Smart move and it includes collateral for the state:
The billion-dollar bank deposit will move state money away from more conservative investments whose returns are dropping as skittish investors flock to them, Giannoulias said. But the bank deposits will be protected by collateral, he said.
Under the plan, any state-chartered bank or national bank with an Illinois branch may request as much as $25 million. The major banks from which President Bush proposes the federal government buy $250 billion in shares using the federal rescue fund are not eligible.
Broadway Bank in Chicago, owned by the Giannoulias family, does not do any state business and will not participate, Giannoulias spokesman Scott Burnham said.
Banks would have to repay the money within a year — Giannoulias said many need money just for a few months.
Lee O’Neill, president and CEO of Champaign-based Busey Bank, said businesses crimped by the economy draw more on savings and other deposits. That leaves less capital for Busey to satisfy a growing loan demand in its Champaign, Peoria and Decatur locations.
“The treasurer’s attempting to get an acceptable rate of return but at the same time make sure banks have access to funds to take care of their community needs,” O’Neill said.
It’s the right thing to do even if the state wasn’t improving its return, said Leo Harmon, senior director of Chicago-based Fiduciary Management Associates and a member of the treasurer’s external investment advisory board.
Harmon said the plan alleviates strain on banks that want to keep investing in communities and boosts confidence among depositors that they’re protected. Even healthy banks can lose customers’ trust, suffer mass withdrawals and slide quickly into trouble.
“Once you lose confidence in a bank and its ability to keep your money safe, you can create a huge domino effect that can really bring a bank down which otherwise would have been able to get through a tough situation,” Harmon said.
Giannoulias predicted other states would follow Illinois’ lead. Aside from the $700 billion federal bailout, state and local governments have not, for the most part, entered the fray. New Jersey Gov. Jon Corzine said Monday that state purchases of foreclosed homes could be part of a broad economic stimulus package he also planned to announce Thursday.
“We’re trying to find ways to free up money, free up capital, for Illinois families and businesses who really need to be able to go to their bank and get that capital and also reassure depositors that their money is safe,” Giannoulias said.
A one-year bank deposit currently earns an average 3.2 percent in interest, up from about 2.25 percent in April. By comparison, one-year Treasury bills are earning 1.2 percent and money markets have fluctuated between 2.2 and 2.8 percent in the past month.
I just think we’ll all soon be paying for this with rampant inflation.