Banker Hypocrisy And Municipal Deposits
One of the first arguments the banks regurgitate in opposition to municipal deposit legislation is that tax dollars shouldn’t go to institutions that don’t pay taxes. First, we all know that credit unions do pay taxes; but, more importantly for this post, banks have never quite explained why their for-profit tax status automatically makes them better protectors of the public Fisc than credit unions.
That question is worth asking the Legislature next year in light of the New York Bankers Association successful efforts to keep New York City from scrutinizing the community investment performance of banks holding the City’s deposits. On Monday, a federal court ruled that a NYC ordinance mandating that banks holding or wishing to hold municipal deposits be subject to a local review of their investment activities was preempted by federal law and could not be enforced. (The New York Bankers Association, Inc., v. The City of New York, 15 Civ. 4001).
The Responsible Banking Act had its roots in the worst days of the Great Recession. NYC council members grew frustrated by the juxtaposition of mounting foreclosures and shoddy banking practices even as billions of dollars of public money was being deposited into banks for safe keeping. The bill established an advisory board that would report on how well banks were doing meeting financial benchmarks. The report would be used in evaluating institutions wishing to hold municipal deposits from the City.
To be fair, the information the advisory board was seeking was much more extensive than what needed to be supplied under the Community Reinvestment Act. For example, the banks were to be evaluated on how they addressed serious material and health and safety deficiencies in the maintenance and condition of their foreclosed property; developed and offered financial services needed by low and moderate income individuals throughout the city, and how much funding they provided for affordable housing.
Mayor Bloomberg hated the bill so much that he vetoed it and refused to appoint members to the advisory board after his veto was overridden. When Mayor DeBlasio was elected, he embraced the idea and the advisory board came to life. It was time to call in the lawyers.
In arguing against the legislation, the Bankers Association argued that both Federal and State law preempted the ordinance. They pointed out that the Community Reinvestment Act was intended to establish the framework for nationally chartered banks to be assessed for their community works. On the state level the Banking Law gave the Department of Financial Services broad powers of regulation to control and police the banking institutions under their supervision.
In response, the City argued that it was not regulating bank activity; but simply carrying out a proprietary function. It should be able to establish its own standards for deciding who gets the city’s money the same way it gets to decide what companies are awarded city contracts. It also argued that the activities undertaken by the Advisory Board were “purely informational.” Its findings were not binding on anybody deciding where the money should be placed.
Southern District Judge Katherine Polk Failla ruled in favor of every major issue raised in opposition to the bill concluding that “the RBA’s very structure secures compliance through public shaming of banks and/or threatening to withdraw deposits from banks that do not provide information to the CIAB. The Court sees no reason why regulation through coercive power, rather than by explicit demand or stricture, should be immune from preemption scrutiny.”
While the lawsuit may have solved the immediate legal problem facing banks it doesn’t change the fact that banks didn’t do enough in return for their public bailout. Nor does it change the fact that there are local leaders who feel that banks still don’t do enough for the communities in which they operate. Giving localities the ability to work with credit unions. which by their very structure invest in the communities in which they operate, would be a perfectly legal way of ending the banker monopoly and perhaps make these banks more responsive to local concerns.
Epilogue A Failure To communicate?
NCUA officials have fallen into the habit lately of making bold statements one day that have to be clarified the next. First, we had Chairman Matz’s clarification of her Congressional testimony that credit union CEOs aren’t representing their members when they advocate for budget hearings. Yesterday NCUA felt the need to clarify to the CU Times its position on how much information the public is entitled to about the Overhead Transfer Rate methodology following the release of a letter from its General Counsel to NASCUS on that very subject(See yesterday’s blog). I think it’s fair to say that NCUA is suffering from some communication problems.
The article quotes Board renegade Mark McWatters, who is emerging as a much needed voice of reason, as saying that “The agency will make the final determination as to the calculation of the OTR and I see no harm in subjecting the agency’s OTR methodology to public comment as a proposed rule under the APA,” Here is a link