Why a Rochester Credit Union Wants the Local Government To Create Its Own Bank

Local lenders envision a Bank of Rochester that would work through them to meet residents’ and small business owners’ needs.

Rochester, NY skyline

Above the Genesee River Gorge High Falls in Rochester, New York. (Photo by  / CC BY-NC 2.0 DEED)

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Melissa Marquez inherited her mother’s deep desire to make the banking system work for those whom it has long excluded.

At 14, she saw her mother break down in tears again and again after coming home from work as a loan officer at a bank. The bank refused to lend to their community in Barrio Logan, an epicenter of Chicano culture in San Diego, her mother told her. Barrio Logan residents would come in, make their deposits and stay faithful customers to the bank, but still couldn’t get access to credit.

That memory from 1974 has driven Marquez to help lead a coalition of tenant organizers, community land trusts, community development lenders and elected officials that has spent the last few years calling for more government-owned banks across New York. She’s tried every other approach in her 40-plus years of working in community development, the last 20 of them with Genesee Co-op Federal Credit Union in Rochester, New York — where she is currently CEO.

Opened in 1982, Genesee Co-op serves 4,200 members in the city’s diverse, working-class “South Wedge” neighborhoods — the former stomping grounds of abolitionist icon Frederick Douglass and jazz legend Cab Calloway.

But for all that Marquez has been able to do at Genesee Co-op, providing credit to the kinds of communities that her mother ached to serve, it still pales in comparison to the credit and investment needs that she encounters daily in Greater Rochester’s working-class neighborhoods. Even after 40 years of growth, Genesee Co-op today has just $40 million in assets.

“The scale that’s needed is more than we can do by ourselves,” says Marquez, who has been a member at the cooperative credit union since 1985. “All along, the idea of who can that partner be has been in my mind.”

That’s why Marquez has joined Rochester’s mayor, city council members and its state legislators in a last-minute push for state legislation to create a “public bank” called the Bank of Rochester. They envision a government-owned financial institution built specifically to hold only government deposits while partnering with local private lenders like Genesee Co-op Federal Credit Union to boost their ability to make loans and investments in communities that still aren’t getting enough of it.

Elected officials and local leaders in Rochester, NY advocate for a public bank.

New York state Sen. Samra Brouk, at the mic, introduces the Bank of Rochester Act. To her immediate right is Assemblyman Harry Bronson. Melissa Marquez stands to her left in the red shirt. (Photo courtesy Brouk / X)

How it works

As laid out in the legislation, the Bank of Rochester would be modeled largely after the century-old state-owned Bank of North Dakota, the only public bank in America.

As they have seen in North Dakota, public banking advocates in Rochester believe a government-owned bank could strengthen local lenders’ relationships with the community rather than competing with local lenders.

Nearly 90% of the Bank of North Dakota’s deposits come from the state government, which is required by law to use the Bank of North Dakota as its primary bank. Most of the remaining 10% of deposits at the Bank of North Dakota come from private banks and credit unions across the state.

Individuals or businesses wouldn’t be able to open accounts at the proposed Bank of Rochester. It would be authorized to take deposits only from government bodies, including local or state government as well as federal offices. Restricting a public bank to government deposits limits the public bank from competing with private institutions for deposits from individuals or businesses.

According to the City of Rochester’s most recent annual financial report, the municipal government had nearly $500 million on deposit in various accounts at private banks. The Bank of Rochester wouldn’t immediately take in all of those deposits — the legislation authorizes the chief financial officers of both Rochester and the surrounding Monroe County to add the Bank of Rochester to their rosters of banks approved to hold deposits from the city or county government.

“What I really want to get to, through this tool of public banking is how can the city be more intentional, and in so doing have a greater impact and creating more equity and more justice by the way its money gets invested,” says Assemblymember Harry Bronson, the primary co-sponsor of the legislation. Along with co-sponsor state Sen. Samra Brouk, both represent parts of Rochester in their respective houses of the state legislature.

Similar to the Bank of North Dakota, individuals and private businesses wouldn’t be able to apply directly to the Bank of Rochester for a loan. Under the legislation, the Bank of Rochester would also be restricted from making direct loans to the public.

