Credit Unions across the US support Public Banks
As states across the US pursue and pass public bank bills, Credit Unions are recognizing the added value public banks bring not only to regional economic stability but also to their own ability to make loans and increase their business. It is common for community banks and credit unions to partner with larger financial institutions to provide business loans and other products, and public banks provide yet another source of liquidity and financial partnership, and at lower interest rates.
- In California, several credit unions supported passage of Assembly Bill 857 in late 2019* enabling the creation of municipal banks in that state.
- In New Mexico, the Credit Union Association of New Mexico formally endorsed a public bank for NM in July, 2020.
- In New York, Melissa Marquez, CEO of Genesee Co-op Federal Credit Union, lauded the benefits of public banks on WXXI in August of 2020.
How will Oregon’s municipal banks differ from credit unions?
Municipal banks in Oregon are envisioned as commercial lending institutions that focus public funding on the needs of the community, including economic development, infrastructure development, affordable housing and other public programs. Municipal banks following this business model won’t have a retail presence, won’t hold consumer or business deposits and won’t make any consumer loans. Credit unions are primarily retail operations serving individual members and their banking needs, including personal deposits, personal loans and small business loans.
The main overlap of the municipal bank’s services and credit unions is in the local commercial loan segment, which stems from the municipal bank’s economic development goal. This is a space of collaboration, not competition. Credit unions (and local community banks) will continue to offer loan origination services to their membership through their retail presence. The municipal bank will be a ready partner with credit unions to participate in loans or purchase loans in their entirety. View a more detailed comparison of the difference.
How can Municipal Banks help credit unions expand what they can do?
Credit unions are generally subject to commercial lending regulations (12 CFR 723.8) designed to safeguard their members’ assets, which necessarily limits their capacity for making commercial loans. A municipal bank will increase credit unions’ capacity to make commercial loans in the aggregate by purchasing commercial loans from credit unions. It will also allow credit unions to originate larger loans by being a participant in loans that exceed the credit union’s commercial lending authority.
While credit unions already engage in loan participation practices, a municipal bank will be a ready and agile partner in this process to increase credit unions’ commercial lending capacity. The Bank of North Dakota’s collaboration with community banks demonstrates this point (here). Credit unions and community banks in North Dakota have found that it’s easier to find a participation in a loan at the public bank, so they can make more loans without having to increase their staff.
The collaboration between a municipal bank, credit unions and community banks will create a more vibrant local economy. This will create more wealth in the community, bringing more business to credit unions’ core businesses of consumer deposits and consumer loans.
What can Municipal Banks do that Credit Unions don’t (like big bonds)?
Credit unions are limited in the size of loans that can be made. Municipal banks will be able to underwrite larger loans that can be participated in by the credit unions, enabling credit unions to form relationships with larger businesses. Over time, Municipal banks will also develop the ability to serve the financial needs of municipalities for public infrastructure projects and public services, such as transportation, housing, schools, and parks. Municipal banks will be able to underwrite bonds or replace bonds with loans from the bank.
Will Municipal Banks compete with Credit Unions for consumer deposits?
A public bank’s deposits are only from public entities. CU Members, and other members of the general retail public, are not welcome at a public bank’s deposit window!
We conceive of municipal banks as low overhead ventures in order to best use the public money for the common good. Serving consumer deposits carries an enormous overhead: physical branches, sophisticated technologies, large staffs and FDIC insurance. Since most consumers and communities are well served by existing community banks and credit unions, there is limited need for a municipal bank to provide these services.
Will there be potential competition for municipal deposits?
Our municipal bank business model is dependent upon capitalization from public funds and deposits of public funds to increase the bank’s capacity to make loans. In this sense, there will be “competition” for municipal deposits between credit unions and municipal banks.
OPBA’s analysis of Oregon’s credit unions shows that the amount of public deposits is very low with the notable exception of the OSU credit union. In addition, credit union executives stated that municipal deposits are challenging, because big banks are able to capture the deposits by offering a slightly higher interest rate to the municipality. While we support the deposits of public money in credit unions, we also believe that credit unions will derive additional, and substantially greater, benefit from partnering with large local municipal banks.
OPBA believes that the collaborative relationship between the municipal bank and credit unions will prove to be a greater benefit to credit unions’ businesses. The municipal bank will be an effective competitor with the big banks for municipal deposits because of the city’s self-interest in the bank, along with providing benefits far greater than a few basis points of interest. The municipal bank will use these assets, in part, towards its economic development goal by collaborating with credit unions and local community banks on commercial loans. Thus, credit unions are able to increase their commercial loan business through the municipal bank partnership instead of holding municipal deposits themselves.
Bankers Roundtable discussion on the benefits of public banks
Walt McRee of the Public Bank Institute moderated a discussion of bankers in North Dakota, home of the oldest public bank in the nation, about the benefits the state’s public bank has brought to their whole banking ecosystem.
North Dakota Bankers Roundtable with Walt McRee
Recent articles on credit union support for public banks
* In California, legislators clarified the partnership arrangement with local financial institutions through a provision in the law stating that public banks would cooperate with local financial institutions and engage in retail activities only in partnership with local institutions, except for retail activities that are “not offered or provided by local financial institutions.”