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WASHINGTON — The New America Foundation, a Washington think tank that describes itself as “nonpartisan and post-partisan,” has proposed a plan to capitalize community banks and credit unions as part of the national reaction to the current financial crises.In its proposal, “To Save America’s Finances, Bring Back Community Banking,” the foundation argued that a dominant theme in the American financial services industry for the last 30 years-that bigger is better-has been proven a fraud by the most current banking crisis and resulting economic downturn.Phillip Longman, a senior fellow with the foundation and one of the proposal’s authors, opened a Nov. 20 briefing saying the bigger-is-better banking paradigm has not worked.He compared the bigger-is-better financial services model, which he described as primarily transactional and not at all focused on relationships between borrower and lender, with the previous community banking model that was dominated by such relationships.The gradual shift in model meant that the steadily larger megabanks scooped up an increasing percentage of the nation’s banking deposits and an increasing percentage of the loan market-not to make sound loans which benefitted communities-but to invest them in increasingly shaky and ultimately disastrous ways, he said.“The primarily transaction-based model for banking has failed,” he said.Given the failure of the bigger-is-better banking model, the foundation urged that the nation instead move to strengthen and broaden the mandate of community banks and credit unions.“So far this year, the failure rate among big banks is seven times greater than among small banks,” the foundation said in its proposal. “The latest available FDIC data show that banks with less than $1 billion in assets are outperforming their larger peers with respect to the critical metrics of return on assets, net interest margin, and the all-important net charge-offs to loans and leases. While banks with between $100 million and $1 billion in assets charged off 0.37% of loans and leases, those with over $1 billion in assets charged off 1.35%.”To make those changes, the foundation proposed a Community Bank Trust Fund that could be set up along the lines of the U.S. Treasury Department’s Community Development Financial Institutions Fund and suggested Treasury could administer it out of the same office. But the foundation stressed that the fund would not have the same sort of low-income and community-development restrictions that the CDFI Fund has. It would have a significantly larger pool of community banks and credit unions to help and a substantially larger commitment of funds.The foundation noted that neither community banks nor credit unions need bailing out, but that both could use capital help with to help with fixed, long-term costs such as information technology and regulatory compliance, as well as a source of “patient capital” (equity that would still provide returns but would not be tied to a quarter-by-quarter economic view).The proposed fund would make equity investments in small-scale depository institutions that need “patient capital” to serve their communities effectively, the foundation explained.“For credit unions and mutually owned banks that do not issue stock, the fund would provide net worth certificates, which would count as equity, but pay a set interest rate. In addition, the fund would make technical assistance grants to cover critical investments in areas such as information technology and disaster recovery,” the foundation wrote in its proposal.Net worth certificates are financial instruments that Congress authorized in the early 1980s to help troubled but healthy thrifts as they were coming out of the S&L crisis.Essentially, the net worth certificate program allowed qualified thrifts to use what amounted to promissory notes from the federal government (on which they paid interest) as capital for regulatory purposes, even though the certificates were not qualified as capital under accounting rules.The proposed Community Banking Trust Fund could offer similar instruments and would encourage these credit unions and mutual banks taking them to offer financial services that are limited in many communities, such as lending to local businesses and homeowners, safe and convenient mechanisms for savings, and transactional, cash management, and investment services. Eligibility would be limited to banks, thrifts and credit unions with a record of service to their communities as measured by high loan-to-deposit ratios, a high level of local lending, local deposits, local boards of directors and high ratings under the Community Reinvestment Act.Ellen Seidman, financial services policy director for the foundation, acknowledged that determining just which community banks and credit unions would be eligible for to participate in the fund would be one of the proposal’s stumbling blocks but expressed confidence that compromises could be struck to make it happen. She also noted that funding for the proposal, which the foundation estimated to be $30 billion, could be accomplished using some of the money from the Troubled Asset Relief Program and then financed on an ongoing basis by a 0.5% tax on the issuance of asset-based securities.Seidman also explained that the proposal was a “skeleton” and that there may need to be a “grand compromise” struck to bring it to fruition, but she added that in the face of the ongoing crisis, many such compromises and changes may need to be made.–[email protected]

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