Cities should scrutinize bank relationships amid turmoil

Cities and towns should take a hard look at the banks that hold their public funds in light of the recent turmoil in the bank industry.

That was the message from panelists speaking Monday at the Government Finance Officers Association's annual conference in Portland.

"You might want to change up how you're doing your banking," said Cory Kampf, chief financial officer of Anoka County, Minnesota. "If you hear about banks being downgraded … those are things to pay attention to and understand where your bank is," Kampf said, suggesting some local governments may want to issue Requests for Proposals for new services. "Understand the totality of their deposits and liquidity."

Bloomberg

The March collapse of Silicon Valley Bank and New York's Signature Bank, followed by JPMorgan Chase & Co.'s acquisition of First Republic Bank, has prompted worries about the health of regional banks across the country. Local governments, which are charged with protecting public deposits, need to pay attention to whether their banks – many of which are smaller, community banks – can meet federal collateralization requirements, panelists said.

The Federal Deposit Insurance Corporation insures deposits that are less than $250,000, a threshold below what many municipal entities hold. Bank accounts with more than $250,000 must be collateralized consistent with state law in order to be guaranteed by the FDIC. In the event of a bank failure, the FDIC will honor the collateralization agreement, but does not guarantee that the collateral will be sufficient to cover the amount of the uninsured funds.

"Can banks collateralize and protect your assets? Not all can," said Jonathon Millard, senior vice president and market executive at Bank of America. "Understand the mix of collateral that your bank provides, because the cost of collateral is driving their appetite for deposits," Millard said. "Having a well-capitalized partner is important," he added. "In an abundance of caution, it makes sense to have multiple partners."

In early May, the New Mexico State Treasury and Auditor sent a joint alert warning that some local governments are bypassing bank collateralization requirements "by adding multiple employees or elected officials to bank accounts" to secure $250,000 account per signer.

"This practice is not consistent with state or federal law," the notice said.  "We trust that this alert will direct attention to the importance of the underlying issue — safeguarding public funds."