Like its counterpart in North Dakota, the Bank of Rochester’s lending would be primarily wholesale lending — loans to other financial institutions — or loan participations, which are loans made only in partnership with local banks, credit unions or community development financial institutions. The local private institution originates the loan and deals directly with the borrower, but the funds are sourced from both institutions.

That means the public bank would rely on the existing expertise of local lenders and their relationships with their communities to underwrite loans, while local lenders could access a deeper pool of funds to support their lending.

In North Dakota, sparsely populated at just under 780,000 residents, the state-owned bank does nearly a thousand loan participations a year, supporting loans to small businesses, farmers and agricultural businesses who only deal with their local financial institutions and never realize the Bank of North Dakota has helped fund their loan behind the scenes.

The potential of loan participations

There’s plenty of concern and criticism around state-owned or local government-owned banks. Often one of the first to come up is how to guard against corruption and political favoritism in loan decisions at an institution controlled even indirectly by elected officials.

Loan participations actually help guard against corruption. Community banks and credit unions are all highly-regulated themselves, meaning their regulators examine their lending practices and management on an ongoing basis to ensure safe and sound operations, which includes guarding against political influence in lending decisions.

By mostly doing loan participations with regulated banks and credit unions, the Bank of North Dakota can rely on bank regulators to keep corruption out of the equation. The Bank of Rochester would benefit in the same way.

The potential for more loan participations was a big reason why Marquez was quick to get behind public banking when she first came to hear about the idea a few years ago after state Sen. James Sanders — who represents part of the borough of Queens in New York City — first introduced a bill that would authorize any city or county across the entire state to apply for a charter for a public bank from the New York State Department of Financial Services. Both Assemblymember Bronson and state Sen. Brouk also support that bill, which has been stalled for years due to opposition from bank industry lobbyists.

“There are loans we can’t do because of the sheer size of the loan or the volume of loans we just can’t take on by ourselves,” Marquez tells Next City. Specifically, Marquez is referring to the bank regulations that limit both the amount each bank can lend to any one borrower as well as the total amount of loans and other investments that a bank can hold in its portfolio.

Both limits are based on how much the institution holds in its capital reserves — an amount that usually grows over time for all banks, but much more slowly for banks or credit unions that put in the extra time and effort required to work in historically disinvested communities like the South Wedge.

In North Dakota, local lenders easily and regularly call upon the Bank of North Dakota for loan participations, which means they can originate larger loans or make higher volumes of smaller loans than they would without the state-owned bank to support them through loan participations while staying behind the scenes. The Bank of North Dakota’s most recent quarterly report shows the bank’s portfolio currently includes more than 500 small business or farm loans of less than $100,000 — all coming in the form of loan participations originated by local lenders across the state.

Marquez has spent decades trying to convince larger banks, even local ones, to do more loan participations with her credit union or other smaller credit unions across the region. She co-founded the Greater Rochester Community Reinvestment Coalition back in 1993 as a vehicle to hold banks accountable for the legal obligation to serve all communities regardless of race or income level.

But there just hasn’t been enough interest from other private lenders to participate in the loans that Genesee Co-op makes. Part of the challenge is the complicated process of reconciling different lending standards across different institutions, especially when many loan participations could be for loans of less than $100,000 — far below typical thresholds for loan participations with mainstream banking institutions. Genesee Co-op also generally uses lending standards that go beyond the flexibility other lenders are willing to provide.

Alternative lending for an alternative future

Genesee Co-op is part of that long tradition of communities who, shunned by other financial institutions because they weren’t rich enough or white enough, came together to form their own. As a credit union, it’s a cooperative — owned and controlled by its members, who annually elect the credit union’s all-volunteer board of directors. Marquez served as a Genesee Co-op board member for eleven years prior to joining the staff of the credit union. Board members are ultimately responsible for setting a credit union’s lending standards.

