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

2. Agenda Regulations impacting treatment of public deposits
Dodd-Frank Act
Basel III
Bank Balance Sheet Implications
Costs of Carrying Collateralized Deposits
FDIC
Collateral
Investment Policy
Partnering with your Bank

3. 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

4. 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

5. 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

6. 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

7. Cost of Collateralized Deposits
FDIC Regulations and Charges
Collateral Types and Costs Involved
Investment Policy – Friend or Foe?

8. 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

9. 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)

10. 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

11. 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)

12. 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

13. 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

14. 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

15. 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

16. 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?

17. 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.

18. 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

19. Investment Policy Best Practices Updates Policy vs. Procedure
Policy should be reviewed at the least every 2 years
Policy should be reviewed if major changes occur
Personnel
Investment committee
Economic environment
Policy vs. Procedure
Policy – overall intention and direction
Procedure – specific way to carry out an activity or process

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

21. Partnering with Your Bank
Managing your banking relationship
Relationship Reviews
Fees vs. Compensating Balances

22. 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

23. 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

24. 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

25. Direct Fees vs. Compensating Balances
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)

26. Questions? Thank you!