Local Banking Multiplier Benefits Our Community

The Local Banking Multiplier

We all learn the basics of banking in high school or college economics classes. The key concept we learn about banks is that they don't keep all of our money locked away in their vaults, but rather, lend most of the money we deposit to other people and businesses for business loans, mortgages, student loans, etc. This is known as fractional reserve lending, a process that allows banks and credit unions to lend 90% of their deposits, while keeping 10% in reserve to have enough cash on hand for withdrawals.

There is an important part of this process that is often overlooked, but is the key to maximizing the impact of the local banking multiplier . . . loans count as new reservable deposits. This means that those 90% of deposits that banks can lend to others become new deposits once the dollars make it back into a 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.

There is over $13 Billion deposited in banks in the three counties of the Pioneer Valley, of which $6.59 Billion dollars, basically 50% resides in non-local banks. If we can shift just 10 percent of these deposits, or $659 million, to local banks it could generate up to $6.5 billion in new local lending.

There is nothing small about these numbers!

The Local Difference

All banks can harness the power of the fractional reserve multiplier, so it matters where banks lend and what they support with their loans. For most of the non-local banks operating in our community, the deposits they get from Western Massachusetts make up less than 1 percent of their total deposits - with the loan side of the coin likely very similar. This makes it very likely that our deposits at these banks are lent outside of the community, and those loans typically aim to maximize profit for absentee owners rather than support local citizens and businesses.

Make The Shift, Bank Locally!!