Purpose

Requires trust companies set aside additional liquid capital, depending on the total amount and nature of assets held in trust.

Background

Currently, trust companies in Arizona are required to have $500 thousand dollars on reserve in order to obtain a certificate from the Department of Banking (the Department). Industry and the Department agree that this amount is arbitrary and somewhat outdated in today’s economic and financial marketplace.

Last year a $2 billion dollar trust company in Illinois failed. According to the Department, the cost to manage that company in receivership is reported to be about $500 thousand a month. The Department also points to certain Texas failures where failed trusts had dubious assets that were unable to meet the costs associated with their receiverships. These two factors drive the Department’s request for passage of S.B. 1294 and their belief that both more and liquid equity be on hand to offer some security to consumers of these trusts. In the event of a “run” on a trust, or similar liquidity threats, the reserve allows a receiver to step in and prevent the loss of consumers’ money.

Trust companies argue that the federal government requirements are less stringent on the type and amount of reserve required by Arizona. While a portion of the reserve is required to be liquid, a portion is also allowed to be in other forms, which is less burdensome to the trusts. Further, requiring large amounts of cash to be held in reserve is an inefficient use of resources. The opportunity costs to the firms is onerous when considering other regulatory bodies allow a mix of liquid and other assets.

S.B. 1294 increases capital amounts trust companies must keep in reserve by the Department of Banking. Depending on the types of accounts and aggregate amounts in those accounts, trusts are required to hold additional monies. Companies dealing in custodial assets (assets that leave little or no discretion to the trust company) are required to reserve an additional $250 thousand for each increment of $500 million under their control. Trust companies that hold assets and have some or significant control over how they are invested are required to hold $250 thousand for each $250 million under their control. Additionally, for each point a company is rated below the satisfactory level, an additional $250 of liquid capital is required to be held in reserve.

According to the Department, there is no fiscal impact to the general fund associated S.B. 1294. The fiscal impact to trust companies is undeterminable.

Provisions

1. Authorizes the Superintendent of Banks to require trust companies to hold $250 thousand dollars in reserve for each:

a) increment of $500 million dollars or more in custodial accounts;

b) increment of $250 million dollars or more in discretionary accounts;

c) composite rating point below satisfactory that the company scored.

2. Makes technical and conforming changes.

3. Provides for a general effective date.

Prepared by Senate Staff

February 5, 2001

Assigned to BI FOR COMMITTEE

Purpose