Linked Deposits Law and Legal Definition

Some states have linked deposit programs to encourage lending to historically underutilized businesses, such as agricultural concerns, housing projects, child care providers, non-profit corporations, and/or small businesses located in an development zone by providing lenders and borrowers a lower cost of capital. Lenders can lend money those who meet the necessary requirements and have the capital to fund the loan replaced by deposits of state funds. The lender charges the qualified borrower less than the normal rate of interest and the lender is reimbursed for this loss of interest by receiving a reduction in interest charged on a deposit in the amount of the loan.

Some pension funds have made agreements with public and private lenders to create linked deposit programs with community development objectives. The pension funds agree to make long-term investments at their normal (but relatively conservative) rates, and the investments are linked to certain loans made at rates two or three percentage points higher.

The following is an example of a state statute involving linked deposits:

"The legislative purpose and intent of this chapter is to create a plan for emergency interim deposits as herein defined and for linked deposits in this state in which the State Treasurer is authorized to deposit or invest a portion of the state's portfolio of investments with participating lending institutions in relatively low-yielding deposit accounts, certificates of deposit, or other authorized investments, where the institutions have made commitments to make available lower cost loans on the basis of these linked deposits for qualifying private farm and small business borrowers. The further legislative intent is that the lower cost loans will result in a significant contribution to the economic and agricultural growth and development of the state, and will assist in maintaining or improving business and agricultural profitability as well as preserving and creating jobs for Alabama citizens."