Extending FDIC program could help community banks invest more locally

June 10, 2012

In Washington and elsewhere in the country, small and mid-size businesses are the job creators and the engine of economic recovery. And, here and elsewhere, loans from community banks are the fuel for small-business growth. Last year, community banks made nearly two-thirds of all loans under $1 million to small businesses.

But community banks need deposits in order to make loans. And one major source of deposits — municipal, county and state governments — have historically entrusted their monies almost exclusively to super-regional and national banks. These money center banks don’t necessarily lend back to the very markets from which they receive government funds, returning no benefit to the communities from which they receive deposits.

State and local governments should increase their levels of deposits with local community banks. What’s the payback? EagleBank, the local community bank of which I am CEO, will commit to turn a dollar of such deposits into two dollars of loans in the same jurisdiction. It’s a win-win.

I also urge extension of the FDIC’s Transaction Account Guarantee or “TAG” program, which extends unlimited FDIC protection to noninterest-bearing checking accounts. Without this program, noninterest bearing accounts are only insured up to $250,000, and as a result small and medium-size businesses that have larger deposits may be more inclined to place their money in larger banks under the theory that government regulators view those banks as too big to fail. The TAG program puts deposits in local community banks on an equal playing field. The FDIC insurance premiums are fully funded by banks without taxpayer assistance.

But TAG is set to sunset in December. It is critical for Congress to extend TAG. Without deposits, community banks can’t make loans. Last year, EagleBank, for example, increased its loans by 24 percent because we had the increased deposits to deploy. Thus, one local bank empowered hundreds of new local jobs and provided funding and hope to numerous local entrepreneurs and business strivers.

Local deposits lead to local loans that will lead to local economic development and vitality. A few years ago, two sisters seeking to grow their start-up bakery came to us. EagleBank, not a megabank, saw the potential and made the loan. Today, Georgetown Cupcake is nationally known.

Community bank loans by EagleBank have fostered economic development in underserved Shaw with the United Negro College Fund headquarters and along 14th Street with the funding of Whitman-Walker Clinic, the important community health facility. A community bank is the lender for the restoration of the newly reopened Howard Theatre. Community banks are also the sponsors of innumerable local philanthropies, supporting community health, education and cultural efforts.

With local deposits into local banks turning into new businesses, new start-ups and more jobs, Washingtonians should always think “local.” Shop local. Dine local. Bank local. Community banks can help launch businesses; it is local customers who will help them thrive.

Local deposits are facilitating local loans. You just don’t get that nexus when you make a deposit into a national bank.

Ronald D. Paul is chairman and chief executive of EagleBank.

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