In almost any idealized picture of a town square there is a local bank among the shops and people. Banks are centers of local activity where people cash their paychecks, save for their future, teach their kids about financial values, and get all sorts of information about local events that affect their daily lives. But how exactly does the presence of large banks in local communities affect those communities?
In this post, we examine recent research suggesting that the presence of large banks in local communities improves consumer sentiment. We also provide specific examples of how Forum members contribute to the local economies they serve and discuss how these efforts may relate to this linkage.
A recent research paper by economists from the University of South Carolina, Cardiff University and the Federal Reserve Bank of Kansas City considers the impact of the presence of large banks in a local area (a county) on the responses of households to a well-known and oft-cited survey of consumer sentiment conducted by the University of Michigan. The survey consists of five questions that gauge overall consumer sentiment with questions like: “We are interested in how people are getting along financially these days. Would you say that you (and your family living here) are better off or worse off financially than you were a year ago?” The researchers use all five questions to construct an index of consumer sentiment and then relate the sentiment among households in a local area to the share of large banks in that area from 2000 to 2014.
The authors consistently find that as the share of large banks increases in a local community, consumer sentiment among households in that community rises. Of course, such a relationship could be driven by a number of confounding factors, but the researchers control for a wide range of such factors and still find a strong positive relationship between large bank presence and consumer sentiment. More still, the authors conduct a number of robustness tests including using various definitions of what constitutes a “large bank.” Interestingly, as the definition of “large bank” coincides with successively larger banks, they find that their empirical results strengthen. The presence of larger banks in a community causes an even greater increase in the consumer sentiment of households in that community.
The authors suggest that the relationship between improved consumer sentiment and large bank presence may be driven by economies of scale in banking or by the fact that larger banks are generally safer as they are better diversified and subject to more prudential regulation and supervision than small banks. Essentially, the authors theorize that the presence of better priced financial services from safer banks lead to a sense that economic conditions are generally better. While we fully agree that economies of scale and enhanced diversification are important and positive characteristics of large banks, we also think that the positive contributions large banks make to the local communities they serve may also be a source of improved consumer sentiment.
Forum members, through their operation of over 16,000 bank branches, have a strong presence in local communities throughout America. What’s more, Forum members make regular, long-term investments and engage in ongoing activities to improve the economies and general well-being of the communities they serve.
Consider the following recent examples of investments and activities sponsored by Forum members.
- In Charlotte, North Carolina, Bank of America is partnering with leading financial services companies to provide over $70 million in investment for affordable housing in the city and surrounding area, marking the largest private-sector commitment to affordable housing in Charlotte’s history. This project includes $50 million in below-market loans, $11 million invested in the newly proposed Housing Opportunity Investment Fund, $2.5 million in economic mobility programs, and a donation of $7.25 million of land in Uptown Charlotte. Through its investment, Bank of America is helping to provide equal access to housing in Charlotte for low- to moderate-income families.
- In Dallas, BNY Mellon administered the largest clean energy program loan ever made in Texas and the second largest in the nation. The project converted a historic landmark into apartments and commercial space. The new building is expected to save more than 6.6 million kilowatt hours of electricity, almost 700,000 gallons of water, and more than 3,500 metric tons of carbon dioxide per year, while contributing to the creation of over 100 new jobs in the Dallas area. In this way, BNY Mellon is contributing to a robust economy and a cleaner environment in Dallas.
- In Quincy, Massachusetts, in cooperation with MassHousing’s workforce housing initiative, Citigroup provided a $35 million construction loan to build a new apartment building that serves people with incomes too high for subsidized housing yet not high enough to afford the Boston area’s expensive rental market. The 140-unit project includes the largest number of workforce housing units ever financed under MassHousing’s Workforce Housing initiative. This new building will give more people the opportunity to live near their jobs, spend less time commuting, and spend more time with their family and friends.
- Throughout Utah, Goldman Sachs, along with partners from the public and private sectors, has committed over $950 million since 2009. These investments have resulted in over 4,700 affordable housing units, 550,000 square feet of retail, industrial, commercial and community space, 2,100 more students receiving early education, and 59 loans to underserved small businesses. As part of this commitment, in 2018, Goldman Sachs provided $49 million to finance the construction of the Hub of Opportunity, a transit-oriented, mixed-use development in Salt Lake County that includes 157 residential housing units, the majority of which will be leased to low- and moderate-income individuals. The project will reserve a portion of these units for individuals with disabilities and other special needs tenants, and will provide a unique combination of support services and workforce development opportunities directly targeting these residents
- In Detroit, JPMorgan Chase’s $150 million commitment to the city’s economic recovery is helping more people move up the economic ladder and share in the rewards of a growing economy. In particular, 14,550 Detroiters have received job skills and training, and 1,800 small businesses have received technical assistance, leading to the creation of over 700 small business jobs. The investment has also deployed $50 million to create 1,500 housing units, 800 jobs and 176,000 square feet of commercial space. Finally, this commitment also provides the expertise of the firm’s employees to help the city come back, as JPMorgan Chase employees have donated over 15,000 hours of their time and expertise to help nonprofits revitalize the city where Chase is the largest bank and has served Detroit for over 80 years.
- In Cleveland, Morgan Stanley partnered with the Greater Cleveland Food Bank and other nonprofit partners in an effort to focus on public elementary school settings as the hub for delivering integrated nutrition, health and play programming to children and their families. The Healthy Cities Cleveland initiative provided over 850,000 healthy meals, and served close to 2,000 students with fitness programs, health education, health screenings, and healthy snack programs. Morgan Stanley employees also donated over 2,000 hours of their time to the Healthy Cities Cleveland program while also participating in similar Healthy Cities programs in Chicago, Baltimore and New Orleans.
- In Boston, State Street leads a $20 million initiative to help prepare students for the workforce. The Boston Workforce Initiative Network (Boston WINs) works with five non-profit partners to enhance access to careers for Boston’s youth to provide stable employment and economic mobility. Because each partner brings a unique strength, State Street has asked them to work together to deliver the full support students need to build meaningful careers. The goals with the Boston WINs program have been to increase college enrollment rates for Boston public high school students; ensure that once a Boston public high school student gets into college, they are successful; and enhance access to careers for Boston youth, leading to stable employment and economic mobility.
- In California, Wells Fargo has donated more than $6 million to support people and communities affected by wildfires. In particular, Wells Fargo has donated more than $3.25 million to organizations in Butte County, where the deadly and tragic Camp Fire in 2018 burned nearly 150,000 acres, 19,000 homes and killed more than 80 people. In addition to direct financial assistance, Wells Fargo has also deployed its Mobile Response Unit to assist customers with disaster relief and insurance check processing. Through these actions, Wells Fargo is providing financial support and much-needed services to rebuild a community they serve.
Each of the above examples shows how Forum members are making real commitments to the local communities they serve by investing their time and resources for the long term. These investments improve local communities and give people a real reason to feel good about Forum members as well as their overall economic prospects. Accordingly, while local community engagement is not specifically considered by the authors of the research study, and likely wouldn’t explain all of their findings, it is worth considering whether the involvement that large banks have in their local communities positively influences consumer sentiment. Such an effect would be consistent with the research findings and would make good sense as well. In any event, both systematic research and real-world examples provide evidence that large banks, including Forum members, are a source of positive influence on local communities that creates a virtuous cycle that benefits banks, households and businesses across the country.