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I am intrigued by the attention community banks are attracting from state legislators. In New Mexico, a bill was introduced this session to move the state’s general fund depository account to community banks. The House passed the bill and a committee in the Senate passed it, but the session ran out before the full Senate took it up for consideration.

Then, in Illinois, a resolution was proposed encouraging municipalities and individuals to move their money to community banks. Read it for yourself here.

And last week, Minnesota Rep. Tim Mahoney (DFL-St. Paul) introduced a bill to give community financial institutions preference over non-resident financial institutions for state deposit accounts. Read the bill here.

While community bank advocates can appreciate these kinds of efforts, I think they miss the mark. In most healthy community banks, liquidity is not the problem; it’s loan demand. FDIC numbers for year-end 2009 show that while lending in many areas was generally down, deposits were generally up. As I have said before, what banks really need is relief from accounting rules which require them to immediately write down the lost value of impaired loans; give them five or 10 years to write those losses off and you will preserve a lot of bank capital, giving them much more strength to participate in the economy.

In Minnesota, this issue of who should be a depository for state funds has been debated before. It usually comes down to interest rates. Taxpayers want the greatest return for their money so public treasurers have generally selected depositories that pay the highest rates, even if those depositories are located in other states. In a low interest rate environment, however, you can make a case that those funds should be deposited with in-state institutions. Whether those institutions should be “community” institutions is still another debate.

Mahoney is a respected, 6th-term member of the Minnesota House, but I don’t see his bill gaining any traction. Wells Fargo and U.S. Bank have an enormous presence in Minnesota; they provide thousands of jobs and donate millions of dollars to charity. I can’t imagine a majority of legislators voting to exclude them from the possibility of holding state funds.

Actually, when you read the bill and its accompanying definitions, it isn’t clear whether banks such as Wells Fargo and U.S. Bank would be excluded. The bill only defines the term “community bank” as a bank or credit union in Minnesota. I am not sure how the proposed legislation applies to Wells Fargo, which is headquartered in San Francisco, chartered in South Dakota but has a major presence in Minnesota; or U.S. Bank, which has its headquarters here but its charter in Ohio.

The Minnesota legislature, like most state legislatures, is pre-occupied this session with budget issues. It will be interested to see if it finds time to deal with Mahoney’s bill. The Minnesota legislature, by law, must adjourn this year by May 17.