Tepid Response To Cahill's Deposit Insurance Proposal | Central Mass. bankers say measure is due, others say it's unfair
As a law intended to require full collateral for all public deposits from banks that don’t already do so, state Treasurer Timothy Cahill’s proposed Security for Public Deposits Act was met with a collective shrug of the shoulders from Central Massachusetts bankers.
For many, like K. Michael Robbins, president and CEO of Spencer Savings Bank in Spencer, it’s because as mutual banks, they’ve been doing it all along.
“We have a deposit insurance fund, so every penny in every account is insured,” Robbins said.
It’s the same for the mutual Savers Co-operative Bank in Southbridge.
Paul Jalbert, Savers’ president and CEO, explained, “We have excess insurance that covers all our deposits in full. The FDIC (Federal Deposit Insurance Corp.) covers the first $250,000” in any account, “and we have additional insurance through the SIF,” the Share Insurance Fund.
Double Coverage
That SIF coverage is one of two systems banks would be able to use under Cahill’s proposal. The other is the Depositors Insurance Fund, and according to the proposed law, the state will pay to purchase insurance on behalf of banks.
Cahill’s office said the law is primarily intended to protect municipal accounts. The state already requires that its deposits are fully insured, as are the $650 million it has on deposit at Sovereign Bank.
Framingham Co-operative Bank, which claims $348 million in assets, also holds some state deposits.
“A couple of months ago, they required that their funds be collateralized,” said Robert Lamprey, the bank’s president and CEO, “and DIF and SIF are sufficient.”
Lamprey said banks organized as national banks, trusts or savings and loan banks do not currently live with a requirement to fully insure deposits. For them, “it might be a little bit of a hassle, but you can understand why (the state would require the coverage) these days.” In fact, Security for Public Deposits Act is a direct response to the failure this summer of California-based IndyMac Bank.
California, one of 46 states with laws requiring full insurance of public accounts, lost nothing when IndyMac collapsed.
William Mahoney, CFO of Commonwealth National Bank in Worcester, said the law would affect CNB, but added, “We can understand that, and it’s not that big of an issue for us, frankly.” CNB does hold state deposits that must be fully insured.
One local banker, James Garvey, president and CEO of Flagship Bank & Trust Co., said the proposed law is unfair to private depositors. Flagship reported $509 million in assets in 2007.
“I would strongly disagree with the treasurer. This goes against what the federal government and the financial institutions are trying to accomplish right now,” Garvey said. “What makes public deposits more important than your deposits or anybody else’s?” The state would purchase the collateral for public accounts and interest earned on that collateral would be paid to the banks themselves, according to Cahill’s office.
However, as a matter of principle, Garvey said the law would punish banks for being well capitalized enough to take on public accounts. “If a bank is undercapitalized, the state shouldn’t encourage a municipality to put money in there,” he said. “It’s counterproductive.”
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