Authorizes the state, local governments and public authorities to arrange for redeposit of moneys through a deposit placement program

Summary of specific provisions

Amends appropriate sections of Law to allow government deposits to be invested through local banks in FDIC-insured accounts through a reciprocal deposit-taking program which provides deposit insurance coverage in excess of $250,000.

Specifically, the bill allows investments which meet all of the following conditions: moneys are invested through a bank located in this state; the bank arranges for the deposit of funds in other banking institutions, as defined in section 9-r of the Banking Law, for the account of the government; the full amount of the principal and accrued interest are insured by the FDIC; the local bank acts as custodian for the government; and the local bank receives an equal or greater amount of funds from other depository institutions.

Justification

This bill provides an alternative option for ensuring the security of public deposits. Currently, government is authorized to temporarily invest moneys in special time deposit accounts or certificates of deposit issued by a bank or trust company located in this state.

Further, the bill addresses an area of the laws protecting deposits and investments of public funds that have not kept pace with changing federal deposit insurance coverage provisions. New York's system of safeguarding public funds has proven extremely effective throughout virtually every economic and interest rate cycle in protecting every dollar of funds deposited in an FDIC-insured bank or trust company from loss. The system relies on full collateralization (in some cases, over collateralization) of deposit in excess of deposit insurance limits. However, the provision dealing with those deposits covered by FDIC insurance has not been changed since first enacted.

Currently, the FDIC provides 100% coverage for deposits in non-interest-bearing transaction accounts and coverage of $250,000 per depositor for deposits in all other accounts. However, over the past ten years, the FDIC has also acknowledged coverage far in excess of

the $250,000 per depositor limit for accounts that are not non-interest bearing transaction accounts. If a deposit in an FDIC-insured bank or trust company is divided into multiple deposits, all under the $250,000 limit, and deposits in that amount are made into other banks and trust companies, the amount insured in increased by a multiple representing the total number of banks and trust companies into which deposits are made. Thus, a $10 million local government deposit can have 100% FDIC deposit insurance if it is split among more than 40 banks and trust companies.

At the same time, each of the banks into which a piece of the original deposit was made, make a reciprocal deposit in the same amount back into the bank that holds the government's original deposit. This allows the full amount of the government's deposit to remain available for loans and investments in the originating bank's community. Because the cost of deposit insurance coverage is generally much lower than the cost of alternative forms of collateralization acceptable under the General Municipal Law, State Finance Law and Public Authorities Law, converting deposits requiring collateralization into deposits covered by deposit insurance with materially reduce the costs of carrying deposits both for the depository banks and for the local government making the deposit.

More than 40 states have already authorized the use of this type of reciprocal deposit system. It is in use in New York for every type of deposit - consumer, business, tax-exempt organization - other than government deposits.

This legislation would allow New York State, its municipalities, agencies and public authorities to reduce the cost of making deposits, to more easily track and manage the collateral backing deposits, and to speed recovery of funds in the failure of a bank or trust company.

Legislative history

This is a new bill.

Fiscal implications

None to the State. Local governments are expected to benefit from the reduced costs involved in collateralizing deposits.

Effective date

Immediately.