If you have not considered the security of your municipality’s deposits, chances are there is exposure related to a lack of insurance or collateralization.
If you have not considered the security of your municipality’s deposits, chances are there is exposure related to a lack of insurance or collateralization. The Federal Deposit Insurance Corporation (FDIC) currently offers $250,000 worth of insurance coverage at each eligible banking institution. Additionally, state statutes require banking institutions to maintain—segregated from its other assets—eligible collateral to cover a certain percentage of a municipality’s deposits. These requirements vary by state and can range from 0% to 100%.
For those banking in states with less than 100% collateralization requirements, there are options available to provide additional security for your deposits. These options include Collateral Pools, Insured Cash Sweeps and Letters of Credit.
Collateral Pools allow multiple banking institutions to maintain collateral for municipal deposits in one central location, and are usually overseen by the state’s treasury department, giving the municipality assurance that their funds are properly insured or collateralized. Collateral pools can be structured in one of two ways:
An alternative to the collateral pool is an Insured Cash Sweep, or ICS. An ICS will break funds up and distribute them across a network of banks. Each bank will hold no more than $250,000, ensuring that 100% of your funds are FDIC insured.
Additionally, another way for a municipality to further secure its deposits is through the use of Letters of Credit. In this situation, the bank would apply for the letter with the municipality as the beneficiary. The Letter of Credit would then make the municipality whole if the bank were to default on the deposit. This is a low-cost alternative to secure your deposits, and is mutually beneficial to the bank, as its funds are not tied up as collateral.
Each of these options represent great opportunities to further insure or collateralize a municipality’s deposits. Requirements and restrictions vary by state, so it is important to understand what is available and where. Each municipality will have to weigh the costs and benefits of securing its deposits and determine how much risk they are willing to take.