In Brief

This opinion piece by Chicago Fed economist Anna Paulson was published in the June 23, 2006 issue of American Banker.

Last Updated: 06/26/06

News Release

Chicago Fed Economist 'Op-ed' Published in American Banker

The following opinion piece by Chicago Fed economist Anna Paulson was featured in the 'Viewpoint' section of the June 23, 2006 issue of American Banker. Paulson co-wrote the piece with Audrey Singer, Immigration Fellow at the Brookings Institution Metropolitan Policy Program.

Bringing Legal Immigrants into Mainstream

The congressional debate over immigration reform may go on for quite a while, given the latest stumbling block.

One piece of the Senate bill proposes that illegal immigrants who adjust their legal status pay back taxes and other fees. But the Constitution allows only the House to create bills that include any revenue-raising, and it is entitled to block any legislation by the Senate that includes such measures.

While the legislation may be held up, the national conversation will continue. Echoing the debate raging in the halls of Congress, the public debate is centered on what to do about the large group of immigrants living here illegally - currently estimated to be about 30% of all foreign-born residents.

But let's not forget that 70% of immigrants - nearly 25 million men, women, and children - live, work, and go to school in the United States legally. The economic impact of immigration on our society will be shaped far more by what happens to these immigrants than how we come to terms with those who are here illegally.

No matter what Congress decides, we need to focus on the long term and agree that making it easier for immigrants to integrate economically and socially will decrease the costs of immigration and increase the benefits.

Making it easier for immigrants to use mainstream financial institutions such as banks and credit unions is a step in the right direction. Studies show that broad financial access is one important indicator of a thriving community; income, homeownership, and employment are higher, and crime rates are lower, in metropolitan areas where a greater proportion of the population has a bank account.

However, immigrants are less likely to have checking or savings accounts and less likely to own a home or invest in the stock market than those born here. This is true even after socio-economic characteristics like education and income are taken into account.

That is because many immigrants arrive with little or no banking experience, as a result of weak political, legal, and economic institutions in their countries of origin that discourage ordinary citizens from saving and investing. In many developing countries, banks are only for the rich, and inflation, fraud, and financial crises often erode account values.

We have the most sophisticated financial system in the world, but many immigrants will not take full advantage of it. Make your way down a commercial corridor in an immigrant neighborhood, and you will see where working-class immigrants do their banking - at businesses that offer check cashing, payday loans, and international money transfers. These activities generate more than $4 billion of fees each year.

These fees, together with the opportunity to reach new customers, have not gone unnoticed by banks and credit unions. Across the country, banks large and small are working hard to attract immigrants. In addition to offering remittance products and services, banks are grappling with how to win the trust of these potential customers.

As the immigrant population continues to grow, there are many more opportunities to link them to the mainstream financial system, so that they can better contribute to a healthy U.S. economy. These include:

Making services they want available at banks. Working immigrants are paid every week or every other week, creating many opportunities for a bank that offers check-cashing services to interact with immigrants and help them "graduate" to a checking or savings account.

Targeting neighborhoods. Those with high concentrations of immigrants often have particularly low rates of bank account ownership. Helping a small number of immigrants open an account in one of these neighborhoods can have a high payoff by increasing the chance that others will learn about the benefits of banking from a trusted source, an immigrant neighbor.

Leveraging immigrant employment. The high rate of immigrants' participation in the labor force presents an opportunity for employers to partner with financial institutions to provide financial education and access to banking services.

Reaching out to the second generation. The vast majority of the children of immigrants are U.S. citizens, and they are one of the fastest-growing segments of the population. Because they often mimic the financial behavior of their parents, the second generation is at risk of growing up with low rates of bank account usage. By partnering with schools to open student-run branches in high schools, banks can make progress in reaching potential customers, while providing education to the next generation of Americans.

Although the current debate is divisive, on this issue banks, law enforcement officials, employers, schools, immigrant advocates, and regulators find common ground in the desire to help immigrants build relationships with mainstream financial institutions.

We cannot afford to wait for Congress to finish its business in order to get serious about making it easier for immigrants to achieve economic integration.

The extent to which immigrants save money, buy homes, access credit, start businesses, and enjoy the consumer protections offered by banks and credit unions is an important indicator of how successful we, as a society, have been in profiting from the ambition and hopes that bring so many immigrants to the United States.

Ms. Paulson is a senior economist at the Federal Reserve Bank of Chicago. Ms. Singer is an immigration fellow at The Brookings Institution Metropolitan Policy Program in Washington.