Responsible Banking Ordinances Are Reforming Municipal Banking -- One City at a Time
The day that the Northridge earthquake shook our city into chaos in 1994, I went into a small grocery store on San Fernando Road to buy water. The shopkeeper, thinking he could earn a few extra bucks in the middle of a crisis, charged me $20 for that gallon of water. Not only have I not been back to that store since, I also make sure my friends and family know my story before they decide if they are going to shop there. After all, if a store decides to gouge customers during a crisis, people should know about it so they can decide whether or not they want to reward the shopkeeper for his behavior.
This same principle -- holistically considering how a business treats it customers -- is helping to reform the way cities around the nation interact with big banks. Local governments, both big and small, are debating and approving "responsible banking ordinances" -- proposals to hold banks accountable for how they treat people living in each city. Though the details of each proposal vary, the core tenet of each ordinance is simple: in order to reward good behavior by banks and avoid making the same mistakes over and over again, we need to improve the availability of information that banks provide cities when we consider depositing taxpayer dollars and awarding contracts for new financial services.
Responsible banking ordinances have recently been approved or are being considered in cities including New York, Seattle, Berkeley, Boston, Portland, Kansas City and San Francisco (responsible banking laws have been on the books in Cleveland and Philadelphia for years). The second-largest city in the nation could be next, as the Los Angeles City Council is currently deciding how the responsible banking ordinance that I introduced in 2009, and which was unanimously approved by the council in 2010, will be put into practice. The establishment of a strong responsible banking ordinance in Los Angeles would help continue the nationwide progress toward increased social responsibility in how banks operate.
The Los Angeles responsible banking ordinance will create a public, transparent process for gathering information about each bank's history of service in the community. The City of Los Angeles has a $30 billion banking portfolio, and the city's decision-makers are charged with selecting the financial institutions that will be allowed to profit from conducting transactions -- everything from managing the city's payroll services to underwriting our bond sales -- on behalf of our taxpayers. The responsible banking ordinance would collect information about how many branches each bank operates in underserved communities in Los Angeles, how many times each bank has worked with homeowners to prevent foreclosures, and how many small-business loans each bank gave to people in the city. Once that information is gathered, banks would be rated based on their social responsibility, and those rankings would be available for councilmembers to consider when banks bid on future city business. Most importantly, this process would be public, so taxpayers can see how banks are using their money.
As other cities around the country with responsible banking ordinances have found, holding banks accountable for socially responsible actions has helped create a "race to the top", where banks compete with each other to invest more in communities so they can have a better chance of getting the city's business in the future. Cleveland, Ohio, for example, has had a neighborhood reinvestment ordinance in place for 20 years, allowing that city to leverage up to three times the reinvestment dollars as similar Midwestern cities. Cleveland has negotiated nearly $10 billion in community lending agreements as a direct result of its ordinance.
Progress toward banking responsibility is not coming without a fight. Big banks have been visiting city council offices in Los Angeles in recent weeks, using the same undue influence in our political system that the Occupy movement has been protesting around the country to try to lobby their way out of accountability. During their lobbying visits, bank representatives have argued that their investment divisions should not be held accountable for how their commercial banking divisions act in Los Angeles. This large loophole would provide the city no benefit and only allows banks to dodge responsibility by claiming that "their right hand doesn't know what the left hand is doing."
If the logic behind this loophole seems confusing to you, you are not alone. In a recent Wall Street Journalarticle, one Merrill Lynch wealth-management adviser said that he hopes to cleave his company from Bank of America "...because we're guilty by association" for how the company acts. I agree -- the responsible banking ordinance will be much more effective in creating incentives for banks to invest in Los Angeles if the scorecard allows us to look holistically at a bank's reinvestment in the city.
As I learned when a greedy shopkeeper lost my future business by trying to rip me off 1994, good information can lead to better decisions. Los Angeles needs complete information to be able to make the best decisions about who to award our business to. The mayor, council and taxpayers need access to information about a bank's lending activity -- the good and the bad -- so we can make better decisions about who we give our business to in the future.
There is a good reason that responsible banking ordinances are being approved across the country -- banking responsibly is the fiscally responsible thing to do.