Partners (Number 2, 2008)
Partners (Number 2, 2008)Banking Development Districts Offer Access to Services
Banking services are critical for neighborhood revitalization, and states are exploring new tools for attracting bank branches to under-served communities.
Incentives, which were initially offered to lure large industrial corporations, have also been successful for drawing businesses like hardware stores and grocery stores to developing neighborhoods. Now incentives are being used to recruit banks as well.
New York State's Banking Development District (BDD) program identifies areas without sufficient banking services and provides a variety of state and local benefits for banks that locate branches in these communities. The strategy seems to work, and several other states are now considering similar programs.
Meeting an important need
Adequate banking services are crucial for a community's economic development. Studies also suggest that establishing a bank account is an important first step for low-income individuals trying to achieve financial security. However, according to the 2004 Survey of Consumer Finances, more than 9 percent of U.S. families lack bank accounts. Many more households are considered underbanked: although they have bank accounts, they continue to rely on other financial service providers for basic transactions.
The costs for individuals without access to adequate banking services are significant. In addition to lacking a secure place to keep their money, those without accounts may be forced to rely on alternative financial service providers who charge high fees to conduct transactions.
One reason households do not establish bank accounts is that they cannot access banking services in their neighborhoods. Banks may hesitate to locate branches in low-income communities or in areas without a significant retail or service sector, citing a lack of profitability. They are concerned that building up the deposit base necessary for more profitable loans will be difficult in these communities.
Banks, government agencies and community organizations realize the importance of making banking services accessible. They are now working with several states to explore banking development districts as a strategy to attract banks to under-served areas where lack of profitability may be an obstacle.
Banking Development Districts provide access to services
New York was the first state to institute banking development districts. Created in 1998, the BDD program encourages the establishment of bank branches in areas with a demonstrated need for banking services. The state recognized that although banks might see a market opportunity in under-served areas, it would take many years for the bank to attract sufficient deposits to make the branch viable.
To draw banks to banking development districts—areas that the state designates as underbanked—the state offers incentives such as access to below-market-rate public funds and municipal deposits to help banks increase their deposit base; real estate assistance for locating new branches; property tax incentives; CRA credit; help with workforce development; and financial education for customers.
In addition to increasing access to banking services, the BDD program in New York also aims to increase capital for businesses in under-served communities, create jobs, enhance community stability and foster economic development.
To qualify as a BDD in New York, a bank in partnership with the local government files an application seeking designation as a banking development district by the state. The application documents current and anticipated banking needs in the community and shows the needs are not being met by other institutions. Banks also outline their plans to meet these needs. Applicants document socio-economic conditions in a proposed BDD and project additional benefits to the community, including job creation and economic stimulus.
New York's success inspires Louisiana program
Since the launch of the banking development district program in New York, 38 BDDs have been created, primarily in New York City and Buffalo, and the program is meeting its objectives. In 2006, BDD bank branches opened 21,000 new accounts and in 2007, they loaned more than $126 million for mortgages, construction, personal loans and community development. In addition to providing direct benefits, banks in BDDs provide financial education and support community development efforts.
In the wake of New York's success creating banking development districts, other states are exploring similar programs. Illinois, California and Texas are considering the BDD strategy, and this year Louisiana is instituting its own version of the program to aid with storm recovery efforts and promote general economic development.
Louisiana's BDD program closely mirrors New York's. A bank applies with a local jurisdiction to request that the state designate an area as a banking development district. The state then reviews the need for more financial services in the proposed district and assesses the potential benefit for consumers and businesses. The state also looks at the socio-economic and demographic data for the proposed district and considers whether additional banks will encourage economic development.
Louisiana law allows local governments to waive property taxes for bank branches in BDDs and provides for the designation of these branches as "public body depositories," so they can hold government deposits at market or slightly-below-market rates. The law includes incentives not only to encourage new bank branches, but also to assist banks on the verge of closing so they can remain in the community.
According to John Fields, Deputy Chief Examiner for the Louisiana Office of Financial Institutions, the details of the law are still being clarified to determine how long a bank can receive the property tax break and hold government deposits. Although no applications have been filed for BDDs in Louisiana thus far, several banks have expressed an interest.
When the details are finalized, the state will market the program to municipalities and banks. However, banks often require several years lead time to plan for a new branch in a community, so the impact of this program in Louisiana may not be apparent for some time.
Bringing banks back into communities that lack banking services is a critical component of broader neighborhood revitalization and economic development efforts. While BDDs are a relatively new idea, the success of the New York program suggests this may be an effective strategy. Just as incentives have attracted other basic goods and services to communities, BDDs may eventually become an important tool to encourage banks to reconsider neighborhoods that have long been neglected.
This article was written by Jessica LeVeen Farr, senior regional community development manager in the Atlanta Fed's Nashville Branch.