State law requires public entities to maintain proper collateralization of their accounts. Collateral provides protection for public funds in the event of a bank failure.

All public funds on deposit in a bank or credit union must be protected by deposit insurance, corporate surety bond or pledged collateral. Most financial institutions choose to pledge collateral for amounts not covered by federal deposit insurance. If the institution should fail, the governmental entity can then take the pledged securities to make up for any loss to its deposited funds.

For more information about the required collateral for public funds, see our Statement of Position entitled Deposits of Public Funds.

The risk addressed by pledged collateral is identified by the Government Accounting Standards Board (GASB) as “custodial credit risk”. Information on how custodial credit risk can be addressed in your investment policy is provided in our Statement of Position, Custodial Credit Risk: Investment Policy Considerations.

Date this Avoiding Pitfall was most recently published: 6/10/2022