We are issuing guidance on the way banks and credit unions protect our deposits in the event an institution was to fail for some reason such as poor management or economic factor.

The Treasurer’s office regularly has cash balances greater than the amount of insurance offered by the FDIC and NCUA. To protect those deposits, banks and credit unions pledge a bond as collateral. If the bank were to fail, the county would sell that bond and recover its funds.

We accept five types of collateral:

  1. U.S. Treasury Bonds
  2. U.S. Agency Bonds
  3. Municipal Bonds issued by States
  4. Municipal Bonds issued by local government (as long as they are backed by property taxes)
  5. Letters of Credit from the Federal Home Loan Bank of Chicago

Because we accept U.S. Agency Bonds, many financial institutions pledge Mortgage Backed Securities (MBS) issued by Ginnie Mae, Fannie Mae, and Freddie Mac. Ginnie Mae bonds have explicit backing by the U.S. Treasury, while Fannie and Freddie.

Explicit means “backed by the full faith and credit.” Implicit means “maybe backed…”

We do not want these instruments as collateral on our deposits. It is not because we are concerned about the viability or stability of Mortgage Backed Securities. Quite the contrary; we hold those bonds as investments. Rather, we don’t want them as collateral because we want explicit guarantees on our deposits if something goes wrong for whatever reason.

Therefore, we have issued guidance to our banking partners asking them to review their collateral pledges for MBS. Where a bank pledges MBS against our deposit, we want them to exchange it for something with an explicit guarantee by December 20, 2014.

We place the upmost priority on protecting the public’s money.

We believe this change does that.

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