The US banking industry is the most regulated industry in the world. Besides the well-known litany of laws and the alphabet soup of regulations, there are others that we do not hear about.
Article 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 is one of the most secret and least understood laws.
It is generally considered good public policy to support loan production bureaus that increase the flow of credit. The reverse is true for deposit-producing offices when a bank withdraws the necessary loanable funds from a host state to lend in its home state.
Free market capitalists argue that capital should go to its highest return, but socially responsible capitalists like myself argue that money should go to its highest and best use. Capitalism with a corporate conscience considers the social impact of capital, especially on low and moderate income (LMI) people and communities, including those of color.
When interstate banks divert the savings of seniors in deposit-rich states like Florida to lend in their home states, they rob the host state of the capital needed for affordable housing and small businesses. This is what happened in my hometown of Miami, often seen as the zero point of the affordable housing crisis in the country. The situation here is even worse than in San Francisco or New York, where house prices are also high, but incomes are much higher.
The problem started 30 years ago when the politically connected First Union (a successor to Wells Fargo), bought Miami’s largest bank, Southeast, at a selling price of $ 81 million. Many analysts, including myself, felt that the Southeast could have been saved.
I then coined the term “Banking colony” to refer to states that were colonized as sources of deposits to be lent to other states. With the subsequent loss of Barnett Bank to NationsBank (now Bank of America)Florida quickly became the world’s largest banking colony based on majority control of deposits by foreign banks.
My 1993 Community Reinvestment Act Book expressed concern over what I have called out-of-state “carpet banks” buying up our biggest banks and savings banks in Florida and lending money elsewhere, which again has contributed to our affordable housing problem. Florida’s banking settlement and affordable housing problems continued, with eight of our 10 largest retail banks, holding two-thirds of Florida’s deposits, now based elsewhere.
A recent analysis of our affordable housing problem in Miami-Dade County concluded that the region housing affordability crisis “Is so serious that it is now a threat to the region as much as the rise in sea level.” Another analysis put the level of economic inequality in South Florida on a par with Colombia and just behind New York.
The COVID-19 pandemic has exacerbated the poor affordable housing situation with the relocation of wealthy residents from Northeastern to South Florida. Every ‘percentage’ earning $ 500,000 or more and buying a luxury condo or mansion on the water requires a handful of LMI people to clean their homes, do laundry, do Amazon deliveries, help take care of their pets. companionship and their children, etc.
Many of these service workers, often minorities, have been devastated by the pandemic and the recession. So I proposed a one-time surcharge of 1% on affordable housing of the 1% of non-residents purchasing Florida real estate valued at $ 1 million or more.
Life in a banking colony is also a problem for small businesses. A recent analysis Florida Paycheck Protection Program Loans has shown that our two largest banking colonizers, Bank of America and Wells Fargo, with a combined one-third market share, have a very poor PPP loan job. Citibank was even worse, and Chase was the only major bank nearby doing a proper job.
So what has public policy done about carpet banks and banking colonies?
The short answer is little or nothing. Drawing inspiration from the 1977 CRA, Section 109 recognized the importance of reinvesting depots locally by monitoring depot production offices, with violators potentially being required to shut them down.
However, public companies are required to report a failing overall CRA rating as a material event. This is not the case for violations of section 109.
Section 109 is toothless because lobbyists for the big banks tricked Congress into keeping the breaches confidential. It was exactly the same thing they did with the RCAF, until 1990 when Congress released ARC ratings and performance reviews in response to S&L bailout.
Lobbyists for the big banks have not only ensured that Section 109 is free from any regulatory burden, but have also exempted credit cards and other limited and special-purpose banks that siphon billions from our big cities, but also little or nothing reinvest in it. Lobbyists have also insisted on an almost foolproof two-step compliance test. First, a loan-to-deposit ratio of at least half that of host state banks and, failing that, a second subjective test to show that a bank was “reasonably helping to meet the credit needs of the host state. community ”.
Mid-year statewide filing data is available from Federal Deposit Insurance Corp., but not the loan data, which needs to be pieced together from various government sources, including reports from state-owned companies. The best indication, however, of a possible Section 109 violation is a statewide failure to “need improvement” or “substantial non-compliance” on a bank’s most recent rating. -States. Public assessment of CRA performance.
Good public policy requires that section 109 assessments, conducted every three or four years concurrent with CRA reviews, be made public. This would not only raise awareness of an interstate bank’s commitment to its host state, but hopefully encourage banks to improve local lending. Now that RCAF reform is back in the spotlight, this should be a top priority.
More importantly is the reestablishment of the Office of the Comptroller of the Currency 5% Deposit Reinvestment Rule for internet banks and credit cards, our modern carpet buying banks, to ensure that they proportionately reinvest their deposits in the communities they originate from. None of these proposals, however, is as extreme as the recent “treadmill bank tax” in Washington state, but it suggests that this is a priority issue for the industry.