Though dwarfed by “Global Systematically Important Banks” (G-SIBs, more commonly referred to as “Wall Street banks”), community banks are becoming vital “lead lenders” in partnership with public banks that provide additional funds to leverage loans for economic development. In each partnership, the community bank keeps all loan origination and service fees, their independence, and a renewed reputation as promoters of the economic health of their communities and local businesses. Read further to find out about this and other benefits.
How Will Public Bank Partnerships Change the Banking System?
- Partnership banks restore “relationship” lending by loan officers in contrast to lending by Wall St. banks that relies on computerized algorithms and FICO scores. [i]
- Credit is extended to qualified customers without minimums. Hence loans of less than $5 million help small businesses create eighty per cent of all new jobs. [ii]
- Low-interest partnership funds enable community banks to compete with the largest banks, boosting their profits and maintaining their independence. [iii]
How Is Such a Partnership Different From One With a Major Investor-Owned Bank?
- Community banks are “lead partners” with public banks and keep all loan origination and service fees. They are the only direct service and retail agents.
- Public banks provide additional funding to leverage community bank lending capacity with absolutely no competition or marketing of services to customers.
- Participation loans with a public bank can focus on longer term community economic development rather than quarterly shareholder expectations.
How is Public Bank Partnership Lending Different from Lending Tax Receipts According to State Treasurer Guidelines?
- Public banks issue letters of credit to waive all collateral requirements for public funds instead of requiring additional insurance and documentation.
- Community banks can offer more competitive loans because public banks can use funds designated for specific needs to buy down customer interest rates.
- The partnership business relationship eliminates the publicity of arbitrary bank evaluations of “Outstanding,” “Satisfactory,” or “Needs Improvement.”
How Do Public Bank Partnerships Differ From Collaboration Lending with State Agencies?
- Community banks work with public bankers who directly access public funds to buy down interest rates and absorb risk.
- A community bank develops a successful, continuing relationship rather than waiting for a revolving loan fund to be repaid or for new appropriations.
- Business contracts replace regulatory burdens for administering agency funds and a process for allocation that may lack transparency, accountability, and procedures for appeal.
- Partnership lending for public projects supports local business hiring. Fewer jobs are outsourced to multinational construction firms. It avoids privatizing public assets through so-called “infrastructure banks” or “private-public partnerships.” [iv]
Why Would a Public Bank Support a Private, Community Bank?
- Public banks are chartered to 1) invest public deposits and exercise careful fiduciary duty in providing a reasonable return to the taxpayer and 2) to support the economic development of communities in partnership with their local banks.
- Community banks are the best positioned institutions to evaluate local needs for credit and perform due diligence.
- Public banks see the financial health of their partners as critical to their chartered missions and hence provide a range of services including; purchasing community bank stock and helping community residents do the same, providing a secondary market for mortgages without retail competition for customers, and providing economic research and loan portfolio analytics.
How do Public Bank Partnerships Preserve and Build our Customer Base?
- Public banks provide increased funding and sometimes interest-rate subsidies for loans. This allows a community bank to make larger loans than its capital position would otherwise support. Hence, a community bank can get new customers without lowering lending standards or increasing its capital base.
- Public banks operate counter-cyclically, providing increasing funding at just the point that Wall St. banks slash their lending to small businesses and tighten credit.
- Economic development loans build local prosperity by supporting businesses that create jobs and will stay in the community. This creates more demand for business and retail banking services.
- An increased reputation for initiating improvements in the community solidifies one’s customer base, attracts new customers and builds genuine good will.
How do Public Bank Partnerships Affect the Regulatory Environment?
- Increased funds from a public bank partner leverage capability and therefore increase earnings, especially during economic downturns when regulators may call for increased capital positions.
- A public bank can serve as an anchor at a time when capital requirements are in flux. For example, a recent limit on the amount of wholesale capital all banks could borrow forced smaller, community banks to come up with retail deposits by opening expensive branches or bidding in broker CD markets. Instead, a partnership bank uses the collateral-free public deposits of local governments that are backed by a letter of credit provided by its public bank partner. These deposits bolster its capital position and reduce its cost of compliance. [v]
- Economic development loans often qualify for Community Reinvestment Act credit.
