A bill seemingly headed toward law at the Tennessee General Assembly would give banks in Tennessee more latitude when it comes to handling the billions of dollars currently being processed by local governments via the American Rescue Plan.
The legislation differs from the politically controversial bills at the heart of this week’s special legislative session, called by lawmakers to crack down on private and public COVID-19 mandates. It also has the support of the business community, a typical ally of the Republicans who control the legislature, unlike some of the legislation currently being considered.
The bill would two things for banks participating in the state bank collateral pool, created in 1990 for banks handling money on behalf of Tennessee local governments. First, it would allow banks to post cash as collateral for local government deposits. Second, it would lower the required collateral from 100 percent to 90 percent.
Tennessee Treasurer David Lillard brought the bill to lawmakers, and it has full support from the Tennessee Bankers Association.
Amy Heaslet, executive vice president and general counsel for the bankers association, said the legislation was necessary to help banks process the billions of dollars making their way to and through local government coffers.
“Banks have had challenges in finding enough collateral to pledge against the influx of those federal funds,” she said. “We needed to give them more flexibility.”
The cash option helps banks because of unprecedented levels of cash in the system, and held by banks. That option would be made permanent under the legislation. Without a cash option, Heaslet said, banks have to turn to more expensive options to put up collateral for the local government deposits.
The change to a 90-percent requirement would only extend through 2026 when the ARP funds are supposed to be spent. The requirement jumped to 100 percent following the 2008 recession, though Heaslet said the change “doesn’t pose any additional risk to the banking system” because financial institutions are “much stronger, more stable than they were in 2009.”
The bill is headed to the House floor and has passed all Senate hurdles so far.