Cahill Proposes Public Account Insurance Law

State Treasurer Timothy Cahill has filed legislation to require banks to provide collateral for all public accounts.

The Security for Public Deposits Act is one of 20 pieces of proposed legislation Cahill submitted Wednesday, the deadline for state agencies to file proposed laws for the 2009 legislative session.

As proposed, the "emergency law" would essentially require banks to insure public deposits in an amount no less than 102 percent of the actual deposits. According to the treasurer's office, 46 other states have the same requirement. Absent the requirements in Cahill's proposal, banks are required to insure deposits up to $250,000.

The state already requires banks with which it has deposits to fully insure those deposits. For example, the state's $650 million in deposits with Sovereign Bank are fully insured, according to the treasurer's office.

The law is primarily intended to protect municipal accounts in the event of a bank failure. Under the law, the state would buy collateral in the form of government treasury bonds or Federal Home Loan Bank letters of credit or through membership in the Depositors Insurance Fund or Share Insurance Fund. Any income earned on the bonds collateralizing those accounts would belong to the bank and the municipalities would recoup the full amount of their deposits in the event of a bank failure.

Cahill's office began pushing for beefed up public deposit insurance in the wake of the IndyMac Bank failure. States like California that had powerful public deposit insurance requirements lost nothing when IndyMac failed and was seized by the federal government in July.

The state's proposal would limit public deposits to 60 percent of a bank's total deposits and the requirement would affect banks with as little as $250,000 in deposits.