- Association with a public bank on some loans can provide an additional layer of due diligence resulting in both public and regulatory perceptions of solidity and fiduciary responsibility.
What New Sources of Business Might a Public Bank Partnership Bring?
- In Massachusetts, local banks were instrumental in starting and marketing Savings Bank Life Insurance. They also market targeted CDs that support local farmers and cooperative businesses. Public banks can include funding support for these and other important community bank programs in their charters.
- The National Conference of Mayors has debated the establishment of public banks to deal with the current funding crisis of most cities. [vi] The financing of municipal debt demands novel solutions. Nationally, community banks have pioneered “slow munis” [vii] as an alternative funding mechanism for municipalities not wanting to face the high costs of floating a bond on Wall Street. Were a public bank available to back such initiatives, community banks would have a key role in selling such investments with at a low risk to their bottom lines.
- Business networks in Switzerland and other countries help businesses of all sizes avoid credit crunches. Other countries are experimenting with selling invoice insurance to the members of a business network (B2B). Backed by a public bank, such insurance is marketed to network members by community banks using a computerized system that minimizes staff and allows for profits, in part, from the 1% cost of invoice face value paid by network members. This Commercial Credit Circuit or C3 approach allows the invoices to serve as cash for government debt and for other network members. This enables businesses to keep their employees on payroll. The system is also a win for a government as the need for unemployment insurance is greatly decreased and business prosperity is transparent and provides additional tax money. Though this is an “outside-the-box” idea, it could provide large profits for community bank partners. Community banks already have relationships with most businesses in their areas and serving network members could expand their customer base. Backed by a public bank, community banks could develop this idea as a major source of profit.
For Hub Public Banking
Stephen C. Snyder
[i] Research shows that loan officer origination makes a significant difference in qualifying small business customers and bank profitability. Large banks have abandoned training credit officers as well as the small business market. See: http://www.nakedcapitalism.com/2014/12/why-bother-with-loan-officers.html
[ii] Over the past decade, North Dakota community banks backed by the public Bank of North Dakota have made 434% more small business loans than the national average. See: “Why Do Banks Want Our Deposits?…” Oct. 26, 2014 at: http://www.globalresearch.ca/why-do-banks-want-our-deposits-hint-its-not-to-make-loans/5410125
[iii] On job creating business and agricultural loans, the public Bank of North Dakota uses PACE funds to buy down interest rates to from between 1% to 5%. Qualifying entrepreneurs are offered loans at 1%. Perhaps because community banks in North Dakota or often more profitable than similar ones in Massachusetts, North Dakota has roughly seven times (per capita) the number of community bank corporations as Massachusetts. See: http://www.bankingencyclopedia.com and http://www2.fdic.gov/idasp/main.asp.
[iv] Darwin Bondgraham, “Highway Robbery; How ‘public-private partnerships’ extract private profit,” Dollars and Sense, November/December 2012 at http://www.dollarsandsense.org/archives/2012/1112bondgraham.html See also: Ellen Dannin, “Innovations or Hucksterism?: Three Little-Known Infrastructure Privatization Problems,” Truthout News Analysis, December 22, 2014 at http://truth-out.org/news/item/28142-innovations-or-hucksterism-three-little-known-infrastructure-privatization-problems
[v] Akshat Tewary, “Swaps Repeal Rule Shows that Community Banks Are the 99%,” At: http://www.americanbanker.com/bankthink/swaps-rule-repeal-shows-that-community-banks-are-the-99-1071936-1.html
[vi] US Conference of Mayors, Proposed and Final Resolutions 2015, Alternatives to Predatory Wall St. Financial Services for Municipalities, at: https://d3n8a8pro7vhmx.cloudfront.net/pbi/pages/267/attachments/original/1430739958/Mayors_Reso_2015_Strengthen_Finances.pdf?1430739958
[vii] Drew Reed, “US cities could turn to “community mini bonds” to fund infrastructure projects” at http://www.citymetric.com/politics/us-cities-turn-could-turn-community-mini-bonds-fund-infrastructure-projects-341.