Wisconsin community banks have received a liquidity boost from municipal deposits that have been plucked out of the state's flagging investment fund, bankers in the state said.
After reports of a $95 million derivatives-related loss in the State Investment Fund in March, many municipalities withdrew funds.
Helge Christensen, whose Bankers' Bank in Madison handles federal funds for about 300 Wisconsin community banks, believes the institution subsequently got about $350 million in new deposits.
The investment fund reported a net decline in deposits of $1.2 billion since the March announcement, though state officials can't distinguish withdrawals related to the derivatives from normal fluctuations in the fund's balance, said deputy treasurer Michael Collins.
The fund has experienced $3.4 billion in gross withdrawals over the same period, he said.
Many municipal depositors in the investment fund felt misled because fund managers had said they weren't involved in risky derivatives. Some investments were even made in securities tied to Mexican interest rates, according to The Bond Buyer, a sister publication of the American Banker.
The fund's derivatives-related losses, totaling $95 million, will be taken over a five to 10 years as an expected 25-basis-point decline in earnings, according to news reports.
The Wisconsin banking commissioner's office won't know what deposits banks received until it reviews second-quarter figures later this summer, a spokesman said.
Nonetheless, Bankers' Bank watched the overall liquidity increase at community banks where it manages federal funds, Mr. Christensen said.
"Less than a week after the announcement of the investment board and their problems, we had an immediate influx of $150 million," he said. "It's just too much coincidence."
Community banks could get more funds if additional depositors flee the fund's decline in yield, he said.
Before the influx, "banks were at a very low point liquidity-wise," Mr. Christensen said. They have been loaned out from heavy demand for commercial and industrial and real estate loans, he said.
Mr. Christensen was not able to cite specific banks receiving deposits, and several community banks said they had no new municipal funds.
Steve Bell, president of $185 million-asset Wood County National Bank couldn't tell if his county's withdrawals affected its deposits at his bank.
"They do a lot of their work on a bid basis," he said. "Our money with the county will go up and down by the millions depending on what is maturing."
First Bank of Sparta received about $1.5 million in new deposits.
"We have seen a temporary increase in those municipal-type funds," said Jim Schiefelbein, senior vice president of the $57 million-asset bank.
He predicted that municipal depositors ultimately will seek a higher rate elsewhere, such as in Treasury bills.
