Two states are considering duplicating a program in New York that rewards banks with government deposits for opening branches in neighborhoods with little or no banking services.
Lawmakers in California and Texas have introduced bills that would create “bank development districts,” specially designated low-income areas that are underserved by banks.
Banks that open branches in those districts would be eligible to receive state and municipal deposits at or below market rates, and in Texas they would get property tax breaks. Banks in both states also would likely receive Community Reinvestment Act credit from their federal regulators.
The bills are modeled after a nine-year-old New York law that offers banks select state and municipal deposits for two years, partial property tax breaks for 10 years, and other perks for opening branches in specially designated districts.
At first few banks took advantage of the program, but it took off in 2005 after the New York State Banking Department designated the districts itself and got busy encouraging banks in those areas to open branches in the districts, said James Fuchs, the department’s chief of staff. Previously banks would have had to identify these communities and then petition the state for approval.
The 31 districts created so far are mainly in New York City and Buffalo neighborhoods, but the Banking Department plans to expand its marketing to other New York cities, Mr. Fuchs said.
California could use a similar program — more than a fourth of adults there are unbanked, said Olivia Calderon, a policy representative in the Sacramento office of the New America Foundation. The nonprofit public policy institute helped draft Assembly Bill 1502, from Rep. Ted W. Lieu, D-El Segundo.
“Too many people are living outside the financial mainstream, vulnerable to burglaries or alternative outlets that charge them ridiculous rates to do something as simple as cash their paycheck,” Ms. Calderon said. “If banks build branches in their communities and then reach out to them, people will come.”
Banks applying for the California program would need to demonstrate that they would offer products and services designed for the unbanked, such as “second chance” checking accounts for people listed on Chex Systems, microloans, and financial literacy programs that could be offered through a nonprofit partner.
The trade group California Independent Bankers supports the legislation, said David Haithcock, its executive director.
He said it has been lobbying the state for years to park more of its deposits in small community banks.
“It’s good that the state would offer incentives instead of trying to force institutions to make business decisions” and open branches in neighborhoods with large numbers of unbanked people, Mr. Haithcock said.
He said that if the bill passes, he hopes the incentives would also be offered to banks already serving such neighborhoods, including community development financial institutions like the $103 million-asset Neighborhood National Bank in San Diego and the $68 million-asset Community Bank of the Bay in Oakland.
David Ford, chief of staff for Rep. Lieu, said that as long as those banks, in conjunction with their local municipalities, file an application with the state to designate their markets as bank development districts, they should be eligible for the same rewards.
“If a bank is already in a neighborhood like that, then that’s a good thing,” Mr. Ford said. “Hopefully the bank would then use the incentives to expand and serve more customers there.”
The California bill was introduced in February, as was the Texas bill, and is now in the Assembly appropriations committee. California’s legislative session ends Sept. 14.
In Texas, Senate Bill 607, from Sen. Rodney Ellis, D-Houston, would give banks property tax breaks in addition to state and municipal deposits at or below market rates for opening branches in bank development districts.
“Texas has very high property taxes, so if a bank were to get a tax break, it would be an impetus” to open a branch in one of the designated districts, said John Heasley, executive vice president and general counsel for the Texas Bankers Association.
The Texas Senate passed the bill last month in a 31-to-0 vote, and last week the House Financial Institutions Committee sent it to be scheduled for a vote by the full House.
Mr. Heasley said the House has until May 28, the end of the legislative session, to pass the bill or include its language in an amendment to another bill. The Texas Legislature does not convene again until 2009.
