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Why Bank Local?

Better for business.  Better for the Economy.  Better for You.

By: Derek Huntington

Jan. 5, 2011

Why Bank Local?

If there is one thing that we at GoLocal have tried to make abundantly clear, it is that what you do with your money matters for you and your community.  Going local with your spending by supporting locally owned, independent businesses causes a "multiplier effect" that keeps more money recirculating in our community.  As illustrated here, a small shift in spending by everyone creates a huge amount of benefit that we all can take to the local bank . . . and should take the local bank, as our local banks and credit unions play an important role in our local economy that increases the impact of the shift.


Better for Business

Small banks and credit unions are by far the largest supporters of small local businesses. A 2009 study by the New Rules Project found that small banks lend disproportionately more to support small businesses than their medium and large sized peers.

Small commercial loans also make up a larger percentage of the overall loan portfolios of small financial institutions, making it much more likely that a money deposited into a community bank or credit union will support investments in small local businesses.

As deeply rooted members of the community, local banks and credit unions operate at a scale where they can get to know their small businesses and the local market conditions. This allows them to be more flexible in making loans that don’t fit into the formulaic processes of the largest lenders.


Better for the Economy

Shifting deposits to local financial institutions creates the potential for increased local lending of all types. Through the process of fractional reserve lending, the amount of new lending potential of local financial institutions created by a shift can be many times the amount of the initial shift.

Here’s how it works . . . The key concept is that financial institutions don't keep all of our money locked away in their vaults, but rather, lend against the money we deposit. This is known as fractional reserve lending, a process that allows banks and credit unions to lend to the point where deposits in reserve equal 10% of their total deposit base.

There is an important part of this process that is often overlooked . . . loans count as new reservable deposits. This means that the deposits created when banks lend can become new reservable deposits once the dollars make it back into another bank, and then 90% of those deposits can be lent, and then 90% of those deposits, and so on. In theory, banks can create new loans, essentially new money, totaling nine times the amount of the original deposit if 100% of the loan proceeds make it back into a bank each time.

Currently, of the $11.35 billion dollars of traceable deposits in Sonoma County, 47.3% or $5.37 billion are held at non-local banks, defined as having less than 1.5% of their total deposits originating from Sonoma County. Shifting just 10% or $537 million of non-local deposits to local institutions could increase their lending potential by up to $4.8 billion if all the newly created deposits from loans make it back into a local bank or credit union. Even if only 25% of loan proceeds make it back into local institutions, this still increases the lending potential of local institutions by $623 million.

To unlock this new lending potential, local financial institutions need a large pool of qualified borrowers to lend to.  An informal survey of the majority of Sonoma County’s local banks and credit unions by the GoLocal Cooperative revealed that they are struggling to find enough qualified borrowers to support their current deposit base.

But a glut of money at local financial institutions waiting to be invested is a good problem to have. By going local first with our spending, both personally and with our business transactions, as a community we can support the success of small local businesses that are the prime candidates for local lending. With successful businesses come successful business owners and increased employment opportunities, creating more qualified candidates for home and automobile loans. This virtuous cycle is the key to creating enduring well-being for all members of the community.


Better for You

Besides the individual benefits each of us receive from a strong local economy, banking with local financial institutions also has a number of direct personal benefits. Recent data show that overall customer fees are significantly lower at small banks and credit unions, and in most cases those small institutions offer the same core services as the big banks.

Credit unions have the added convenience of a shared network of branches and ATMs throughout the country, making it easy to meet your banking needs wherever you are without expensive ATM charges.

As with most local businesses, community banks and credit unions pride themselves on getting to know their customers personally. They provide unmatched customer service, and, like they do with local businesses, can find ways to make personal loans that don’t fit into the formulaic models of the mega banks.


Make the Shift

Want a stronger local economy in Sonoma County? . . . Take action by banking locally.  Switching is easy with our Bank Local Switch Guide.  Check out our bank and credit union profiles, and visit our business directory to find a local bank or credit union with a branch near you.  And join GoLocal to keep making shift happen.


Deposit and lending data was gathered from the FDIC, NCUA, and Federal Reserve. Information and graphics on small business lending and customer fees was kindly provided by the New Rules Project’s Community Banking Initiative (

Comments (3)

it's taking me a little while, but I can't wait until we have the research completed here in Western Mass to see where people are banking. Keep up the great work!!

posted by This is such a wonderful resource, thank you!! on 1/04/11 @ 08:38 p.m.

You have some very good information, but I wanted to kindly point out, your misunderstandings of how the banking system works. Banks by law are prohibited from lending out their deposits, which are considered liabilities (becasue this is what they owe their depositors.) If banks did lend out deposits to fund other companies by giving them loans, the banks would have to comply with SEC regulations as any investment fund would have to do, to disclose the risk of the investments through a prospectus to their depositors. Obviously this is not what banks do. The fractional reserve system is the system the banking industry uses so the checks issued by one bank can clear with or be accepted by other banks. It is how money gets transferred and keeps people from issueing false checks. Overnight through a central computer of the Federal Reserve Bank, all checks are cleared by transferring reserves from the bank that issued the check to the bank that is receiving the check to ensure that the entire banking system of debits and credits can work. Banks are required to have a certain number of reserves in "reserve" to ensure their checks can clear. People who take their money out of their bank in cash rather than writing checks are given cash or if you note on the top of the bill, it says bank Federal Reserve Note. This is what we use as cash or ensure that the banking reserve system maintains its balance of debits and credits to keep track of who owes what to whom. Your cash basicly is a note saying that the Federal Reserve Bank owes you this amount.

So where does the money come from that banks lend out? This is the money supply. This is what the Fed reports on as the M1, M2, etc. money supply. By regulating interest rates, the Fed is able to regulate the amount of money(actually in the form of credit or loans) in circulation. A bank basically has a franchise to issue new money as part of the banking industries monopoly on the world's money supply. And purchasing reserves, or generating them in the form of attracting deposits from other banks, is part of what they need to make sure their checks clear with other banks.

If you should have any questions, I would be happy to try to answer them.

Have a good day!

Mike Krajovic

Peaceful Economics &
Uplifting Humanity

posted by Mike Krajovic on 1/17/11 @ 01:52 p.m.

Greetings Mike,

Thanks for getting involved in the conversation. You are correct that the process through which fractional reserve lending works is more complicated than specified in the article above. For those who are interested in specific detail of the process, I recommend reading the handbook by the Federal Reserve Bank of Chicago called Modern Money Mechanics. (You can just Google it)

A couple of key details left out in the article is that bank reserves must be in the form of vault cash (hard currency) or deposit balances at their Federal Reserve Bank, and that institutions must have capital or assets on their books offsetting the deposit liabilities created through lending. A mortgage note is a good example of an asset that banks and credit unions use to create deposits against. Your promise to pay the mortgage (or ultimately the value of the real estate) is considered an asset to the bank, and the deposits created in your checking account to fund the real estate purchase are considered the banks liability. The total amount of deposits that an institution can create through this process is limited by the amount of acceptable reserves as explained above and the required reserve ratio (currently 10%).

All complexity aside, the point is still valid that if we shift our deposits to local banks and credit unions, those deposits can be used as reserves (with additional deposits at the Federal Reserve Bank) to increase the potential for new local lending. For this lending potential to be unlocked, banks and credit unions need good assets to lend against in the form of collateral, creditworthy promises to pay, or both. By supporting our local businesses, we increase their chances of their financial success and make them good investments for our local lenders. This virtuous cycle is the key to creating jobs and enduring well-being for all members of the community.

In Cooperation,


posted by Derek Huntington on 2/09/11 @ 02:25 p.m.

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