Rural Water - Quarter 4, 2008 - (Page 21)

CONTROLS BY LINDA PATTERSON, PATTERSON & ASSOCIATES Remember that there are three independent parties to any collateralized bank relationship: you, the bank and the independent custodian holding the collateral. It is best to have all three parties to the relationship sign the agreement. This will not be possible if the bank is using the Federal Reserve as custodian. In that case, only you and the bank sign. But in that case, you should have a completed “Circular 7” form on ﬁ le from the Fed. Find these documents. 2. The written depository/collateral agreement must be approved by resolution of the bank board or the bank’s loan committee. Only an agreement approved by resolution of one of these two bodies will be acceptable to the FDIC. Does your depository agreement have the resolution number and date of the resolution on it? Is your depository agreement approved by resolution of the bank board or the bank’s loan committee? How do you know? Get it in writing. You can ask for a copy of the resolution from the bank. This point is critical because only these two bodies of the bank can put a record of the agreement into the “ofﬁcial” records of the bank. And, the FDIC only looks at the ofﬁcial records of the bank. 3. As noted above, the agreement must be in the ofﬁcial records of the bank. To prove this, it is a good idea to get the resolution date and number of the action on the agreement itself or in written form to you. 4. Under FIRREA, the pledging of collateral must be “contemporaneous” or simultaneous with the agreement itself. In its purest form, this means that the agreement, if it references the specific securities pledged to the public entity, would have to be re-executed each time there was a substitution. That need not be done, however, if you do not, make a list of collateral a part of the agreement. It is important to NEVER attach a list of the collateral originally pledged to an agreement. This collateral will have been substituted off or matured off and been replaced over time and the list will not be valid. Even with safekeeping receipts from new substituted collateral, the collateral will not be honored by the FDIC because the receipts are not part of that original ofﬁcial record. Instead of an attached list of securities that is part of the agreement, the terms of a depository/collateral agreement should state that ANY collateral pledged over the term of the agreement must comply with the terms and conditions of the agreement (such as margin amounts, type of security, substitution etc.). The criticality of this point is that again, the FDIC is very literal on the requirements and if a list of collateral is attached, then they will only consider the actual securities on that list and none that were substituted afterwards – even if you have pledge safekeeping conﬁ rmations. It is important to also remember that when the FDIC is called in to close or bridge a bank, the agency is working for the FDIC Fund to keep it strong enough to support any and all failures that might occur. As such, the agency will not be lenient on any conditions. You will lose any unsecured funds that do not follow these conditions. Risk Control As a second point of control to ensure the safety of your funds, you must be able to answer three basic questions that address collateral risk. 1. What is required by your investment policy, or the banking services contract, as to type of collateral and is that what is currently pledged to you? Your investment policy should include a reference to what the collateral requirements of the entity are. These requirements are set by you and list exactly what type of collateral is authorized; not only by law but by your policy. Any public entity can restrict collateral to include only part of the authorized legal list in the Pubic Funds Collateral Act (TX Government Code 2257). Of course, any type of collateral authorized by the entity should be fully understood by the investment ofﬁcer and the governing body. It may be prudent to restrict the authorized list to only what is marketable and can be priced accurately. It is recommended to allow only “obligations of the U.S. Government, its agencies and Instrumentalities.” Remember, in limiting collateral, make it a win-win for you and the bank. A bank has a longer asset/liability mix than any public entity so their portfolio will, by deﬁ nition, require longer securities. If you artiﬁcially restrict collateral by maturity, you are requiring the bank to buy securities for their portfolio that are not cost-effective. This costs them – and ultimately you – money. Requiring high credit quality treasuries and agencies or instrumentalities and allowing mortgage backed securities that pass the bank test, all of which ﬁt a bank’s portfolio goals and objectives, is productive for both >>22 There are a number of major control checkpoints that are beneficial to assure you have done enough to protect your assets sitting in time (CD) and demand (accounts) deposits for your entity. Fourth Quarter 2008 • 21

Table of Contents Feed for the Digital Edition of Rural Water - Quarter 4, 2008

Rural Water - Quarter 4, 2008 Contents From the President Rural Water: Where are We Headed? The Future of Water in America Bank Collateral Controls in Nervous Times Bottle of Water or Billion Dollar Bully? Aqua Chocolate No Mas Why Even Small Water Systems Should Have Personnel Policy Manuals Safe Drinking Water Regulatory Update 2008 NRWA Industry Event Throwing My Loop Advertisers.com Index to Advertisers From the CEO

Rural Water - Quarter 4, 2008

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