Lend Local: How Public Funds and State Banks Can Spur Growth

Four years after America’s “bigger is better” banking model collapsed under its own weight, there are signs of a shift towards more local, accountable, and borrower-friendly banking across the country.

In Maryland, a Lend Local bill under consideration would require the state to move more of its public deposits out of large out-of-state Wall Street banks into community banks, who lend more, per dollar of bank assets, to in-state businesses. As our colleague Jason Judd wrote in an op-ed published Monday in the Baltimore Sun:

We should stop rewarding giants like Bank of America with our public deposits. With Bank of America, Maryland’s deposits are as likely to be invested in Wall Street trading desks, Brazilian steel mills or Chinese high-speed rail projects as in Maryland’s small businesses.

In fact, Bank of America’s lending here under the Small Business Administration’s flagship lending program collapsed at the start of the financial crisis and never came back. The state’s largest bank made 312 of these federally guaranteed loans in 2007. In 2010, it made two. And a February analysis of the bank’s lending nationwide shows that its small business lending fell by more than 5 percent in 2011.The bank has surely invested more in its pricey ad campaign touting its small business lending than it’s put into affordable SBA lending here in Maryland.

And Maryland is not the only state getting into the action. Massachusetts has shifted more than $160 million of the state's deposits into community banks in the last year. The state's new Treasurer Steve Grossman, moved quickly in 2011 to give small business lenders the wherewithal to lend more and help create new Massachusetts jobs. Here's a map that shows how the Massachusetts Small Business Banking Partnership is helping to re-distribute the state's lending power and open up local credit markets in a state dominated by giant banks like Bank of America, RBS/Citizens, and Sovereign/Santander.

The Oregon legislature approved last week the creation of a new fund to help spur small business and farm lending. The Oregon Growth Board will soon begin designing a new "loan participation" program to allow Oregon's community banks to partner with the new Oregon Growth Fund to help increase lending to deserving borrowers in a state that saw a massive contraction of big bank credit in the financial crisis.

The new fund is a step towards creation of a Partnership Bank in Oregon, a proposal Demos supports to create an entirely public institution modeled after the century-old Bank of North Dakota. With Wall Street banks like Goldman Sachs in the news for gleefully ripping off their clients, it’s past time for us to create a bank whose mission is to promote the common good.

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