Changes to the Banking Regulations that Impact Your District Presented by: Aimee Briles, Wintrust Financial Julie Conenna, Bank of America.

Changes to the Banking Regulations that Impact Your District

Presented by:Aimee Briles, Wintrust FinancialJulie Conenna, Bank of America

Agenda

I. Regulations impacting treatment of public deposits– Dodd-Frank Act– Basel III– Bank Balance Sheet Implications

II. Costs of Carrying Collateralized Deposits – FDIC– Collateral– Investment Policy

III. Partnering with your Bank

The Dodd-Frank Act

Passed by Congress July 21, 2010 Largest regulatory overhaul since the Great

Depression Includes 385 new “rules” for financial

institutions At least $866 million in direct compliance

costs – some estimating $1.8 billion to $1 trillion when all is said and done

Bank Impact – Dodd-Frank

Compliance with regulations will require: Over 2 million employee hours every year Implementation of new testing & reporting

systems Changes the way in which banks historically

have covered costs FDIC assessments are going to remain

elevated

Basel III – Global Regulatory Standards

Tier 1 Capital Redefined Banks must hold more capital and larger pools of

liquid assets New Liquidity Coverage Ratio (LCR)

LCR identifies the minimum amount of unencumbered, high quality liquid assets an institution must hold to cover an acute 30-day short term stress

This affects the availability of collateral

Bank Impact – Basel III

Higher capital and liquidity requirements resulting in: Depressed returns on assets and lower interest

rates Higher cost of credit Lower liquidity value for deposits requiring

collateral Fewer securities can be pledged as collateral

Cost of Collateralized Deposits

FDIC Regulations and Charges Collateral Types and Costs Involved Investment Policy – Friend or Foe?

Changes in FDIC Coverage Limits

FDIC increased the standard insurance coverage per depositor to $250,000

Unlimited FDIC coverage for non-interest bearing transaction accounts expired 12/31/12

Increased FDIC coverage for certain government deposits

FDIC Coverage for Government Deposits

Public funds held in an insured depository institution within the state the public unit is located receive: $250,000 coverage for combined savings

and time deposits (including NOW accounts and Money Market accounts)

$250,000 coverage for demand deposit transaction accounts (interest bearing or non-interest bearing)

FDIC Coverage - Cost to Your District?

Does your bank pass FDIC assessment(s) directly on to you? Via hard charge or through compensating

balances? Does your bank indirectly pass FDIC

assessment on to you? Via a decreased interest or earnings credit

rate? Check your analysis statement and talk to your

banker

Securing Deposits with Collateral

Pledged Securities Held by a custodian bank or trust department

through a tri-party agreement Obligations issued by the U.S. Federal Government

Historically have been treasuries and agencies Movement towards mortgage backed securities

(Fannie/Freddie) Limited availability of securities and capacity at the

banks (liquidity ratio)

Securing Deposits with Collateral

Letters of Credit Binding document that guarantees the payment of

an obligation Public entity is the beneficiary on the LOC Payable on demand – no delays from selling

securities or FDIC disputes Usually written by a FHLB (Government Agency) Currently more cost effective than pledging securities Acceptable form of collateral in the Illinois Public

Funds Investment Act if issued by a FHLB

Collateral – Cost to Your District?

Costs to banks to secure your deposits have changed Indirect cost for bank to own low-yielding securities

(not included in banks liquidity ratios) Administrative cost to pledge and monitor

collateral is 25 bps Type and amount required will affect yield and

who is willing to hold deposits Collateral has become a commodity

Additional Thoughts on Collateral

Collateralization is not required in Illinois, but is recommended by GFOA

Pooled collateral is allowed in many states

Collateral options are governed by the District’s Investment Policy Statement

Takeaways

Collateralized Deposits are less valuable to Banks because they are liquidity neutral

FDIC costs are going to remain elevated to replenish FDIC fund

School Districts are best to position themselves to consider a wide array of collateral options

Investment Policy Does your District have an Investment

Policy in place?

When was the last time it was updated?

What should be included in the policy?

Investment Policy - Definition A document drafted between a portfolio

manager and a client that outlines general rules for the manager.

The Policy helps ensure that your District’s investment strategy accurately reflects your risk tolerance and liquidity requirements, while providing guidance to the professionals managing your cash portfolios.

Investment Policy - Features Specific information of your District’s risk

tolerance, liquidity requirements and return objectives.

Allowable securities (and those to be avoided)

Guidelines for the construction and management of your investment portfolios

Mechanisms to promote ongoing compliance with the policy

Investment Policy Best Practices Updates

Policy should be reviewed at the least every 2 years Policy should be reviewed if major changes occur

PersonnelInvestment committeeEconomic environment

Policy vs. Procedure Policy – overall intention and direction Procedure – specific way to carry out an activity or

process

Investment Policy

Share Updated Policy Send to your Banks / Portfolio Managers Post on District’s Website

Partnering with Your Bank

Managing your banking relationship Relationship Reviews Fees vs. Compensating Balances

Managing Your Banking Relationship

• What you should expect from your bank– Focused expertise– Full range of services and products– Acumen, accuracy, approachability– An annual review of your banking

relationship

Managing Your Banking Relationship

A checklist for building a strong, ongoing banking relationship – Stay in touch– Talk to your bank about best business practices– Make your bank an essential part of your

finance team– Review the fees your bank is charging you– Remember all banking relationships are

different

Relationship Reviews

Review should be done at least once a year Have the right people in the review Make sure that the district’s banking goals are

shared with banking partners. Review current services/products & account

structure Complete a Diagnostic check with how satisfied

you are with bank’s services and coverage team Discuss areas to build on relationship

Direct Fees vs. Compensating Balances

Direct Fees Requires budgeting Requires additional monitoring of collected

balances Requires active investing

Compensating Balances Potentially higher yield than interest bearing

account Investment Policy’s outline of required collateral

might impact ECR rate (cost of funds)

Questions?

Thank you!