Although most employees in the financial industry are still working from home, banks can still take measures to help maintain the vitality of the communities they serve.

Community banks are striving to release as much liquidity as possible to fund Small Business Administration (SBA) loans, helping businesses impacted by the COVID-19 crisis weather the storm. Banks need to review their balance sheets and find ways to free up capital, which means lowering collateral requirements and improving liquidity ratios.

One option to enhance liquidity is to transfer collateralized funds into FDIC-insured reciprocal deposit programs. In such programs, deposits are allocated through a network of banks, ensuring that all amounts are FDIC-insured. Most states have passed legislation allowing local entities, including school districts, to use such reciprocal networks as an alternative to collateralization. Additionally, the federal government passed legislation in 2018 allowing banks to treat such reciprocal deposits as core deposits.

Freeing up space on the balance sheet for reciprocal deposits enables banks to immediately increase lending to small businesses before seeking additional deposits. And small businesses have never needed the support of community banks more than they do now, as evidenced by the surge in SBA loan applications.

Customers can also help. Take local governments, for example: 48 states have now passed legislation approving the use of reciprocal deposit programs; they are no longer forced to use collateralized deposits. In states that recently passed such legislation, including New Jersey, Georgia, and Washington, local governments may not yet realize that they can now access more competitive interest rates, more diverse deposit sources, and are no longer limited to banks with large securities portfolios.

By working with banks to move municipal funds from collateralized programs into FDIC-insured reciprocal deposit sweep programs, local governments can free up liquidity for banks, enabling them to serve other local businesses and organizations in need of financial assistance during the COVID-19 crisis. By converting collateralized deposits into reciprocal deposits, public fund managers can help businesses obtain loans through their community banks.

Government entities should review pricing, flexibility, and service, without incurring additional costs or requirements. Moving public funds into FDIC-insured reciprocal deposit programs can incentivize banks to work with local governments, thereby driving competition and choice.

Banks still need to focus on their own profitability. During the crisis, some banks may be reluctant to accept additional deposits that require collateralization, which limits the number of banks available to municipal and public funds, thereby reducing competition for municipal business. This is disadvantageous to local governments, as they rely on competition to improve rates and win business.

Due to collateral requirements, fewer banks bid on municipal business, and local governments may face lower interest rates, fewer services, and less flexibility. They need to ensure that as many banks as possible compete, so that banks actively bid for their business. This may mean shifting from state-regulated collateralization requirement programs to FDIC-insured reciprocal deposit sweep programs. The transition has almost no impact; funds remain liquid at all times and are protected by the full faith and credit of the federal government. Ensuring that local banks are stable, liquid, and able to support the communities that depend on them is in the best interest of all parties involved.

Ultimately, in this unprecedented time, everyone should do their part to help their communities. The actions taken or not taken now will have a profound impact for years to come. Ensuring that banks have sufficient liquidity to reinvest in their communities will be a key driver in preventing small businesses from permanently closing.