to CIB, San Francisco FHLB letters of credit are only
used by California-based banks and are not issued to
out-of-state institutions. Existing law was
established with the intention of helping California
community banks and, in turn, California businesses and
consumers. Existing law provides smaller banks with an
easily accessible form of collateral for state
deposits, which are an important source of funding for
these smaller banks. Smaller banks take in-state
deposits and reinvest those deposits within the
communities they serve. AB 2481 will allow mega-banks
to use California state deposits to fund loans made by
those banks to businesses and consumers in other parts
of the country. By allowing a large, multi-national
bank to use a letter of credit from any FHLB, an
important funding source for California-based lending
will be weakened.
b. California Community Bank is opposed for similar
reasons. "Community banks depend strongly on local
deposits in order to support local businesses and the
community where they live. Big banks enjoy many more
AB 2481 (Morrell), Page 5
sources and opportunities to move funding from other
markets, and rarely struggle for deposits to meet loan
funding requirements."
4. Amendments:
a. Technical amendments are necessary to accomplish the
intent of the author. Due to an error, the June 18th
amendments failed to include an amendment to Government
Code Section 53651. The following amendments are
necessary to insert the amendments that were
inadvertently excluded: Page 7, line 2, strike "the" and
strike "of San Francisco."
5. Prior and Related Legislation:
a. AB 2805 (Papan), Chapter 913, Statutes of 2000:
Sponsored by the California Independent Bankers.
Authorized the use of letters of credit issued by the
Federal Home Loan Bank of San Francisco as collateral for
deposits of state money by the Treasurer into eligible
banks. Prior to AB 2805, letters of credit issued by the
Federal Home Loan Bank of San Francisco could be used as
collateral for deposits of local money into eligible
banks, but not as collateral for deposits of state money.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Bankers Association (sponsor)
Opposition
California Independent Bankers
California Community Bank
Consultant: Eileen Newhall (916) 651-4102