GET-Biden infrastucture 1300543199

As president Joe Biden's $1.7tn infrastructure bill is stuck in Congress, what do US banks stand to win – and lose – once it is finally approved? 

US president Joe Biden is making infrastructure spending a government priority, as his $1.7tn American Jobs Plan demonstrates.

According to economists, investment in repairing and modernising physical infrastructure (such as roads, bridges, and water and energy systems) and human capital spending (or instance in education and training) have all declined continuously since the 1960s, to reach only between 1% and 2% of US gross domestic product (GDP) in recent years.   

Moreover, an American Society of Civil Engineers report earlier in 2021 says the consequences of not closing the infrastructure funding gap of more than $2tn by 2025 would lead to a GDP reduction of nearly $4tn.

In a breakthrough in a two-track approach to passing his major infrastructure package, President Biden endorsed a deal with a bipartisan group of senators on June 24 on new investments on roads, broadband internet and other projects. He maintained, however, that the deal can only move forward in conjunction with a much larger package of spending and tax increases that Democrats are trying to push through Congress unilaterally, against opposition from Republicans.

Once it is approved by Congress, what will the American Jobs Plan mean for banking? Financial analysts say that there could be new lending and banking services opportunities linked to the Biden administration’s commitments both to tackle climate change and reduce US inequalities as part of the infrastructure package. 

Major projects planned

Big ticket proposals in the plan reflect these priorities. For example, $174bn is earmarked for the construction of 500,000 electric vehicle charging stations by 2030, and there are also plans to connect more wind and solar generation plants to big city transmission lines. There is a multibillion-dollar proposal to extend broadband to ensure internet connectivity includes low-income and poor rural households – many of which lacked this technology during the pandemic.

Because Republicans have insisted taxes are off the table, it has proved really hard to get support for the bill

Ed Mills, Raymond James

Additionally, $400bn in public financing is contemplated to pay for home-care for the elderly and the disabled — a measure that government officials say would also help health workers, who are mainly women of colour and on low wages, to earn more. 

Further, there is the important general benefit that economists envisage of infrastructure spending having a significant multiplier effect — meaning that the gains in GDP growth, productivity and jobs are greater than the amount spent. Some economists and financial analysts believe the economic growth gains of the 2022-30 Biden infrastructure investment plan could end up compensating for, or at least mitigating, the principal objection to it.

To finance the plan, the government has proposed rolling back some tax breaks signed into law by former president Donald Trump in 2017, increasing corporate tax rates to 28% from 21%. Furthermore, if the administration’s American Families Plan — which proposes the largest US government-funded social safety net and child anti-poverty expansion in 90 years — is also submitted to Congress, alongside the infrastructure proposal, rates on individuals’ incomes of more than $400,000, and capital gains, will also be raised for the next 15 years.

Tax hurdle

The redistributive, or progressive, tax approach — a Biden 2020 campaign pledge — has become the biggest stumbling block in Congress in efforts to reach bipartisan support for the plan. At the time of writing, only a very few items in the Biden bill, such as research and development investments and some transport proposals, have the backing of more than 60 votes in the Senate, where ruling Democrats only have a razor-thin simple majority.

Ed Mills, a policy analyst at Raymond James, a Florida-based financial services company, says: “Because Republicans have insisted taxes are off the table in negotiations with the White House, it has proved really hard to get support for most of the bill on a bipartisan basis.”

Instead, Mr Mills and other congressional experts believe the most likely course is that the government will try to pass its 2022 budgetary resolutions over the summer, ahead of passing Mr Biden’s full infrastructure and anti-poverty proposals. This would happen in a special process that does not require the opposition party’s support. “It’s the path of least resistance,” says Mr Mills.

Impact on banks

Fresh on the heels of an approval, financing opportunities will open up for US lenders.

Aaron Klein, an economic studies fellow at the Brookings Institution, says that “to the extent new infrastructure money is pumped out of Washington for states and local governments, this usually has to be matched by them, and the way they do this is by borrowing from financial institutions”.

Ed Mills low res

Ed Mills, Raymond James

US banks, both national and regional, would help state and local governments to issue bonds and underwrite those bonds on local and municipal debt markets. The US is unique in this respect in having the largest municipal bond market in the world, with such bonds amounting to a total of $3.9tn at the end of 2020, according to the Securities Industry and Financial Markets Association.

Meanwhile, in a parallel development that could reinforce the infrastructure bill’s equity objectives, community development financial institutions (CDFIs) and minority depository institutions (MDIs) have received major infusions of funds. CDFIs are organisations that provide financial services to low-income communities and communities where there are significant unmet capital and financial services needs, while MDIs are banks and credit unions either owned or directed primarily by minorities.

For instance, Congress recently earmarked a total of $3bn for a new rapid response programme administered by the US Treasury that provides grants to CDFIs; and the Biden administration’s pandemic relief stimulus bill in February apportioned a further $10bn for a state small business credit initiative, which provides funds to CDFIs and other local institutions in programmes that states’ oversee.  

Private sector support

There has also been an unprecedented amount of support provided by the private sector, especially by traditional banks, to MDIs and CDFIs in the past year. One case is JPMorgan Chase, which announced early in 2021 that it would provide more than $300m in CDFI financing over five years. 

Edward Sivak, vice-president for policy at Hope Credit Union, a black-owned MDI based in Jackson, Mississippi, says that they are at an inflection point. “What we are witnessing now is a moment where CDFIs and MDIs are finally able to align their resources to their ability and the needs of communities historically overlooked by traditional banks,” says Mr Sivak, who is also a spokesperson for Communities Unlimited, a CDFI that focuses on providing financial services to rural communities in the south of the US.

Meanwhile, the success of infrastructure investing in the US depends a great deal on how wisely and efficiently states deploy the funds, which can vary from state to state. Having strong and better capitalised CDFIs and MDIs would be an advantage in ensuring that investments flow into minority and rural communities as much as possible.  

Mr Sivak adds that his MDI would like to deploy any funds it may receive to provide loans to launch small businesses in childcare, elderly care and pre-school centres. All of these are critical sources of employment for many people. “We would like to use the funds for what MDIs are already good at, which is making markets where none existed before or in hard-to-serve places,” he says. 

Pushback on energy reform

Meanwhile Paul Merski, executive vice-president at the Independent Community Bankers of America, believes the impact of the Biden bill on the country’s 4500 small community banks — whose numbers have declined sharply in recent years, especially in rural areas — will be mixed.

To the extent that infrastructure spending has a multiplier effect on the vitality of smaller markets — putting more money into people’s pockets and leading to more spending and more businesses — he believes that this will benefit community banks, as their viability rests on the strength of the local economy.

However, as investing in infrastructure becomes synonymous with mitigating and adapting to climate change, there will be community bank winners and losers, Mr Merski adds. In oil-producing states such Louisiana and Texas, as well as in natural gas fracking states in the Midwest and in Pennsylvania, community banks could be hard hit by the transition to a low carbon economy. The Biden infrastructure package proposes substantial job retraining and reallocation support for workers in existing fossil-fuel industries, but all of this will take time to accomplish and there will be push back by some states, he says. 

The US infrastructure bill is largely good news for banking — but it will not be immune to the immediate challenges of transitioning to a more sustainable economy.


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