House mulls amending bank laws

In the wake of the Bank of Saipan debacle, the House of Representatives is now mulling two options on how to adequately protect government deposits in banks that are not insured by the Federal Depository Insurance Corporation (FDIC).

House Speaker Heinz S. Hofschneider said that recent developments transpiring from events at the Bank of Saipan only highlights the fact that current requirements for government deposits are not adequate to ensure that government monies are protected.

“We think it’s very obvious that the government deposit requirements on non-FDIC banking institutions in the Commonwealth are less than adequate to ensure that the deposits of the government are well secured,” Hofschneider said.

The House Speaker said that, as a result, the lower chamber is now crafting two possible bills that would address this concern: to require non-FDIC banks to secure government deposits with Treasury bills and to limit government deposits in non-FDIC covered banks.

“The kind of security or instrument that could be allowed for non-FDIC banks so that they would have the privilege of accepting government deposits should be Treasury bills or T-bills, as opposed to assets that are themselves at risk, such as loans,” he said.

Hofschneider said that, if the security for government deposits is equivalent to assets such as bank notes or loans, there is the possibility—however remote—that the government could have some difficulty in withdrawing those deposits at any given time.

“How can you withdraw a million dollars of government deposits if you have to wait for those monies to be recovered from loan applicants?” he asked.

So long as banks secure government deposits with equivalent value in terms of hard cash or T-bills, “I don’t think we will face this problem in the future. The problem now lies in the undercapitalization and securities of existing banks and the potential for a bank run to occur,” he added.

The other legislative option, Hofschneider said, is the possibility of limiting the total amount of government deposits in non-FDIC banks to ensure minimal risk.

The House Speaker conceded, however, that non-FDIC covered banks play an important role in addressing the needs of people who would be considered by other banks as high-risk in terms of liquidity and credit-worthiness.

“We do see the that, to some extent, the non-FDIC banks are also contributing to the greater lot of people who themselves are at a higher risk than the average borrower. So, they [non-FDIC banks] become the conduit for those with higher risk clients,” he said.

Hofschneider stressed that this issue is very important, particularly “since paranoia can really pick up to the extent that even FDIC-banks may face similar nervousness and a potential bank run.”

He pointed out, though, that the depositors themselves are the ones in control of the paranoia. “So, as a caution, I think the issue should be left to appropriate agencies like the federal agencies that are looking into this problem, such as the U.S. Attorney General’s Office and the local AGO. These are adequate instruments for safeguarding the issue on hand,” he said.

What the Legislature sees in terms of its responsibility is to review the enabling statutes for the CNMI’s banking system to see whether there are enough safeguards for depositors that would prevent hyperactive behavior, such as a bank run, where any bank can be inundated with withdrawals, he added.

When asked if the passage of Public Law 12-61 may have only worsened the situation in terms of protecting government deposits, Hofschneider said it is the instrument of security that is more important, not the lowering of the security reserve. Public Law 12-61, signed into law in August last year, lowered from 110 to 100 percent the security that a bank is required to furnish and pledge to protect government funds deposited in private banks.