Small Banks Finally Get Real Shot at Municipal Finance

By Reosti, John | American Banker, April 14, 2015 | Go to article overview

Small Banks Finally Get Real Shot at Municipal Finance


Reosti, John, American Banker


Byline: John Reosti

Community banks are getting an unexpected shot to compete against Wall Street firms in the area of municipal finance.

Local governments have historically relied on selling bonds to finance operations. The process is cumbersome, but is typically cheaper than borrowing from a bank, even after accounting for legal and underwriting costs.

Low interest rates, combined with rising costs of taking bond issues public, are making traditional loans a more tempting option for many local governments. As a result, smaller banks, many of which already hold municipal deposits, are seizing on an opportunity to bulk up the other side of the balance sheet.

Loans have become "competitive with interest rates obtainable in the capital markets," said Daniel Malpezzi, a lawyer at McNees, Wallace and Nurick in Harrisburg, Pa., adding that an increasingly large segment of local government borrowing has moved away from the bond market.

Banks are eager to take the new business, given the sterling performance of most municipal loans. Banks that have made a business providing deposit and treasury management services to municipalities have proven to be especially well-placed to reap a windfall, though plenty of others seem to be lining up to get in on the game.

Robin Russell, a lawyer at Andrews Kurth in Houston, is set to give a webinar this week on lending to municipalities. Through last Thursday, 36 banks had signed up for the session, which is sponsored by the Texas Bankers Association. While that number might not seem overly impressive, it is up from 11 participants in last year's webinar, Russell said.

"That tells me there's interest," Russell said.

Despite bankers' complaints, the long stretch of artificially low interest rates has been crucial to the growth of bank lending to local governments, municipal finance experts said.

Municipal lending has been growing steadily in Texas the past five years, Russell said, linking the surge directly to low rates. "With tax-affected interest rates on commercial debt at all-time lows, the rate on low-risk tax-free municipal obligations is competitive and attractive to investors and lenders," she said.

Comprehensive statistics on banks' municipal lending are difficult to obtain. Local governments, which are required to make bond issues public, are not required to disclose bank loans.

Individual banks do not always break out their lending to local governments, though the Federal Deposit Insurance Corp. keeps an industry-wide account of loans to "states and political subdivisions in the U.S." Its numbers indicate a steady increase in municipal lending, rising from $66.5 billion in 2010 to $131.4 billion last year.

A quick check of local governments in northern Virginia showed that at least two jurisdictions used bank loans in recent years. …

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