5 Things to Know About Supporting Communities with Large-Dollar Deposits
By Steve Kinner, Senior Managing Director
Promontory Interfinancial Network, LLC
Socially responsible money management has become a hot concept in recent years. The idea of managing funds and helping our community at the same time strikes a chord with our better selves. But for many individuals and institutions, putting socially responsible investing into practice has often seemed out of reach given other important considerations, such as safety and return.
Here at Promontory, we are often asked by socially motivated individuals and organizations (particularly foundations) how their bank deposits can help communities and what they should know when they are considering depositing their money with a community bank, generally defined as banks with assets of less than $10 billion.
- Depositing money at a community bank can have a positive impact for the local area. Why? Because community banks drive local economies. When you deposit money in a bank, the bank may use that deposit to invest in local opportunities that have the potential to generate return for the bank and to reap benefits for the local community. For example, if your community is looking to grow and develop, keeping your deposits local can help provide financing for loans to start or expand small businesses, build new homes, rebuild a nearby park, or send your neighbor’s kid to college.
- Community banks are job creators. It is common knowledge that small businesses are engines for job creation in America. But the ability of small businesses to finance growth is, in turn, largely dependent on the capacity of community banks to lend them money. Although community banks control only 17% of all bank assets, they account for 52% percent of the total value of loans to small businesses1 and currently hold 825,000 small business loans as of September 2013.
- Deposits in troubled areas don’t have to be risky. Occasionally, we hear that socially responsible investors have anxiety about placing their deposits with a particular financial institution because they are uncertain about the economic strength of the city or town where the institution is located. Frequently, this compounds the difficulty that many banks in troubled areas face in attracting deposits. But, federally insured deposits are backed by the full faith and credit of the federal government, whether they’re in banks that serve developing communities or those that serve wealthier locales.
FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts, and certificates of deposit. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. Since the FDIC was created in 1933, no one has ever lost a penny of insured deposits.
Many large-dollar depositors require that banks fully protect any deposits that exceed the FDIC insurance maximum. Many public entities like cities and towns have statutory requirements to maintain protection on any deposits. This requirement often necessitates collateralizing any deposits that exceed the FDIC insurance maximum with Treasuries or agency notes. For businesses, nonprofits, and individuals that seek protection on excess funds, banks will often use repurchase sweeps or money market funds. However, the use of these solutions may make it harder for banks to use the full amount of the deposit for local lending.
- With a reciprocal deposit placement service, banks can use the amount of those large-dollar deposits to invest locally. Through the use of reciprocal deposit placement services, banks are able to offer depositors access to FDIC coverage in excess of the standard limit, while keeping the full amount of the deposit on their balance sheets. Reciprocal funds simultaneously come back to the bank in the same amount and term, sourced from the customers of other institutions. This means that banks can offer access to FDIC insurance without locking up the funding in restrictive collateral or investments, enabling them to lend the full amount of the deposits to foster local business, education, and home ownership.
- You can support other local communities, not just your own. Just because a community isn’t local to you or your organization doesn’t mean that you are limited in your ability to support it with your deposits. Promontory has made programs available to banks through which depositors can place funds in banks located in high-need areas, even if the areas are not local to the depositor. For example, it developed the $1 Billion Gulf Coast Rebuilding Challenge to help depositors place funds through CDARS in participating institutions located in areas that were affected by Hurricane Katrina. This program allowed corporations and other depositors to help rebuild that region by supporting those closest to the rebuilding efforts: local community banks. We continue to work with organizations like the Community Development Bankers Association to help communities in need.
Using your deposits to make a difference doesn’t have to be in response to a particular crisis. It’s possible for socially conscientious, large-dollar depositors to work with underserved communities across the country knowing that their deposits give community banks in that area more flexibility than ever to make an impact locally.
1 Source: Federal Deposit Insurance Corporation, Statistics on Depository Institutions as of September 30, 2013.
Promontory Interfinancial Network is the leading provider of FDIC-insured deposit placement services, including ICS®, CDARS®, and IND®. You can follow Promontory Interfinancial Network on LinkedIn at http://www.linkedin.com/company/promontory-interfinancial-network or visit its website: www.promnetwork.com.