Massachusetts Treasury's Partnership with Local Banks to Boost Loans to Small Businesses Through Cash Deposits
Steven Grossman, Treasurer and Receiver General
Tuesday, March 01, 2011
The Massachusetts Treasurer's office is creating a new Small Business Banking Initiative to shift state cash deposits under the control of the Treasurer to Massachusetts banks that are willing to expand their small business lending.
Small businesses are the cornerstone of the Massachusetts economy. According to state data, small businesses and sole proprietorships make up 85% of businesses in our Commonwealth. Experts say that historically two-thirds of the new jobs created in the Commonwealth come from small businesses. Clearly, a strong small business sector is critical to the recovery from the current economic downturn and to Massachusetts's economic future.
Tightened credit markets in the wake of the 2008 financial crisis, which particularly hit large, money center banks, resulted in profound difficulties for small businesses seeking loans. However, a number of financial institutions, primarily smaller local and regional banks, have continued to maintain or expand their small business loan portfolios.
Prior to taking office, Treasurer Steven Grossman spent 35 years as CEO of a 100-year-old family-owned company and has first-hand knowledge of the problems small businesses face. He also has received substantial input from the small business community as to steps that might spur economic growth and job creation.
Moreover, pursuant to Section 10 of Chapter 10 of the General Laws of the Commonwealth, the Treasurer is directed to give preference in assigning cash deposits to banks with a strong small business loan-making record, subject to the Treasurer's responsibility to ensure the security of the funds and obtain high returns.
The Treasury posted draft guidelines for public comment February 9-23, 2011, and received more than 25 responses from banks, trade associations, businesses, and the general public. These final guidelines reflect the input from the comments. The Treasury also will issue a public Request for Qualifications ("RFQ") to solicit participating banks. Those selected to participate will then be asked to negotiate a Memorandum of Understanding ("MOU") that will set the terms of their agreement with the Treasury.
The primary objectives of this initiative are to:
- Promote small business growth by providing creditworthy enterprises with greater access to bank loans.
- Provide capital support through cash deposits to banks with a strong record of small business lending.
- Obtain competitive interest rates on the Commonwealth's deposits.
- Require that all funds are insured or collateralized to ensure that there is no risk to the taxpayer's money.
- The initial phase of the program will allocate a total of $100 million for deposit in participating banks.
- Memoranda of understandings with participating banks will have a two-year term, subject to the right of renewal by the Treasury for an additional period.
- The Treasurer, at his discretion, may extend the duration or increase the amount of funds allocated to the initial phase of the program as needed to successfully meet its objectives.
- To qualify for the program, banks must:
- Be on the list of banks approved to do business with the Commonwealth, as maintained by the Commonwealth Division of Banks from time to time.
- o Have a rating of at least "satisfactory" under Commonwealth and federal Community Reinvestment Act ("CRA") (Chapter 29, § 34 of the General Laws).
- o Banks must be adequately capitalized. "Adequately Capitalized" shall mean, consistent with 209 CMR 47.00 et seq., if the bank meets the definition of an adequately capitalized institution as defined under the prompt corrective action provisions of the Federal Deposit Insurance Act, 12 U.S.C. § 1831(o), and the Federal Deposit Insurance Corporation's Capital Adequacy Regulations, 12 CFR § 325.103.
- Banks will be expected to offer interest rates no lower than the lesser of the prevailing LIBOR (London InterBank Offered Rate) three-month rate or Massachusetts Municipal Deposit Trust (MMDT) overnight rate at the time the MOU is signed.
- Rates will be adjusted on a quarterly basis. Interest earned will be wired to the State Treasury on a quarterly basis.
- Deposits must be fully secured by insurance or collateralization. Membership by the financial institution in the Depositors Insurance Fund (DIF) or the Share Insurance Fund (SIF) will meet this requirement.
- In accepting state funds, banks must commit to using the funds to increase their loans to creditworthy small businesses as defined in Section 57 of chapter 23A of the General Laws of the Commonwealth. Alternatively, banks may define a commercial loan of $500,000 or less as a small business loan.
- Terms and conditions of the individual loans will be set by the banks and will not be subject to review by the Treasury.
- Banks will make determinations of creditworthiness according to their own guidelines and procedures. The Treasury does not seek to encourage, nor will it provide guarantees for, loans with excessive risk.
- Banks will agree to publicize, market, and promote the program to small businesses in their market area. The design and execution of the marketing program will be solely determined by the bank.
- Deposits made to any one institution will be no greater than $5 million under this program and participating, qualified banks may accept less than $5 million. At the discretion of the Treasurer, additional deposits may be added to successful programs.
- A "qualifying loan" for purposes of disclosure under this program will be a small business loan determined to have resulted from the deposit of state funds per the MOU.
- The Treasury's intent is to minimize the regulatory requirements and paperwork associated with this initiative. With respect to the information requested below, extracting relevant data compiled for other agencies (e.g., FDIC Quarterly Call Reports) will meet our needs.
- To verify compliance with the objective of increased small business lending, participating banks will be required to:
- Disclose the number and dollar volume of their small business loans at the time the MOU is signed as well as data on those loans' share of the bank's overall loan portfolio.
- o Report to the Treasury on a quarterly basis qualifying loans made during that quarterly time period to small businesses.
- o Disclose publicly on its website and in any other manner to be determined by the Treasury, the aggregate number and dollar amount of qualifying loans.
- o Voluntarily compile on a semi-annual basis an analysis of the jobs created as a result of their qualifying loans.
- o Meet with Treasury officials on an annual basis, or as required by the Treasury, to assess the program results and the bank's compliance with its terms.
- The program will be statewide in scope and support small businesses in all regions of the Commonwealth.
- The Treasury will endeavor, however, to ensure that so-called "Gateway Cities" are fairly represented in the program.
- Banks will be asked to outline plans to ensure fair opportunities for minority-owned businesses to compete for loans under this program and to endeavor to increase employment among low- and moderate-income groups. As with CRA, these criteria should reflect the demographic makeup of a bank's market.
- The Treasury will give preference to institutions that are chartered in the Commonwealth of Massachusetts.