Some banks are discovering that buying bonds issued by municipalities is a cheaper and less complicated way of extending credit to local governments than the more common method of writing a letter of credit or standby bond-purchase agreement. While no measure of this type of financing exists because municipalities do not have to disclose when a bank takes on its bonds, sources say it is definitely growing.

"Some local governments looking to tap the market are finding that things have changed since they last sold bonds," said Bill Rhodes, a partner in Ballard Spahr's public finance practice. "Some of these banks are coming to them and saying, 'We're willing to buy and hold your bonds.' … Instead of issuing a three-year letter of credit, they're just buying and holding the bonds for three years."