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VERIBANC BLOGS Next blog: Senate Banking Committee - Deposit Insurance Reform - Be Careful! Why isn't collateralization enough?Q: Why do state, county and municipal treasurers have a need for banking due diligence, even if all of their funds are collateralized? (Why should their auditing firms require this as well?) A: The following are some of the not so obvious but compelling reasons. 1. Our service provides documentation that the treasurer is meeting their fiduciary responsibilities for tax payers’ deposits as well as it mitigates their banking risk. This effort is regardless if they have all of their deposits collateralized and/or “have known their banker(s) for years”. 2. We know of no banker, who a treasurer interacts with, ever warning them that their bank is having financial or operational issues. Since government deposits are in the order of millions, if not tens of millions of dollars, these types of deposits are coveted by banks. How do we know this - because bankers have told us during a call to see why their rating fell. Further, and as important, if their “banker” is not the CFO or president, most banks have various departments whereby a silo environment (not sharing information among departments or teams) exists. As a result, their banker is in the dark about the bank’s financial or operational condition. Even if the “banker” is the CFO or president we have never heard of one of our government customers tell us – “Oh the president or CFO told us that they were having financial or operational issues”. Many conversations over the years are initiated by our government customers whereby they see a rating that is less than Green with Three Stars (our highest) and they call us to see why. Together, we review the Research Report and see what is driving the lower rating. After we have consulted with them, they now have data, not opinion, to call their banking contact and see if the banker’s story is consistent with the data. This type of conversation usually elicits an explanation of what the bank is doing to resolve the issue or issues. Although infrequent, a few of our government customers have told us that they switched banks due to problems we made them aware of and that the bank was not addressing or not addressing promptly. 3. We offer a time-tested, completely transparent track record, non-biased and no conflict of interest (no bank has paid us to rate them) proactive service. Since we can detect financial and/or operation issues quarters prior to a bank’s potential failure, (Silicon Valley Bank, Signature Bank and First Republic Bank are examples) our service provides treasurers or finance managers with assessments and plenty of time to discuss these issues with their banker before they become more or too serious. Hence, they are able to be proactive instead of being forced to be reactive – which is never a desired outcome. 4. Even if all of your deposits are collateralized, can you afford to wait a week or more if your bank fails - to have access to those deposits? Historically, the FDIC has found another bank to absorb a failed bank’s deposits, just over 85 percent of the time. However, even if the FDIC can’t find an acquiring bank, regardless of the type of resolution, the FDIC looks over all collateralization agreements and if every “I” isn’t dotted and every “T” isn’t crossed there are going to be delays. 5. Are you aware that many banks have operational shortfalls when it comes to keeping the percentage of securities’ value as outlined in a collateralization agreement up to the required amount. There could be a number of reasons for this very subtle situation. a. Are the bank’s personnel that handle this function not held to a high level of diligence and/or professionalism? b. Are they not aware of their customer’s requirements that the bank agreed to? c. Is the bank experiencing financial difficulties? Wouldn’t someone depending on the bank’s securities’ values want to know if the bank has to keep buying securities to keep up with a securitization agreement? This last question is exactly what got Silicon Valley Bank into problems. They kept buying US securities even though the value of those securities kept falling! Yes, our model picked up this problem nine quarters prior to the quarter of failure! 6. How do you debate a candidate, answer a legal suit or address negative social media posts about how you are protecting taxpayers’ deposits, if the only box you have checked off is – we collateralized all of our deposits. Our service provides a proactive and sound rebuttal to all of the above. |
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