Monday, December 14, 2009

Clay Backs Bank With No Business Plan

It figures that Lacy Clay would back a program that does not make any financial sense.

In an article by David Nicklaus, in the Post Dispatch, David points out the fallacy of this program backed by Lacy Clay

Rep. William Lacy Clay, D-Mo., says he has a way to bring some of the 9 million unbanked American households into the financial mainstream. He has signed on as a co-sponsor of the Bridging Bank to Recovery Act, which would set up a new type of financial institution to serve people who currently don’t have a bank account.

That’s right: a bank for people who avoid banks. Clay says in a news release that he was spurred into action by a recentFDIC report which showed, among other things, that 31 percent of African-Americans in St. Louis are unbanked. In a news release announcing his support for the bridging-bank bill, Clay says:

Until we fully address this gross disparity, minority consumers will be condemned to a life of debt, financial exploitation and little or no access to affordable credit. … Access to a bank account and financial literacy are central to financial freedom.

The bill doesn’t really explain how the new institutions will differ from credit unions, which also have non-profit status and tend to have accounts that are affordable for low-income people. Many credit unions and banks also have outreach programs to help people improve their credit scores and learn how to manage a checking account. The FDIC study found, though, that the No. 1 reason for being unbanked is anobvious one: People just don’t think they have enough money to have a bank account. That will be a tough one to overcome.

The bridging-bank bill, introduced by Rep. Joe Baca, D-Conn., requires its special-purpose institutions to have minimum capital of $10 million. It doesn’t say where the money would come from.

It seems to me that this concept ignores a basic rule of banking, which is diversification of risk. A bank or credit union with a broad base of business can afford to make an effort to servie in low-income areas. That’s the principle behind the Community Reinvestment Act. If, however, a bank is only allowed to serve people who are struggling, the bank itself is likely to struggle. If that happens, the bridging bank could become a bridge to nowhere.

Of course Clay is for it. It makes no sense and no one can figure out how it will work. Maybe he will work with his friends in the Rent to Own and Payday Loan industry to run this.

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