Pub. 4 2015 Issue 6

L E A D I N G A D V O C A T E F O R T H E B A N K I N G I N D U S T R Y I N K A N S A S 12 HOW REGULATION IS CHANGING THE VALUE OF PUBLIC FUNDS FOR KANSAS’ COMMUNITY BANKS By Patrick Melland, Regional Director, Promontory Interfinancial Network P ROMONTORY RECENTLY PUBLISHED A WHITE paper 1 about how shifting factors in the banking industry are making public fund deposits more available to community banks. The paper notes that now is a time when many government finance officers are considering shifting investments out of money market funds into bank deposits. It also notes that many of the nation’s largest banks do not want public fund deposits, as new regulations raise the cost of public unit deposits to large banks (but not to smaller and mid-sized banks). Here’s an overview of what’s happening at the Federal level: • The Liquidity Coverage Ratio (LCR) is making public funds more expensive for large banks – The largest banks (banks with assets of $50 billion or more) hold more than half of the country’s public deposits. Basel III’s introduction of the LCR applies a 40% run- off rate to public funds at these largest banks, making them more likely to forego public fund deposits. With less competition from the nation’s largest players, these deposits may become more accessible and more affordable for community banks looking for inexpensive funding. • Changes to money market fund (MMF) rules are limiting where public funds can go – By the middle of 2016, changes to the rules that determine how prime MMFs calculate net asset value (NAV) will make it impossible for public funds to invest in prime MMFs. The general consensus is that this ruling will also apply to local government investment pools (LGIPs), either forcing LGIPs to invest in fully secure investments (e.g., Treasuries) or operate with a floating NAV. The change is likely to either reduce the yield from LGIPs or eliminate them as an investment option for public funds, giving community banks a better chance to compete for these funds – possibly without rate competition from large banks if they sit on the sidelines, as many expect. So what does this mean for banks in Kansas? Kansas state law requires that governmental entities maintain protection on all public funds, and community banks are well- positioned to provide this protection, potentially at a lower cost than in the past. Increased availability of public deposits, reduced price competition for these funds from large banks, and fewer alternatives for government finance officers may provide an opportunity to community banks in Kansas to access and make use of these funds at a time when overall funding costs are expected to rise and competition for deposits increases. The new value of public funds could have benefits for the community, as well as community banks. Community banks have typically been the leading source of small business lending in the United States, and as more deposits from governmental entities throughout Kansas are funneled into community banks in the state, this could substantially increase the funds available for local lending. To grab hold of this potential opportunity, community banks may want to revise their perception of public deposits. What has often been looked at as a mixed blessing may be a key to community banks thriving. About Promontory Interfinancial Network: Promontory is the leading provider of FDIC-insured deposit placement services. Their services include Insured Cash Sweep, CDARS, IND, and Yankee Sweep, which enable banks and other financial institutions to build strong, multi-million-dollar relationships; replace higher-cost deposits; reduce collateralization; and purchase cost-effective funding. For more information about Promontory and its services visit promnetwork. com or contact Patrick Melland at (866) 776-6426 ext. 3422. 1 You can read the white paper at http://www.promnetwork.com/media/118213/Promontory-White-Paper- e-New-Value-of-Public-Funds.pdf