By Ernest Garfield
The thought behind the suggested EB-5 community bank re-capitalization initiative is to help banks increase their capital to be able to add to their asset base and boost lending capacity for projects in their communities. The goal is to recapitalize 3,000 banks by 2024 out of the about 5,170 banks insured by the Federal Deposit Insurance Corporation.
Advantages of Community Bank Re-Capitalization
Our Re-Capitalization Initiative also includes proposals to help U.S. Citizenship and Immigration Services speed up processing of EB-5 Visas and establish added safeguards.
When EB-5 capital is injected into community banks, the loans made by the banks will have stringent oversight by at least two, and at times three, bank regulatory organizations. They are the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Reserve Bank and state bank regulators.
Equally significant, because of the capital to asset leverage permitted in banks, the economic impact of the foreign investment capital is multiplied substantially over the usual EB-5 project. Every $100 million of investor money used to recapitalize banks could support $1 billion to $1.4 billion in assets with a potential of creating 100,000 to 140,000 jobs rather than 10,000 jobs.
Unlike the business of the existing 865 regional centers, our focus will be primarily loans in nine business categories: (1) emergency responders and military veterans; (2) export-import; (3) cyber security; (4) franchises; (5) emerging technology; (6) emerging medical; (7) non-profits; (8) shared loan services that are in excess of legal lending limits and (9) non-bank loans for businesses refused by banks.
Strategic Affiliates
The banking model provides additional layers of oversight for the deployment of the EB-5 capital and deposit leverage of 10 to 14 times for every dollar invested. A community bank is an ideal match for the objectives of the EB-5 Regional Center Program. The heart of the business plan of each center focuses on regionally defined investments. They look to new commercial enterprises or the expansion of businesses that will stimulate the creation or preservation of U.S. jobs.
Leveraging gives a bank the ability to lend $10 for every $1 invested and at times up to $14 for every dollar invested. Not only does this multiplier create more jobs and free up more available capital for local businesses, it also diversifies the foreign investment from routine real estate projects and increases confidence in the EB-5 program. In addition, the money multiplier effect of locally invested dollars may increase leverage by another four to ten times. Conceivably, every dollar invested can become as much as twenty-eight working dollars in a community.
Avoiding Fraud
Investing in community banks and multiple regulatory oversights will provide additional confidence to investors and USCIS adjudicators that the capital is being injected into quality projects focused on community development and localized job creation within the defined Regional Center area. These additional levels of supervision help USCIS lessen the burden of understanding all of the nuances of specific investment projects. This allows the USCIS to focus on other immigration matters.
The Banking Initiative of EB-5
The history of EB-5, highlighted by the limbo period of 1998-2002 created by the Immigration and Naturalization Service retroactive decisions affecting previously approved applications and the current status of EB-5 Regional Center Program with a flurry of new Regional Centers who may or may not know how to structure safe USCIS-compliant projects, the community banking model provides an opportunity to increase foreign confidence in the program at large.
Economic Issues to Solve
Increased capital injection for community banks will help states address relevant issues:
- Dropping from approximately 95 percent locally controlled banking assets to about 6 percent.
- Major out-of-state banks service nearly all local government jurisdictions.
- Together, the top 10 largest banks, as of Sept. 30, 2016, held $10.1 trillion in assets of the $12.8 trillion in all U.S. chartered banks.
- 5,160 banks held $2.7 trillion of all banking assets as of Sept. 30, 2016.
- Large banks shift control of assets from the source state to out-of-state.
- Large banks provide transactional services rather than personal services.
- Dramatic reduction of the local money multiplier effect which ranges from 4 to 10 times per dollar reinvested.
- Low deposit-to-loan ratio.
Hurdles in Funding Community Banks Through EB-5
- Liquidity – EB-5 investors expect their capital to be repaid within 5-7 years but when funding banks, core capital cannot be callable. This creates liquidity problems when trying to pay back investors in 5-7 years. As a solution, investors can buy into intermediary firms that in turn will buy stock in community banks.
- Targeted Employment Area Requirement – how will the USCIS determine whether a community bank investment qualifies for a TEA designation? Is it based upon where the community bank is located or will the determination be based on where the businesses who receive loans as a result of the EB-5 capital are located?
- Measuring Job Creation Capital from EB-5 invested into a community bank will allow the bank to increase deposits by $10 to $14 for every $1 of investment capital. The bank will then be able to make loans utilizing these deposits. As a result of the initial investment capital, the bank will be able to make loans that equal 10 to 14 times the EB-5 investment. This means that the economic impact will be 10 to14 times greater when investing into a bank rather than directly into a specific project.
- Establishing a viable method for utilizing EB-5 capital to fund community banks would be in-line with the intent of the program to limit the use of EB-5 to banks that have a regionally defined focus. If multi-national banks were to get involved, their multinational focus would result in much of the benefit of the EB-5 capital to flow outside of the defined region, and could oftentimes result in the economic benefits being directed outside of the United States.
(Editor’s Note: Chinese translations may vary slightly as published.)
Ernie Garfield
Ernest Garfield is president of Independent Bank Developers, LLC and chairman of Interstate Bank Developers, Inc. companies that specialize in the creation of community banks. He is also the founder of the Alliance of Business Banks, the Arizona Financial Institutions Task Force for Arizona Legislators, the Financial Services Advisory Council and Community Bank Advisory Council for Arizona members of Congress.
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