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Umbrella Banking Agreements

Griff Behncke

There's a little known development in the mitigation banking industry that, to all but a few insiders, has flown under the radar during its recent existence: umbrella banking. Known by several names—umbrella banking, umbrella agreements, umbrella instruments—people often mention the tool, but few can say exactly what it is. The Ecosystem Marketplace provides clarification.

There's a little known development in the mitigation banking industry that, to all but a few insiders, has flown under the radar during its recent existence: umbrella banking. Known by several names—umbrella banking, umbrella agreements, umbrella instruments—people often mention the tool, but few can say exactly what it is. The Ecosystem Marketplace provides clarification. Of course it was an Englishman who wrote the history of the umbrella. In his book, Umbrellas and their History, William Sangster wondered how hardly an Englishman had heard of an umbrella in the early 1800s. Will future mitigation bankers one day wonder the same thing about our current understanding of an instrument called umbrella banking? In 1995, when the federal regulatory agencies issued their policy guidance on mitigation banks, they made one mention of an "umbrella" instrument. It was buried in the section detailing the prospectus information for a mitigation bank, and gave few details. (Not familiar with mitigation banking? See: Banking on Conservation: Species and Wetland Banking in the US [pdf].) Over a decade later, "umbrella banking is still undefined," according to Jessica Wilkinson of the Environmental Law Institute, who co-authored the Institute's 2005 Status Report on Compensatory Mitigation in the United States. Nonetheless, a number of public and private umbrella agreements have popped up in enough locations to draw interest from states throughout the country.

A Definition

Essentially, an umbrella banking agreement is the bundling of multiple mitigation banks into one agreement in order to streamline the regulatory approval process. The idea is to eliminate steps and involve fewer resources in approving banks in the same area. "The concept is great," says George Kelly, founder of Environmental Banc & Exchange, which created the Neu-Con Umbrella Mitigation Bank in North Carolina. But the application, says Kelly, is still rough. Under the current set up, an interagency Mitigation Banking Review Team reviews one document establishing the parameters of the umbrella agreement up front and then subsequent documents each time a new bank is added to the umbrella. "Resource agencies [i.e. the Army Corps of Engineers and the EPA] are not enamored with umbrella banking because the sites are not yet identified," Kelly explains. The MBRT would rather deal with each bank at the time it is created rather than prepare paperwork for banks that do not yet exist.

The Upside

Despite some reticence on the part of regulators to approve umbrella banks, umbrella agreements do have some economic and environmental advantages for bankers. By outlining the financial framework for credit production and release for a series of banks upfront, umbrella agreements allow bankers to save time and money. According to Kelly, the umbrella construct allowed EBX "to choose sites that were more appropriate," thus limiting the likelihood of rejection and the added time that the re-approval process would require. The second big advantage of umbrella banks is that they can advance a more coherent approach to watershed conservation by including wetland, stream and endangered species habitat restoration under the same instrument. NOAA Fisheries, for instance, wants to create an umbrella bank for its species-banking program in the California Delta; individual sites would function under the larger banking system, with each site tailoring restoration to the intended species. The Delta's complex flooding system requires constant maintenance. Ideally, according to the Corps' Mike Dietl, there would be multiple banks up and down the river. This combination of private and public agencies, partnerships, and mitigation options would possibly reduce regulatory hurdles for projects that require mitigation, while improving conservation efforts throughout the Delta.

The Downside

The potential economic and environmental advantages of umbrella banks are enticing, but their greatest disadvantage for the banking industry also lies in their raison d'etre, their sheer size. This manifests itself in two ways. First, umbrella banking agreements, because they often link sites spread across a state and include both wetland and stream restoration projects, generally increase the number regulatory agencies involved in the approval process. The second disadvantage to agreements of such size is that there simply isn't much demand at that end of the market. According to the aforementioned ELI report, the number of approved, active umbrella banking agreements declined from 40 in 2001 to 33 in 2005. None of the regulations changed during those four years to precipitate a decline. In fact, during the same time, the number of approved, active mitigation banks increased by 85%. Based on these numbers, Wilkerson says she thinks public sponsors are probably the instrument's greatest consumer. Approximately two-thirds of umbrella banks are sponsored by public agencies, compared to less than a quarter for mitigation banks. "It's a good mechanism for agencies that have foreseeable future impacts," Wilkerson explains.

Connecting the DOTs

One state agency that often knows its long term needs is the Department of Transportation (DOT). Currently, seven state DOTs have active or pending umbrella banking agreements. In Pennsylvania, the DOT and other state agencies have been developing mitigation banks since the 1980s. The practice slowly grew, and when a large transportation project required compensatory mitigation for unavoidable wetland impacts, PennDOT formed an umbrella banking agreement. Dave Goerman, a biologist with the Pennsylvania Department of Environmental Protection, one of the permitting agencies involved with the process, seemed pleased with the PennDOT agreement. "The primary emphasis is always on avoiding impacts, but where that is not possible, as was the case here, umbrella banking agreements are a viable alternative solution." The PennDOT example also explains why these agreements most often have public sponsors. Despite the large physical size of Pennsylvania, there often aren't as many compensatory mitigation requirements as in states with large coastal areas such as Virginia or the Carolinas. Therefore, no robust private marketplace has developed in the state to support mitigation banking. But that doesn't mean there isn't interest. Private bankers have approached the state on numerous occasions, according to Goerman, but found the service areas too small to pursue. Interestingly, one spur to the growth of umbrella banking may come from the regulatory agencies. This March's policy guidelines from the Corps and the EPA proposed, "equivalent standards for all forms of compensatory mitigation." To accomplish this, the in-lieu fee program sponsors would have to significantly modify their programs. Both George Kelly and Jessica Wilkinson wonder if this would mean the end of in-lieu fee programs; and both guessed that umbrella banking agreements would grow to fill the potential vacuum.

What's Next?

For now, Kelly says EBX is open to more umbrella banking agreements, if applicable conditions exist. In particular, he says he sees a future for this instrument in large, rural states. In these areas, due to only periodic mitigation needs, the private banking community has been slow to develop, so umbrella banking agreements may be a good, if publicly sponsored, solution. When asked if PennDOT's experience might make the state more likely to consider other umbrella banking agreements, Goerman says, "I'm not sure. Projects of such a size don't occur very often," before wondering aloud if umbrella banking agreements might be appropriate for pipeline projects or abandoned mines. Perhaps thinking along similar lines, private companies in states without umbrella banking agreements are paying attention to programs like that at PennDOT. Tom Cannon of Wildlands Inc., for instance, says his company is exploring options in umbrella banking in California. Whether or not umbrella banking really takes off, then, has yet to be determined. Maybe one day, someone will write the history of umbrella banking agreements, and wonder why so few bankers knew about the instrument. Or maybe not. Griff Behncke is based in San Francisco. He may be reached at gbehncke@gmail.com. First published: September 7, 2006 Please see our Reprint Guidelines for details on republishing our articles.

Please see our Reprint Guidelines for details on republishing our articles.