History Of The Business Plan

The business plan for the Common Good Bank was not born fully developed. The initial idea was conceived (very roughly) by William Spademan, as described in this article published in the Friends Journal in July, 2006. Our sponsoring organization, the Society to Benefit Everyone, navigated through several alternative strategies before settling on the current plan. These strategies have ranged from do-it-yourself economics to a variety of formally chartered financial institutions with millions of dollars in investment capital.

1. Strategy #1: just do it. In the United States, the quickest and easiest way to start a financial institution is simply to begin performing the functions of a financial institution. A do-it-yourself economy allows for unparalleled ongoing innovation. The Society to Benefit Everyone employed this strategy in Ashfield, Massachusetts from 2003 to 2005 and found that there are two drawbacks to continuing on this path: (1) slow growth, due to public reservations about anything out of the ordinary and (2) federal and state laws prohibit most financial services unless they undergo formal approval and regulation.
2. Strategy #2: credit union. The next quickest and easiest way to start a financial institution is as a federal credit union. Federal credit unions are regulated by the National Credit Union Administration (NCUA). Part of NCUA's mission is to encourage the formation of credit unions. The application process is relatively simple and NCUA offers free help in getting started. Organizing as a credit union also preserves much of the opportunity for innovation characterizing the "just do it" phase.

   Unfortunately, our plan doesn't quite work in credit union form, either. The missing pieces are: (1) rapid growth and (2) profits to the community - both of which are integral to our plan and to our ultimate objectives.

   The problem is that credit unions are required to maintain a net worth to average assets ratio of at least 7%. A low-income credit union (most of whose members make less than 80% of the median income) can use subordinated debt for up to half of its net worth requirement. Subordinated debt (or "secondary capital") here means a long-term loan from an organization, that takes second place to any claim on the credit union's assets by the National Credit Union Share Insurance Fund (NCUSIF). The Society to Benefit Everyone would borrow money from investors to supply the credit union with qualifying subordinated loans. Such investments by member depositors would be used as collateral for additional reserve credit, making the investments act - almost transparently - like a higher interest component of the member's WOW! Account.

   The upshot of this 7% limit is that the credit union must hold onto almost all of its profits (not spend them to benefit the community) and member deposits cannot increase until the credit union has made a 3.5% profit on the deposits it already has AND has raised 3.5% in additional long-term subordinated loans. If a credit union holds onto all its earnings and makes bank-sized profits by offering very low interest rates on deposits, membership growth is effectively limited, in the long run, to 29% a year (assuming a return on assets of 1% a year - higher than most banks and credit unions), and limited to local low-income members. We want to welcome members of all income levels, give our depositors a decent interest rate, return nearly all profits to the community, and still maintain at least the possibility of expanding beyond our initial boundaries and doubling our membership every six months. The credit union model would leave those objectives unreachable.

3. Strategy #3: state-chartered bank with a nonprofit holding company. We can avoid the restrictions on growth rate and returning profits to the community by organizing as a stock-based savings bank. In this form, capitalization requirements are satisfied by investors buying stock and taking on a proportionate share of the financial risks. The Society to Benefit Everyone would act as a holding company, borrowing money from investors in order to purchase all (or at least most) of the bank's stock, paralleling its pass-through function in the credit union model. All bank profits are spendable and growth is limited only by the volume of stock purchases, relative to deposits. This limitation can be made moot by setting the benefits of loaning money to the holding company such that, on average, members choose to make those loans in adequate proportion to their own deposits. Our survey shows that a fixed interest rate of 4% (with no dividends) is sufficient.

   Unfortunately, regulations for banks are MUCH more stringent than those for credit unions. In particular, Massachusetts state-chartered banks are required to start with a large pool of investment capital (at least $8 million) and highly experienced management. This would make it very hard for other communities to follow our example.

4. Strategy #4: Hybrid: converting a credit union to a stock bank. It would appear that starting as a credit union gets us up and running much sooner, allowing us to grow bigger sooner and continue as a credit union until we have sufficient capital, then convert to a bank. Federal regulations DO permit converting a credit union to a bank. We could reach the critical capital level earlier by retaining 50% of the community's share of the merchant tithes as income to the credit union. Since the credit union's profits eventually go to the community, the retained funds would still satisfy the tithing principal of "half to the customer, half to the community".

   After one to five years, with about 2,900 members, $2.5 million in retained earnings and an equal amount in subordinated debt, we could then convert to a mutual savings bank, then to a stock-based savings bank about a year later. (Conversion directly from a credit union to a stock-based savings bank is prohibited.) The conversion to a stock-based savings bank is necessary because mutual savings banks suffer growth-restricting capital requirements similar to those for credit unions (5% minimum net worth to assets ratio). As a stock-based savings bank, our capital requirement would be satisfied by members sharing the risk (indirectly buying stock), rather than by stockpiled profits.

   Upon conversion, an equitable portion of the stockpiled profits would be distributed to members (about $50 each), as retroactive fair interest and as a one-time incentive to join early and vote to convert. The remaining stockpiled profits and all future profits would be distributed to advance the common good of the larger community.

   Until the conversion, interest on deposits would be kept as low as necessary to maintain adequate progress toward that 7% net worth level, as required by the National Credit Union Administration.

   Other communities could follow this hybrid startup strategy quickly, easily and with low startup costs, with our assistance, software and financial investment. Perhaps more importantly, once the Common Good FCU/Bank existed as a working paradigm, this hybrid strategy would provide existing credit unions a clear path for converting to a Common Good FCU/Bank almost overnight.

   Unfortunately, the NCUA will not permit a credit union to start with loans (only "seed" money, that is grants and gifts) AND a new credit union is not permitted to offer mortgages, business loans and credit cards in its first two years and allows offering checking accounts only if the directors and officers are very experienced. This not only defeats our purposes, but is also slower and more difficult than raising sufficient investment capital for a bank.

   Furthermore, one of our organizers knows from personal experience with NCUA regulators that they can be brutally intransigent in forcing small credit unions to merge into larger ones. She advises that we would not be safe from this preemption unless we started out with about 2,000 members. This is many more than we need for a federally chartered stock bank startup.

5. Strategy #5: federally-chartered bank with a nonprofit holding company. Federal regulations require only $2 million in startup capital. Although in practice the regulators like to see at least $5 million, a senior analyst at the Office of Thrift Supervision (OTS) says they would consider a plan with only $2 million if the business plan is strong. The nonprofit holding company could manage the market for all the bank's stock, borrowing from investors and buying the corresponding amount of stock, thereby regulating the price and avoiding unnecessary regulation by the SEC.

   Unfortunately, our plan to pay a fixed interest rate on stock (rather than dividends) won't fly with the regulators, so we are liable for hefty federal and state taxes on the bank's net income before giving a modest return to investors (who then pay taxes on it again).

   Furthermore, the OTS tells us that a holding company must have its own assets. It may not borrow the money it intends to use to finance the bank.

6. Final Strategy: state chartered stock savings bank. The state charter process is easier and less expensive than the federal, and we intend that eventually, each state and each country will have its own Common Good Bank organization.