State Law Ensures Collateralized Deposits in Puerto Rico

Puerto Rico has implemented a unique deposit insurance system that sets it apart from other states in the United States. Under this system, financial institutions are required to collateralize deposits with government entities through the use of previously-selected securities or instruments.

Requirements for Financial Institutions

Financial institutions must provide sufficient collateral to government entities’ funds by pledging short-term securities or irrevocable letters of credit issued by US- or Puerto Rico-based entities with a AAA or AA rating from internationally recognized credit rating agencies. The pledged collateral must have a readily ascertainable market value and be entered into an effective and valid pledge against third parties.

Protection for Government Deposits

The Secretary of the Treasury of the Commonwealth of Puerto Rico is responsible for assessing the market value of the collateral from time to time. If the value falls below the value of public deposits, institutions are required to supplement pledged collateral. This legal framework aims to protect government deposits and ensure that in the event of a bank failure, there is a viable path to recourse and recovery of all such deposits.

Benefits for Financial Institutions

The collateralization of preferred deposits represents a significantly more stable funding source for institutions for development and internal reconstruction (IDIs) because it mitigates any incentives from preferred depositors to withdraw deposits due to concerns about a bank’s solvency. This also reduces the risk to the Federal Deposit Insurance Corporation (FDIC) and the Deposit Insurance Fund (DIF) in the event of a systemic risk determination.

Recommendation for IDI Assessment

The FDIC believes that including preferred deposits in the calculation of the special assessment base for IDIs would be inconsistent with the stated rationale of allocating the burden of the special assessment to institutions that benefited most from the assistance provided under the systemic risk determination. Therefore, it is recommended that preferred deposits be disregarded in determining an IDI’s special assessment base.

Key Points

• Financial institutions must provide sufficient collateral to government entities’ funds through the use of previously-selected securities or instruments.
• The pledged collateral must have a readily ascertainable market value and be entered into an effective and valid pledge against third parties.
• The Secretary of the Treasury of the Commonwealth of Puerto Rico is responsible for assessing the market value of the collateral from time to time.
• The collateralization of preferred deposits represents a significantly more stable funding source for institutions for development and internal reconstruction (IDIs).
• Including preferred deposits in the calculation of the special assessment base for IDIs would be inconsistent with the stated rationale of allocating the burden of the special assessment.