We expect certainty to work in our lives every time without fail — until something goes awry, and we're left frustrated and angry. In policy circles, political opportunists use these moments to engage with performative overreaction rather than meaningful examination. So, it's no surprise that in the wake of several high-profile failures earlier this year, our banking system is having one of these moments, and the viability of its future is dinner conversation. Americans are now wondering: "Are my deposits safe?" or "Is our neighborhood lender going to be around in five years?"
In political circles, there is a growing interest in imposing new capital requirements envisioned to protect consumers that large banks with scale can comfortably meet, but could cripple the viability of smaller, local banks — essentially facilitating the very destabilization that these new policies were designed to avoid.
Additionally, a related set of voices is advocating the diminishment of another of the long-standing institutions that smaller banks have relied upon to level the playing field with the large banks. A once largely unknown yet stabilizing force behind the American banking industry, the Federal Home Loan Bank System, is now being questioned for doing the work that banks, credit unions, insurance companies and CDFIs have relied on it to do for decades. Home Loan banks are wholesale providers of liquidity to regional and community lenders, who for over 90 years have supported residential homeownership, community development and affordable housing programs.
Our financial system is differentiated from those of other countries in a critical way: We have decentralized banking that allows for an intimate relationship between lender and borrower. Unlike the handful of national banks in the U.K. or Canada, the United States has more than 6,000 financial institutions, with branches on Main Streets all across our country. There's a well-known adage: All real estate is local. The same can be said for banks and credit unions.
Historically, banks and credit unions lent money to families and businesses based on three factors: credit, collateral and character. Smaller institutions are more likely to have relationships with individuals and small businesses. They are the ones that fund Little League teams, shelters and community activities because they reside in the communities they serve.
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Yet, local lenders are under a real threat today. An insidious conversation is happening in the recesses of Congress that could have a very harmful impact on our national banking system and the viability of community lending in this country. This conversation takes a hostile view of the Federal Home Loan banks, which, despite being engines of economic development, are being attacked by a small handful of dishonest yet megaphone-savvy critics seeking to limit their impact, putting local community lenders in harm's way.
Full disclosure: I served on the board of the Federal Home Loan Bank of San Francisco for two decades, until early this year. Prior to joining the board, I was the CEO of the largest private down payment assistance provider in the country, Nehemiah Corporation, where we put over 300,000 families into first-time homes by partnering with hundreds of large and small community lenders. The Home Loan banks are the largest privately owned funder of affordable housing initiatives in the U.S. and have provided more than $7.6 billion in affordable housing grants since 1990. It's hard to imagine what our economy and our communities would look like without them.
Some would argue that the Federal Reserve should be the only liquidity provider to our nation's financial institutions and would prefer the Fed act as both regulator and capital source. By politicizing banking, they would create difficult hurdles for smaller lenders to stay in business and push deposits to the large national franchises. Bigger is better, right? And the way to do this, these folks contend, is to limit the role of the Federal Home Loan banks.
Here is what the Home Loan banks do: They allow smaller banks, credit unions, insurance companies and community development financial institutions to belong to a co-op where they pool their real estate loan assets into investable securities, allowing smaller institutions to access worldwide debt markets and equitably compete for your business. Without them, the deep-pocketed giants of banking have cost advantages that even the best-run local institutions can't match.
The prime example of this phenomenon is the treatment of small businesses seeking a lifeline during COVID-19 by obtaining a PPP loan. If you were not a giant customer of one of the big banks, you were left uninformed, with no access to the PPP program. I lived this firsthand, as I'm sure many others did, with a large money center bank. As a business customer, this large bank offered no information and kept me hanging helpless for weeks. I ultimately went to a small credit union to obtain my PPP loans. In Sacramento, where I reside, it was the local lenders that rescued so many independent businesses and, by extension, their employees.
The law of unintended consequences has been around since the times of Adam Smith and his invisible hand. But we need look no further than today's debate to see that trying to solve a largely nonexistent problem will make things worse. We must preserve the role and standing of our local and regional community lenders. One doesn't need an advanced degree in economics to appreciate that local community development will grind to a halt if we curtail the ability of regional banks to support their customers. These regional banks rely on the Federal Home Loan banks to be a backstop and look to them to provide liquidity in all economic conditions.
