New Collateral Rules Expected to Boost Lending
Illinois bankers say a change in the rules on accepting deposits from the state government will give them more liquidity, freeing up funds to lend in their communities.
Banks holding state funds must pledge securities as collateral for deposits that are above the amount insured by the Federal Deposit Insurance Corp.
But as of Oct. 1 the amount they must pledge will be reduced to 105% of such funds, from 110%, under new guidelines adopted by the state treasurer, Judy Barr Topinka.
Hunt Bonan, the president of the $521 million-asset Market Street Bancshares Inc. of Mount Vernon, said the change frees up more of banks’ capital. He added that he expects local governments, which include school districts, to follow the state’s lead and to lower their collateral requirements on deposits.
As of Aug. 31, Illinois had just under $1.5 billion deposited in 290 financial institutions statewide.
According to the most recent information available from the Conference of State Bank Supervisors, 39 states have laws requiring collateral for state deposits.
Illinois’ rules, though, are set by the treasurer and not by statute, so the bankers did not need a legislative change. Even so, Joyce Nardulli, the vice president for government relations at the Illinois Bankers Association, said that it took two years for the Treasurer’s Office to reduce collateral requirements.
Martin Noven, the deputy chief of staff for law and policy in the Illinois Treasurer’s Office, said the change was made after the staff developed a system for tracking the value of collateral daily using a mark-to-market system so that it could fine-tune its coverage level while being fully protected.
“We were simply overprotected before,” Mr. Noven said. “We’re able to streamline those requirements,” he said.
Bruce W. Taylor, the president and chief executive officer of the $3.1 billion-asset Cole Taylor Bank of Chicago, was among the bankers who had been pushing for a change in the collateral rules.
“It’s very important in terms of freeing up assets that were previously pledged to oversecuring these deposits to be recycled into loans in the communities,” said Mr. Taylor, who is also the chairman of the Illinois Bankers Association.
