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Banks Getting $1 Billion State Deposit

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llinois state Treasurer Alexi Giannoulias plans to make a $1 billion deposit in the state's banks, giving them needed cash for borrowers in a bid to dismantle a credit jam and brace the state during the financial crisis.

Giannoulias told The Associated Press he will make the money available to interest-bearing bank accounts by shifting it from lower-yielding investments in one of the first sweeping moves by a state government to face down a menacingly volatile economy.

The first-term Democrat planned to announce the cash infusion later Thursday.

"The foundation of healthy local economy is a strong local lender," Giannoulias said. "We want them to know that the state's banker has confidence in our local lenders. As soon as we give them the resources and the capital to continue lending, we can keep businesses open and we can keep jobs here in Illinois."

The treasurer, whose job is to invest state tax revenues but keep them liquid enough so they're available to pay state bills, maintains a portfolio of about $8 billion in invested state money.

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.

Repurchase agreements - bonds bought from dealers who promise to repurchase them at a specified rate - earned 4 percent a year ago, but now bring in 0.8 percent, Giannoulias said.

The new plan actually expands by about a third an existing program that already has deposited $1.7 billion in state banks. State transfers are limited to 10 percent of a bank's total deposits and a bank may have no more than $100 million total. So if a bank already has $75 million or less from the state, it may get the full $25 million under the new plan.

The treasurer plans to release $500 million immediately and issue the balance incrementally at the beginning of each month from December to March.

Giannoulias said his idea is safer than Bush's because the state would not be investing in bank ownership. Participating banks must put up collateral worth as much as 110 percent of the deposit. If the bank fails, the state can collect the collateral, Giannoulias said.