More Banks, More Jobs: BDDs and Economic Growth

If you ask an average Californian for their solution to unemployment, giving government incentives to banks probably won’t top the list.

Public sentiment about the nation’s “too big to fail” financial giants, whose predatory lending and bets against the housing market led to the global financial meltdown, seems at odds with the concept of giving incentives to financial institutions in order to create local jobs and revitalize communities.

But in struggling communities, banks are key to economic mobility, financial opportunity and employment.

We all know that in California 12 percent of households are unbanked. We know that check cashing fees and payday loans drain income away before it can create wealth. Being unbanked is expensive, and in a recession, it hardly makes for confident consumers.

Why are so many Californians unbanked? There are many reasons. But primary among them is that banks choose not to locate in communities of working or lower-income families. While banks may see long-term value in locating in such neighborhoods, they may hesitate do so because it could take years to attract enough deposits to be viable.

In California, AB 2581 (Bradford) would establish Banking Development Districts, which offer incentives such as government deposits to banks that locate in underserved communities.

It makes sense that services like savings accounts, business and home loans and financial advising can help many Americans on the road to financial opportunity and economic mobility. But new banks don’t just benefit the individuals of one community- they create jobs and improve the health of the entire economy as well.

That’s why bringing banks to underserved areas is part of the federal government’s plan to improve the economy nationwide. According to the government’s Financial Stability plan:

[E]conomic recovery will be driven in large part by America’s small businesses, which have generated about 70 percent of net new jobs annually over the past decade.  But across the country, tens of thousands of small business owners are finding it harder to get the credit necessary to stay in business.

Banks can provide that credit. The federal government is investing in CFDI (Community Development Financial Institutions) banks and credit unions to do the work of economic recovery, and BDD banks can build on that movement. Between federal, state and local efforts to reinvest in struggling communities, government can provide layered incentives for banks to locate in underserved locations.

And once new branches go up, there’s proof that they do boost economic activity. In a review of New York State’s banking development district program, which was launched in 1998, the New York State Banking Department reported that 70.4 percent of the branches enhanced the commercial and economic development of their districts by providing services such as small business loans, technical assistance, educational seminars and referral to microlenders for businesses not qualified for a traditional bank loan.

New banks also create jobs. In New York, 7.4 percent of banks participating in the program reported creating jobs and hiring local residents to work at their branches.

But there’s always room for improvement. California policymakers should examine why New York’s BDD branches hired a relatively small number of employees from local communities. In California, the program should require that branches at least make an effort to hire locally. That will help revitalize local economies, and the larger economy in turn- but it will also help ensure that BDD banks can really serve the unbanked populations they are designed to provide for. Because hiring locally can help ensure that newly banked populations face fewer language and cultural barriers, and have more face-to-face interaction. That in turn helps the branch’s bottom line.

BDDs have the potential to improve financial opportunity and quality of life for lower-income Americans. A program that aids underserved populations and promotes economic stability? That should be something all Californians can agree on.