what happened to the days of ‘free’ banking may 17, 2012 integrity. commitment. performance.™
TRANSCRIPT
What Happened to the Days of ‘Free’ Banking
May 17, 2012
What is Driving Returns & Fees?
• Historically low rate environment• Changes to how/what financials are evaluated• Dodd-Frank Act• Durbin Amendment, Reg E, FDIC, etc.
What is with These Rates?
• Fed Funds rate at 0-25bps since December 2008
• May 2011 - January 2012 was < 10 bps• September 2011 - Fed announces “Operation
Twist” • January 2012 - Fed pledges to keep rates near
zero through 2014
“Operation Twist”
• $400B of short-term Treasuries (3m-3y) to be replaced with securities with maturities of at least 6 years
• Goal is to increase mortgage refinancings and consumer spending
• Keeps lending rates low which keeps deposit rates low
New Standards in Our World
• Tier 1 Capital Redefined– Banks must hold both more capital and larger
pools of liquid assets• New Liquidity Coverage Ratio – gives credit only to liquid government and
government-guaranteed securities *this affects the availability of collateral
New Standards in Our World
• Basel III – Significantly revises the types of instruments that
count as bank capital– Requires extra capital against “risky assets”
• Tightened lending guidelines– More expensive to lend to those with credit scores
under 660 (this is 40% of all Americans)
What Are the Effects?
• Higher capital and liquidity requirements equal:– Depressed returns on assets and lower interest
rates– Fewer loans being made (need to preserve capital)– Higher cost of credit– Reduced need for deposits– Fewer securities can be pledged as collateral
The Dodd-Frank Act
• Passed by Congress July 21, 2010• Largest regulatory overhaul since the Great
Depression• Includes 385 new “rules” for financial
institutions• At least $866 million in direct compliance
costs – some estimating $1.8 billion to $1 trillion when all is said and done
Costs Created by Dodd-Frank
• Compliance with new regulations will require:– Over 2 million employee hours every year– Implementation of new testing & reporting
systems• Changes the way in which banks historically
have covered costs (Durbin & Reg E)
• Increased FDIC Assessments
Costs Created by Dodd-Frank
• Durbin Amendment– Limits the fees banks charge retailers for
processing debit card transactions• Reduced $0.32 per transaction to $0.12 – cost is $0.27• Equals over $33B in revenue over 2 years
• Reg E – Requires customers to choose whether to receive
overdraft protection
Dodd-Frank Costs
• Changes in FDIC Assessments– Charge on all assets, not just insured deposits– Minimum reserve ratio increased by .20%– Premium placed on brokered deposits
• Although at a slowing pace, banks continue to fail (16 so far in 2012); this will continue to play into assessment rates
Cost of Securing your District’s Deposits• New FDIC Regulations – New FDIC charges
• Cost of Collateral• Investment Policy
What Does FDIC Coverage Cost Your Bank?• FDIC Assessment is based on the assignment to one
of four Risk Categories, determined by Capital Ratios and CAMELS Rating
• Bank is determined to be Well Capitalized, Adequately Capitalized, or Under Capitalized
• CAMELS Rating is a 1-5 rating of a Bank’s “soundness”
• Capital Assets Management Earnings Liquidity Sensitivity to Risk
What Does FDIC Coverage Cost Your Bank?• Current FDIC assessment charges range from 7 basis
points to 77.5 basis points• In 2006 this range was 0 to 27 basis points• Costs incurred monthly using average daily balances• A Bank’s rating can change mid-quarter; a blended
assessment rate is then used
What Does FDIC Coverage Cost Your District?• Assessment is a “pass-through” cost• FDIC costs are higher across the industry• Much larger variance than in the past• Dodd-Frank premium is lumped in with risk rating
assessment• While comparing cost structures for banking services,
FDIC charges must be included– FDIC Assessment = Average Balance x Assessment Rate
366 / 100(# of days in month)
What Does FDIC Coverage Cost Your District?• Does your bank pass FDIC assessment(s) directly on
to you?– Via hard charge or through compensating balances?
• Does your bank indirectly pass FDIC assessment on to you?– Via a decreased interest or earnings credit rate?
• Check your analysis statement and talk to your banker– Account analysis– RFP for banking services
Recent Changes in FDIC Insurance Limits• FDIC increased the standard insurance
coverage per depositor to $250,000• Provides full FDIC coverage for non-interest
bearing transaction accounts– Set to expire December 2012
Cost of Securing your Deposits
• FDIC Collateral Requirements• The Agreement must be:
• In Writing– Signed by Proper Parties– Approved by Bank’s Board of Directors– Held by a Third Party Custodian
Cost of Securing your Deposits
• Types of Collateral – Obligations issued by the U.S. which are fully guaranteed
by the Federal Government– Obligations of Agencies of the U.S. Government
• Check your investment policy for specific % requirements– Letters of Credit – LOC
• Binding document that guarantees the payment of an obligation. • Payable on demand• Usually written by a FHLB (Government Agency)
Cost of Securing your Deposits
• Costs to banks to secure your deposits have changed– Indirect cost for bank to own low-yielding
securities (not included in banks liquidity ratios) – Cost to monitor collateral• Fed, custodial fees
• Collateral has become a commodity
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Investment Policy - Definition A document drafted between a portfolio manager
and a client that outlines general rules for the manager.