Genesee Co-op is also one of nearly 1,500 lenders across the country that are certified by the U.S. Treasury Department as community development financial institutions, or CDFIs, meaning their primary mission is to serve households, businesses and real estate developers working in low- and moderate-income communities. Making loans in these communities often involves providing technical assistance and other wraparound services coupled with providing access to credit and basic banking services. CDFIs often offer loans with little to no collateral requirements or no credit score minimums, deploying wraparound services to mitigate the risk of such loans. The U.S. Treasury provides grants to CDFIs to support those services.

As a result of such alternative lending practices, CDFIs have loan default rates on par with or sometimes even lower than mainstream financial institutions. But Marquez still hasn’t seen much appetite from other lenders for loan participations with her credit union. She envisions that a Bank of Rochester would finally be the institution that can meet that need on an ongoing basis.

“If they wanted to do it, they would have already been doing it for years by now,” Marquez says. “The Bank of Rochester would have it written into its mandate to do these kinds of loan participations that support access to credit in the communities we serve, who have long been denied that access.”

Marquez even believes that a Bank of Rochester’s presence in the market would help draw in other local lenders into providing more loans and investments in the South Wedge and other historically disinvested areas around Rochester, with or without any direct involvement from her credit union. She even believes a local public bank could influence prevailing lending practices by only offering to participate in loans that use non-predatory terms and interest rates, particularly when it comes to car loans.

The road ahead

Rochester Mayor Malik Evans, himself a former banking and credit union professional, also supports both the earlier New York statewide public banking bill as well as the new bill to create the Bank of Rochester. The city council has also passed measures in support of public banking.

The wellspring of local elected officials who support public banking made Rochester an obvious location for the last-minute push for state legislation to create an intermediate alternative to the stalled statewide public banking bill.

New York state banking lobbyists remain unconvinced. They point to recent progress in mainstream banks reaching unbanked populations and increasing support for CDFIs to show there’s enough progress under the status quo. It’s not worth the risk or potential cost to taxpayers of starting up a new bank, they argue.

The banking lobbyists may be right in saying a potential city-owned bank may not be financially viable. But the ultimate authority on the question of the potential Bank of Rochester’s financial viability would still be the same Department of Financial Services that charters and regulates private banks and state-chartered credit unions in New York.

Per the legislation, the Bank of Rochester would still need to apply for a bank charter from New York’s Department of Financial Services before it could open for business and start taking deposits from government offices. Like all state banking agencies, the department would be charged with evaluating the Bank of Rochester’s market analysis and proposed business plan. Not only would it need to give the bank its approval, it would also set the bank’s required start-up capital, an amount that the department’s analysts deem would be necessary for the bank to break even within a reasonable timeframe based on its business plan, usually by the end of its third year in operation. That evaluation process can take one to three years or more, even for private banks.

Besides its ownership structure, the Bank of Rochester would also share another key distinction with the Bank of North Dakota — it wouldn’t seek coverage under federal deposit insurance. Created in 1919, the Bank of North Dakota predates the creation of the Federal Deposit Insurance Corporation by 14 years. It has never been covered by federal deposit insurance. Instead, the Bank of North Dakota’s deposits are guaranteed by the state of North Dakota itself. Similarly, under the legislation proposing the Bank of Rochester, the state of New York would guarantee its deposits.

It might seem strange for a state to provide deposit insurance for any bank, let alone a bank that would be owned by a unit of government. But it would not be unprecedented for New York. Back in 1829, New York was the first state in the union to create a state-level deposit insurance program. It proved successful enough that many New York businesses soon started minimizing the use of hard currency, preferring the safer and more reliable means of conducting business using checks, boosted by the confidence that if a counterparty’s bank failed, deposit insurance would minimize or even prevent any losses.

Citing the costs and risks of such a program, the New York banking industry opposed the creation of deposit insurance back then, too, even though it eventually helped make the state into the financial capital of the country.

Marquez hopes that New York can once again take up the mantle of using creative, unorthodox public policy to support a more well-functioning banking system – one that finally honors her mother’s aspirations.

“Municipal deposits in particular should be used to benefit the communities from which they come,” she says.

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Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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Tags: credit unionscdfispublic banksrochester

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