Recent Activity Impacting Financial Institutions

September 11, 2008 at 6:11 pm Leave a comment

Kansas Bankers Surety Exits Private Deposit Insurance Business

Kansas Bankers Surety Co., a subsidiary of Berkshire Hathaway based in Topeka, Kansas, and one of the largest private bank deposit insurance providers in the Midwest, recently announced that, effective immediately, it will no longer provide banks with deposit guaranty bonds to insure deposits in excess of the FDIC’s $100,000 limit. The company made the decision to exit the private deposit insurance business, in part, because of recent bank failures and the company’s inability to buy reinsurance for the product. The company indicated that within the next few months they will begin sending notices to depositors that their existing policies will be cancelled after 90 days from the date of the notice. Your financial institution should explore the various alternatives to Kansas Bankers Surety’s product. Those alternatives include:

  • CDARS®. If your bank is a member of Certificate of Deposit Account Registry Service®, which is offered by the Promontory Interfinancial Network, LLC, then your bank can offer depositors up to $50 million in FDIC deposit insurance by placing deposited funds into various certificates of deposit, in increments of $100,000 or less, issued by other banks in the CDARS® network. This alternative may not be available to all banks.
  • Repurchase Agreements. Your bank can enter into repurchase agreements with large depositors whereby the bank agrees to sell government securities to a depositor and, subsequently, repurchase the securities from the depositor at a specified price and a specified time (either the next business day or at the expiration of a stated term). The depositor benefits from this arrangement because the depositor owns a government-backed security, rather than a partially uninsured bank account. Banks must carefully follow government securities regulations to properly transfer legal ownership of the security to the depositor in order to provide the depositor with protection if the bank fails. Further, failure to follow those regulations may subject the bank to regulatory criticism.
  • Collateralized Deposits – Public Funds. In most states, banks are required to “collateralize” deposits of public funds, such as those of the state, counties, municipalities and school districts. State law varies on the types of collateral banks must pledge. While banks may be required to pledge collateral to secure deposits of public funds, banks are generally prohibited from pledging collateral to secure deposits of non-public funds.
  • Private Deposit Insurance – Other Vendors. Banks may continue to purchase private excess deposit insurance from any of the remaining providers in the market.
Government Bailout Felt by the Shareholders of Fannie Mae and Freddie Mac

Banks across the country will immediately feel the consequences of the recent government bailout of Fannie Mae and Freddie Mac. Banks that own preferred stock in those entities will be forced to write off much of the value of those shares further aggravating the capital problems facing many banks. Of significance, the takeover suspends dividend payments in respect of preferred shares. The suspension of dividends has prompted a drop in value of the shares in the two companies of greater than 80 percent. Those losses may result in “other-than-temporary-impairment” charges, which would have a negative impact on regulatory capital.

The Federal Reserve Board and other federal regulators have responded to the potential impact, stating in a recent press release that they “are prepared to work with these institutions to develop capital-restoration plans.” Treasury Secretary Henry Paulsen has explained that if any bank faces losses that will place them below the government designation of a “well-capitalized” institution they should contact their primary federal regulator. Initial indications are that only a handful of banks should be affected to this extent but the cumulative impact of the write-downs will reverberate throughout the banking system.

What this means for your financial institution:

  • You should determine the extent of your holdings with Fannie Mae and Freddie Mac and determine the potential impairment charge as a result of those holdings.
  • Banks with substantial holdings of these shares may need to address the losses by seeking additional capital, restructuring their balance sheet, suspending dividend payments or identifying possible merger opportunities.

Entry filed under: Client Alerts, Financial Institutions.

FDIC Deposit Insurance Processing of Federal Reserve Membership Applications

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