Illinois to deposit $1 billion in banks
SPRINGFIELD -- State Treasurer Alexi Giannoulias on Thursday put Illinois among the first states to wade into financial sector rescues, promising to deposit up to $1 billion in the state's banks.
Giannoulias told The Associated Press he will make the money available to interest-bearing accounts by shifting it from lower-yielding investments in a move bankers are embracing and the treasurer says will earn the state a better return.
"The foundation of a healthy local economy is a strong local lender," said Giannoulias, who announced the cash infusion on Thursday. "We want them to know that the state's banker has confidence in our local lenders."
Giannoulias predicted other states would follow Illinois' lead. While the federal government adopted a $700 billion financial system rescue, including $250 billion to be invested in banks, few states have entered the fray.
New Jersey Gov. Jon S. Corzine also announced a broad stimulus package Thursday that had echoes of Giannoulias' plan in that it would move $500 million from state pension funds into bank deposits to encourage lending. The New Jersey plan also features immediate assistance for homeowners facing foreclosure, $3,000 to businesses for every job they create and keep and putting public works projects on a fast track.
Alabama lawmakers are looking for a way to prevent the state's most populous county from filing for bankruptcy over a multibillion-dollar sewer debt.
The Illinois treasurer, whose job is to invest state tax revenues but keep them liquid enough so they're available to pay state bills, maintains a portfolio of about $8 billion in invested state money. About 20 percent of that, or $1.7 billion, is already invested in banks.
But banks are offering better interest rates because they want the cash. The billion-dollar bank deposit will move state money from more conservative investments whose returns are dropping as skittish investors flock to them, Giannoulias said. The deposits will be protected by collateral, he said.
The program allows any state-chartered bank or national bank with an Illinois branch to request as much as $25 million. The major banks from which President Bush proposes the federal government buy $250 billion in shares using the federal rescue fund are not eligible.
Broadway Bank in Chicago, owned by the Giannoulias family, does not do any state business and will not participate, Giannoulias spokesman Scott Burnham said.
And while the move raises the profile of Giannoulias, a first-term Democrat and potential candidate for governor in 2010, he prohibits political contributions from banks or contractors doing work for the treasurer.
Banks would have to repay the money within a year. Giannoulias said many need money just for a few months.
Lee O'Neill, president and CEO of Champaign-based Busey Bank, said businesses crimped by the economy draw more on savings and other deposits. That leaves less capital for Busey to satisfy a growing loan demand in its Champaign, Peoria and Decatur locations.
"The treasurer's attempting to get an acceptable rate of return but at the same time make sure banks have access to funds to take care of their community needs," O'Neill said.
It's the right thing to do even if the state wasn't improving its return, said Leo Harmon, senior director of Fiduciary Management Associates in Chicago and head of the treasurer's external investment advisory board.
Harmon said the plan alleviates the credit strain on banks and boosts confidence among depositors that they're protected. Even healthy banks can lose customers' trust, suffer mass withdrawals and slide quickly into trouble, he said.
"Once you lose confidence in a bank and its ability to keep your money safe, you can create a huge domino effect that can really bring a bank down which otherwise would have been able to get through a tough situation," Harmon said.
It's unusual that banks could offer better returns than other stalwart investments, said Joyce Nardulli, vice president for government relations for the Illinois Bankers Association, "but it's an unusual time and hopefully very short-lived."
A one-year bank deposit currently earns an average interest of 3.2 percent, up from about 2.25 percent in April. By comparison, one-year Treasury bills are earning 1.2 percent and money markets have fluctuated between 2.2 and 2.8 percent in the past month.
Repurchase agreements -- bonds bought from dealers who promise to repurchase them at a specified rate -- earned 4 percent a year ago, but now bring in 0.8 percent, Giannoulias said.
"He's going to be doing as well in a bank as he could anywhere else, if not better," Nardulli said.
Participating banks must put up collateral worth as much as 110 percent of the deposit in the form of bond investors assurance certificates, letters of credit from the Federal Home Loan Bank, or other secure obligations. If the bank fails, the state can collect the collateral, Giannoulias said.
State transfers are limited to 10 percent of a bank's total deposits and a bank may have no more than $100 million total. So if a bank already has $75 million or less from the state, it may get the full $25 million under the new plan.
The treasurer plans to release $500 million immediately and issue the balance incrementally at the beginning of each month from December to March.