The Policy provides the general investments goals and objectives of a client and describes the strategies that the manager or approved broker/dealer should employ to meet these objectives.
Specific information on matters such as asset allocation, risk tolerance, collateral restrictions and liquidity requirements would also be included in an Investment Policy.
Investment Policy Best Practices Updates
o Policy should be reviewed at the least every 2 yearso Policy should be reviewed if major changes occur• Personnel• Investment committee• Economic environment
Policy vs. Procedureo Policy – overall intention and directiono Procedure – specific way to carry out an activity or process
Partnering with your Bank• Managing your banking relationship• Relationship Reviews• Fees vs. Compensating Balances
Managing your Banking Relationship• What you should expect from your bank– Focused expertise– Full range of services and products– Acumen, accuracy, approachability– An annual review of your banking relationship
Managing your Banking Relationship• What the bank will expect from you– Properly prepared financials– An educated client is a strong client– Strong internal controls– A willingness to communicate– A plan for the future
Managing your Banking Relationship• A checklist for building a strong, ongoing
banking relationship – Stay in touch– Talk to your bank about best business practices– Make your bank an essential part of your finance
team– Review the fees your bank is charging you– Remember all banking relationships are different
Relationship Reviews• At the least should be done annually• Have right people in the review; Bank & SD
• Verify understand of goals • Review current services/products & account
structure• Diagnostic check with how happy you are with
bank’s services and coverage team. • Discuss pain points.
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Direct Fees vs. Compensating Balances• Direct Fees– Requires budgeting – Requires additional monitoring of collected balances– Requires active investing
• Compensating Balances– Potential higher yield than interest bearing
checking account– No need for collateral – 100% FDIC insured
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Compensating Balance: Example • Example– Monthly service charge = $2,000– Earnings credit rate: .20% divided by 12 months
= .0167– CB = $2,000 = $11,200,000
.0167– Multiplier• (365/31)/.20• For every $1 of service fee you need $5,887 in balances
Compensating Balance• In today’s rate environment, attractive for
both bank and school district– Changes in FDIC allow for
– 100% of balances covered by FDIC – Eliminates collateral need/cost
– More competitive rates– Must allow for in investment policy
Aimee Briles, Vice President, Government FundsWintrust Financial [email protected]
Aimee oversees the Government Funds group at Wintrust Financial and has over nine years of experience in government banking. Aimee joined Wintrust in 2007 and works with the family of Wintrust Community Banks to deliver innovative products, tailored processes and exceptional customer service to local governmental entities.
Aimee has been a member of the Illinois School Business Officials and Illinois Government Finance Officers Associations, as well as the Illinois Park and Recreation Association for nine years. She is a member of the IASBO Cash Management Professional Development Committee, and presents seminars several times a year providing information on industry updates, treasury management product enhancements and the current rate environment. Additionally, she is a current member of the Service Associate Advisory Committee (SAAC).
Audra Scharf, Vice President• PMA Financial Network
2135 Citygate Lane 7th FlNaperville, Il [email protected]
Audra Scharf joined PMA in 2002 as a Bank Analyst in the Credit Department and was initially responsible for analyzing the credit of financial institutions. Audra spent 6 years as a Portfolio Advisor, where she was responsible for developing and implementing cash flow analysis for Illinois School Districts. Audra was also responsible for bond proceeds management and arbitrage reporting for those districts. Audra has also worked with Illinois School Districts to implement a five year Financial Planning Program (FPP). Currently, Audra leads a team of Portfolio Advisors and is responsible for assuring that clients receive the superior services that are expected from PMA.
Audra received her Bachelor of Science in Finance and her Masters in Business Administration from Northern Illinois University. She is a member of IASBO and holds Series 7, Series 63 and Series 24 securities licenses.
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Kimberly Feeney, Senior Vice President Bank of America Merrill Lynch
Public Banking & Markets Group135 S. LaSalle StreetChicago, Illinois [email protected]
Kim is a Senior Government Client Manager in the Midwest Region. Joining the Bank in May 2003, she came with over ten years of government finance experience and has held roles as Accounting Manager and Chief Financial Officer for the Cook County Treasurer and Comptroller for the Cook County Forest Preserve District. Her responsibilities at Bank of America include working with clients to understand their current operations and assist in improving, enhancing and automating their treasury management operations as well as meeting all their capital raising solutions.
Kim is a Certified Public Accountant (CPA) and has an MBA in Finance from Loyola University.