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

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

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 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

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 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!