PA 08-39—sHB 5331

Banks Committee

AN ACT CONCERNING LETTERS OF CREDIT

SUMMARY: The act permits the use of irrevocable Federal Home Loan Bank of Boston letters of credit to secure public deposits in Connecticut. By law, qualified public depositories have the power to secure public deposits. To do this, each qualified public depository must keep at all times, segregated from its other assets, eligible collateral in an amount equal to a certain percentage of public deposits held by the depository. In lieu of the eligible collateral required, up to half of the deposits may be secured solely by a private insurance policy.

The act allows qualified public depositories to, in lieu of the eligible collateral requirement, secure their deposits solely with an irrevocable letter of credit issued by the Federal Home Loan Bank of Boston if certain conditions are met. Specifically, (1) the federal home loan bank must have the highest rating available from a rating service the banking commissioner recognizes and (2) the amount of the letter, as a percentage of public deposits must be not less than the amount required for eligible collateral for a particular depository.

To accomplish this change, the act changes the definition of “qualified public depository” to include a bank, out-of-state bank that maintains a state branch, or Connecticut or federal credit union that holds public deposits and either (1) segregates eligible collateral or (2) arranges for a letter of credit to be issued. The act also makes conforming changes.

EFFECTIVE DATE: October 1, 2008

CONFORMING CHANGES

Procedure Upon Loss

By law, a “loss” is (1) the issuance of an order of supervisory authority restraining a qualified public depository from making payments of deposit liabilities or (2) the appointment of a receiver for a qualified public depository. When the banking commissioner determines that a loss has occurred, he must make a payment to the proper public officers of all public deposits subject to the loss. In determining how much to pay, he must determine the amount of public deposits by looking at the depositories' records and the amount covered by insurance and certify the amounts to each depositor. When the depositor receives the certification, the depositor has to provide verified statements of its deposits within 10 days.

The act requires the depositors to also provide information about any letters of credit issued to the depositor under the act. The commissioner must then determine and fix the amount of the deposits minus any deposit insurance. The act also requires the deduction of any current or future amounts received by the depositor pursuant to a letter of credit issued under the act's provisions.

Report

The act requires a qualified public depository to include in the certified written report that it is required to file periodically with the banking commissioner, the amount and name of the issuer of any letter of credit issued under the act's provisions, along with other required information.

BACKGROUND

Eligible Collateral Requirements

Currently, most institutions must hold an amount equal to between 10% and 120% of their public deposits, depending on their risk-based capital ratio. A qualified public depository that is (1) an uninsured bank must maintain, apart from its other assets, an amount equal to 120% of all public deposits it holds and (2) subject to a cease and desist order or a stipulation and agreement or letter of understanding and agreement with a bank or credit union supervisor, must maintain, apart from its other assets, 120% of all public deposits it holds, except that the depository and the public depositor can agree on a greater percentage.

Letter of Credit

A letter of credit is a document issued by a bank guaranteeing the payment of a customer's drafts up to a stated amount. An irrevocable letter cannot be canceled.

Federal Home Loan Bank of Boston

In 1932, Congress established the Federal Home Loan Bank System. The federal home loan banks are government-sponsored enterprises, federally chartered but privately capitalized and independently managed. The Federal Home Loan Bank of Boston is one of 12 regional federal home loan banks established by the Federal Home Loan Bank Act. It serves the six New England states. Financial institutions throughout New England are the bank's members and customers.

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