The Alaska Permanent Fund Corp. is changing how it sets rates on money it lends to Alaska banks, after fund managers felt those rates had fallen too low.
The fund's Alaska Financial Institutions Certificate of Deposit program places as much as $300 million in Alaska banks, giving them a low-cost source of funds with which to make loans, said Mike Burns, executive director of the corporation.
The program was created in 1984 to "provide liquidity to banks, and help the Alaska economy," Burns said.
Burns said the way the CDs - essentially loans from the Permanent Fund to banks - have been priced has become too low because of anomalies in the credit markets. Alaska CD rates are currently tied to Treasury Bills, which currently are at record low rates.
Alaska CD rates as of the first week in January were 0.24 percent for a three-month CD, compared to the 1.4 percent LIBOR, a commonly used inter-bank lending rate.
A one-year Alaska CD would go for 0.68 percent, while LIBOR was at 2 percent.
The difference between what banks can borrow money for and what they can then lend it at is what their profits are based on.
Burns proposed that Alaska CD rates instead be moved closer to market rates to provide a better return to the fund.
Only a small amount of money is devoted to the Alaska CDs relative to the size of the Permanent Fund, about 1 percent, but that's still $300 million.
That's the maximum amount the fund will currently lend, Burns said, and with the current credit market crisis it is in high demand.
"It is in great favor with them right now," he said.
The increase will raise rates for the banks at a time when many are under pressure elsewhere due to a troubled economy and frozen credit markets.
"They weren't particularly happy about the change in pricing," Burns said.
Alaska Pacific Bank President and CEO Craig Dahl said he supports continuation of the program and the benefits from having rates as low as possible.
"We appreciate having access to those funds," he said.
The Juneau-based bank is currently borrowing about the maximum available based on its small size, Dahl said.
"We wouldn't be taking as much as we have if the rate hadn't been so attractive," he said.
Under new rules adopted by the board of trustees this week, the Permanent Fund will now charge a rate tied to the rate the Federal Home Loan Bank of Seattle charges for advances to banks.
That rate is currently well above what is now being charged, but is still substantially below LIBOR.
For the first week of January, the Federal Home Loan Bank rate was 0.63 percent for a three-month CD, and 1.32 percent for a one-year CD.
Despite the low rates charged by the Permanent Fund, for the last year that money has been the fund's best investment. So far this year, the Alaska CD's 0.73 return is the Permanent Fund's only asset class with a positive return.
Contact reporter Pat Forgey at 523-2250 or email@example.com.