Lesniak Bill To Protect Public Funds In Bank Collapses Advances

TRENTON – A bill sponsored by Senator Raymond J. Lesniak which would change the supplemental protections put in place on government bank deposits in order to protect banks participating in the protection program and enhance protections for municipalities and other government units was unanimously approved by the Senate Commerce Committee yesterday.

“The effects of the crisis gripping our world economy have been profound and far-reaching, but nowhere are we seeing a bigger impact than in the financial services sector,” said Senator Lesniak, D-Union. “The bank industry has been significantly destabilized as a result of the near-collapse of our economy, and a little pressure in either direction could send the whole house of cards tumbling to the ground. This legislation puts safeguards in place to make sure we don’t inadvertently set off a chain reaction through a program intended to reimburse taxpayers should a bank fail.”

The bill, S-2859, would make various changes to the “Governmental Unit Deposit Protection Act,” (GUDPA) a law supplementing Federal Deposit Insurance (FDIC) protections for governmental bank deposits should a bank fail. The bill would establish a public fund deposit cap of $200 million, and require a 100 percent collateralization above that amount in order to better protect smaller depositories. The bill would also reduce the maximum liability of banks participating in the GUDPA program from five percent to four percent once all collateral has been liquidized, in order to protect against a chain reaction should a bank holding large amounts of government funds fail. Finally, the bill would enhance the Department of Banking and Insurance (DOBI)’s oversight of banks participating in GUDPA, requiring such banks to file quarterly reports with the Department detailing their financial stability.

Senator Lesniak noted that his bill was intended to address the increased instability of banks around the nation resulting from the global recession. He noted that while such public fund protections were appropriate in good economic times, they may result in further expanding bank instability in times of crisis. The Senator pointed to an instance in Washington state in which a bank failure forced other banks to pay a total of $15 million to cover the failed bank’s government deposits, and said that after reviewing New Jersey’s GUDPA program, he found that a bank failure in the Garden State would result in losses for any municipality or county covered as well as all of the other banks participating in the program.

“The GUDPA program was envisioned as a safety net to reimburse taxpayers should one bank fail, but we live in times when a little pressure could cause the whole system to collapse,” said Senator Lesniak. “I still think the GUDPA program has value, within limits, but we need to protect the stability of New Jersey’s banks in addition to providing a safety net for lost taxpayer funds. This bill strikes the proper balance, continuing the goals of the GUDPA program while reducing the risk of a system-wide collapse should the program be put to use.”

The bill now heads to the Senate Budget and Appropriations Committee before going to the full Senate for review.

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