ACCG Webinar
Multi-Bank, Cross-Guarantee
Collateralization Pool for
Depositors of Public Funds
January 27, 2016
GEORGIA
BANKERS
ASSOCIATION
Protecting Public Deposits
in the Post Basel III Era
Pledging Pool Options for Georgia
Game Changer for the Largest
Financial Institutions
Third Basel Accord (Basel III) Components
• Capital Adequacy
• Stress Testing
• Market Liquidity Risk
Pledging Pool Options for Georgia
Basel III Requirements
Market Liquidity Risk
Has resulted in:
• Shortage of collateral to pledge to public
depositors
• Increased cost of collateral to banks
• Fewer banks offering public depositors
traditional deposit account services
• Less choice for public depositors
Pledging Pool Options for Georgia
Basel III Requirements
Liquidity Coverage Ratio (LCR)
* Effect on Public Depositors
• Collateralized deposits may no longer be practical
for LCR-banks to accept
• Lower yields for excess liquidity (non-operating
deposits)
• Fewer choices for depository relationship
• Lack of capacity among smaller banks to absorb
deposit inflows
Pledging Pool Options for Georgia
Basel III Requirements
Liquidity Coverage Ratio (LCR)
* Effect on Banks
• Increased collateral and liquidity requirements
• HQLA (Treasuries, Agencies) commonly used as
collateral are now used mostly for unencumbered LCR
liquidity purposes making them less available for
collateral purposes
• Reduced preference for public deposits
Pledging Pool Options for Georgia
Basel III Requirements
Liquidity Coverage Ratio (LCR)
What Public Depositors Need
• Assurance their deposits are protected during a crisis
What Banks Need
• Lower percentage pledging requirements
Proposal to Align Depositors’ and Banks’ Needs
• Multibank pledging pool
Pledging Pool Options for Georgia
Proposed Solution for Public
Depositors and Banks
* Multibank Pledging Pool *
• Recognizes the marketplace realities of
Basel III
• Banks contingently liable for losses
attributable to any individual participant
• Recommended characteristics based on
similar models in FL, AL, TN, MS, VA, OR,
WA, CT, NJ, OH and other states
Pledging Pool Options for Georgia
Multibank Pledging Pool
Benefits to Public Depositors:
• Retain a level of collateralization
• Gain participating banks being held collectively
accountable for the protection of public deposits
• Spreads risk among participating banks, in addition to
depositor’s bank, under the contingent liability
agreement
• Compliance oversight and loss recovery by the Office
of the State Treasurer
Pledging Pool Options for Georgia
Multibank Pledging Pool
Benefits to Banks:
• Contingent liability structure could potentially result in
lower percentage pledging requirements
• Frees a portion of the deposit to use for other
purposes, like lending
• Provides LCR-covered banks the ability to comply with
Basel III and continue to serve local and state public
depositors
• Offers any other qualified bank the right to join the
pool to compete for public deposit relationships
Pledging Pool Options for Georgia
Multibank Pledging Pool
What’s Different for Public Depositors:
• Deposits with large banks will be monitored in a
contingent liability statewide pool
• Collateralization percentage tiers set quarterly by
Banking Commissioner based on the health of the
bank
• As is the case with the current bank-level pool:
– Collateral is pledged to State Treasurer on behalf of depositors
– Compliance oversight and loss recovery handled by the Office
of the State Treasurer
Pledging Pool Options for Georgia
Multibank Pledging Pool
What’s Different for Banks:
• Increased liability to cover losses caused by other
institutions
• Increased reporting
• Increased transparency
Pledging Pool Options for Georgia
Multibank Pledging Pool
Collateralization Options
1. Dedicated method and bank-level pool options remain for
most banks / depositors
2. Qualified Banks <$50 billion (Small Banks) MAY use the
multibank pool
3. Qualified Banks >$50 billion (Big Banks) will be REQUIRED
to use the multibank pool; the dedicated method and banklevel pool options would not be available to these banks
following a transition period
Pledging Pool Options for Georgia
Multibank Pledging Pool
If deemed qualified by the State Depository Board, 10
Banks will initially be required to participate
Banks Operating in Georgia with Assets >$50 billion
Bank of America
JPMorgan Chase
U.S. Bank
BB&T
PNC
Wells Fargo
CitiBank
Regions Bank
Fifth Third Bank
SunTrust Bank
Pledging Pool Options for Georgia
Multibank Pledging Pool
“Qualified Bank” Eligibility Established by State
Depository Board:
Factor 1:
1.
2.
3.
Tier 1 leverage ratio of 6% or greater;
Return on average assets of 0.0% or greater; and
Institution rating by SNL of 35 or greater
Factor 2 (if any one of three components in Factor 1 are not met):
1.
Have a Tier 1 leverage ratio of 5% or greater;
2.
Have a Tier 1 risk-based capital ratio of 8% or greater;
3.
Have total risk-based capital of 10% or greater;
4.
Have Common Equity Tier 1 risk-based capital ratio of 6.5% or greater; and
5.
Not subject to a regulatory order to maintain a specific capital level for any
capital measure
Pledging Pool Options for Georgia
Multibank Pledging Pool
Collateralization Percentage
Established by Commissioner of Banking based on financial
strength of the institution using an average of at least two
nationally recognized rating services such as the SNL Bank
Insight National Ranking Report or similar reports from FIS or
IDC and their 100 point score system.
Here’s how Florida has set the collateralization tier percentages:
– 0-29: 125%
– 30-69: 50%
– 70 and above: 25%
Using this example and the SNL ratings, all 10 required
participating banks would currently pledge at the 50% level.
Pledging Pool Options for Georgia
Multibank Pledging Pool
Collateralization Percentage
In addition, the State Depository Board, acting on a
recommendation from the Treasurer in consultation with the
Commissioner of Banking, shall have the authority to increase
the percent collateralization level of any one bank or all banks in
the pool up to 125% as economic conditions warrant.
Pledging Pool Options for Georgia
Multibank Pledging Pool
Periodic Reports from Depositories
• Monthly reporting by the banks to the Treasurer
• The Treasurer shall have the authority to require more
frequent reporting
• All reports shall be consolidated into a single report
and shared with all depositories and posted on the
administrator’s website for transparency.
Pledging Pool Options for Georgia
Multibank Pledging Pool
Legislation will:
•
•
•
•
•
•
Establish the multibank pool
Authorize all Qualified Banks to participate
Require Qualified Banks >$50 billion to participate
Establish contingent liability for all participants
Empower State Depository Board to enact rulemaking
Effective date to be determined
Pledging Pool Options for Georgia
Multibank Pledging Pool
Questions?