Giannoulias commits $1 billion to Illinois financial institutions

Alexi Giannoulias

“It’s critical that Illinois take steps now to ease this crisis and get financial institutions lending to local businesses and consumers again so that this international crisis does not spread to other sectors of the Illinois economy,” said Giannoulias, noting that unemployment has skyrocketed in Illinois as 31 counties are reporting an unemployment rate of more than 8 percent. “Current market conditions have created a unique situation where we can wisely use state investments to help Illinois residents obtain loans and businesses expand while at the same time getting the best rate of return for taxpayers.

“When financial institutions do not have available funds to lend, businesses cannot access the capital they need to invest in new plants, new equipment, new buildings and new home construction,” Giannoulias added. “It also means that they do not have the short-term financing necessary to smooth out cash flows to retain or hire new employees, pay for materials and make payroll.” 

In the past, lenders had various sources to obtain needed capital. However, during the recent economic downturn and with the credit markets completely freezing up, financial institutions have found state deposits more attractive, triggering higher rates that taxpayers can earn on these deposits relative to alternative investments.

As of today, one-year deposits in state approved financial institutions would earn the state a rate of 3.38 percent. That compares favorably with other traditional investment options such as the one-year Treasury bill which yields 1.16 percent, repurchase agreements at .75 percent, and money market funds, fluctuating between 2.20 and 2.75 percent during the past month.

Calling the move a “tremendously constructive development in the effort to alleviate the strain faced by our local financial institutions,” Leo Harmon, a partner with Fiduciary Management Services in Chicago and head of the Treasurer’s External Investment Policy Committee, believes the plan will ultimately impact everyday citizens and help restore confidence in the system.

Charles Wheelan, a senior lecturer with the Harris Graduate School of Public Policy Studies at the University of Chicago, described Giannoulias’ plan as “timely and prudent,” noting that the investments are fully collateralized and protected by the state.

“Given that the normal process for short-term lending among banks is essentially frozen, the Treasurer’s plan is a sensible complement to the actions that are being taken at the federal level,” Wheelan said. “The danger of a financial panic is that otherwise healthy banks are denied short-term access to capital at the same time depositors are making extraordinary withdrawals. The top policy priority at the moment should be to ensure that healthy institutions stay healthy. This plan does that.”

Giannoulias will implement the plan by expanding an existing program. The Treasurer’s Access to Capital program allows approved banks and credit unions to request state deposits at market rates which are published each morning on the Treasurer’s website based on market conditions. The state deposits are limited to no more than 10 percent of a bank’s total deposits with no more than $100 million aggregate total in any one bank.

Currently, the Treasurer’s Office invests $1.7 billion in financial institutions throughout the state.

Under the new program, banks can request up to $25 million of the $1 billion commitment (The 10 percent deposit/$100 million aggregate rule still applies). Any state and federally chartered bank and credit union that is an approved depository is eligible to request deposits under the program. Financial institutions not chartered by the state must have a physical location in Illinois. The nine major banks that the federal government recently committed to buying equity stocks in are not eligible to take part in the program.

Rik Hafer, director of the Office of Economic Education and Business Research at Southern Illinois University in Edwardsville, said this plan “gets out front of a problem that could damage Illinois’ economy.”

“The Treasurer’s plan provides an important backstop to our local banks,” said Hafer, who also is a member of the Treasurer’s External Investment Policy Committee. “The conditions set forth in the plan ensure that the State is there to help troubled banks regain their balance.”

The expansion will be implemented incrementally with $500 million immediately available, and the additional $500 million gradually becoming available at the start of each month between December 2008 and March 2009.

“Busey Bank is appreciative of the continued efforts of Alexi Giannoulias and the staff at the Illinois State Treasurer’s Office in assisting Illinois banks by expanding the Access to Capital program,” said Lee H. O’Neill, president and CEO of Champaign-based Busey Bank. “Busey Bank continues to make loans and has experienced strong loan growth in downstate Illinois. The Access to Capital program has been an attractive funding option available to fund a portion of the loans Illinois banks have made in our local communities. The expansion of the Access to Capital program will assist in ensuring this funding option is available to banks throughout Illinois.”

The Illinois Bankers Association issued a statement, applauding the Treasurer’s Office for working to find innovative solutions to the financial crisis.

Illinois banks welcome this additional access to state deposits, which will help participating banks by increasing their liquidity, enabling them to offer more loans to their communities,” the statement read.

„By investing in healthy Illinois banks and credit unions, Giannoulias is helping to untangle the credit mess and ensures the state’s commitment to Illinois families and businesses,” said John Pawlowski, vice president of finance and investments at Consumers Credit Union, which has six locations in Lake County.

All deposits are fully collateralized from 102 to 110 percent of their value, depending on the type of collateral pledged, to ensure proper performance by the bank. In the event a financial institution fails or is unable to return a deposit to the state, the state is entitled to the full amount of the pledged collateral held by the Treasurer’s Office.

The money used to fund this program will come from a reallocation of the state’s diversified portfolio, which is governed by statute and implemented through the Treasurer’s investment policy. No statutory or investment policy changes are necessary to implement this program. No equity, warrants on equity or other forms of ownership in banks or banking institutions are part of this program.