We know the public banking environment is changing due to increased regulations—a result of the Dodd-Frank Wall Street Reform Act—as well as low interest rates and increased technology. But my question is, “Are some public entities feeling the pain more than others?” The answer is yes. Most notably our towns and villages.
There are four main implications the public banking paradigm shift is having on towns and villages across America:
1.) fewer banks are choosing to service towns/villages because of their small size
2.) banks are closing branches in towns/villages throughout New York and the rest of the country
3.) banks are passing along substantial hard fees to towns and villages because of their lack of profitability
4.) banks that do service towns and villages offer them deposit rates as low as 1 or 2 basis points because of the increased costs associated with carrying their deposits.
Although all public entities are either feeling the pain of these implications or are about to, some of the biggest challenges are being felt in towns and villages because, in many cases, they’re not big enough to solicit services from many banks. Large institutional banks (those with $50+ billion in assets) are reconsidering the value of public clients mainly because of the low profit margin public clients offer them due to current regulation/collateral requirements.
While community banks may be in a better position to take on these deposits, they have a difficult time providing services to towns and villages mainly because they also have regulatory requirements they must deal with. In addition, towns and villages cannot receive deposit rates of any material size from community banks because there is usually only one such bank near them and thus competition—and any sense of obligation—for community banks to provide higher rates to towns and villages just isn’t there.
While it is true that the conference of regulatory requirements around holding public deposits on large banks has created an opportunity for community banks to take on public funds, towns and villages across the country are simply not feeling the love.
At three+one, we advise towns and villages to mount a coordinated effort with their respective county in order to leverage the various banking services they need and thus save their constituents money and increase their own interest income. A consolidated banking services contract between towns and villages within a county—and with their county—could increase banking efficiencies, provide all these public entities with higher deposit rates, and save their taxpayers substantial amounts of money.