Let Federal Home Loan Banks keep helping Main Street

The Baltimore Sun

In recent speeches, President-elect Barack Obama has called for an economic recovery plan that "helps both Wall Street and Main Street." Main Street may seem like an abstract concept to some, but in communities across Southern Maryland, it is not. When I drive down the main streets of towns such as Waldorf, Leonardtown and Prince Frederick, I see not only homes but also businesses, churches and professional offices that were built and supported by a community bank's financing efforts.

As the economy begins to rebound and confidence is restored, what economic recovery plan will be needed to improve the flow of lendable funds to Main Street? Who will provide the funding when a developer wants to build new homes or a businesswoman wants to grow her practice there?

In the old days, most banks got their deposits - the money to make loans - from Main Street. In 1990, a migration began. Over the past 18 years, deposits have shifted from Main Street to Wall Street to the tune of $15 trillion dollars; at the same time, bank deposits grew by only $2.5 trillion.

In the current crisis, some will try to pit big banks against community banks or Wall Street against Main Street, and debate whether bigger is better. It is more important to look forward, however, to assess what systems worked during the great migration of funds to Wall Street. Further, we need to assess what can work in the future to get each set of institutions the reliable funding to restart the economy.

Community banks like mine are financially solid and don't need a "bailout." Yet, to continue to grow, we increasingly need funding beyond scarce local deposits. Raising nonlocal deposits is risky and expensive, and selling loans - especially in this environment - is even more difficult.

We rely on the Federal Home Loan Bank (FHLB) system to provide a layer of funding not available through deposits. We borrow from the FHLB to capture a loan opportunity and then replace those funds through organic deposit growth. We consistently maintain a pool of about 15 percent of our funding from the FHLB of Atlanta. Nationally, about three out of four FHLB members are small, community-oriented institutions, and the FHLB advances play a huge role in the funding strategies of these banks. There simply are no other reliable, cost-effective sources of funds for the community banks like us.

Federal Home Loan Banks were also among the first to respond to the credit crisis. Their contribution of liquidity, more than $1 trillion, was second only to the Federal Reserve.

In the months ahead, Congress and President Obama will revisit the roles of all lenders to financial institutions - the Federal Reserve, the U.S. Treasury and the Federal Home Loan Banks. Along with debating the necessary changes of financial reform and an economic stimulus package, Washington should look at what works on Main Streets. One institution that has worked - in good times and in tough times - is the Federal Home Loan Bank system.

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