New York City’s local legislature voted Tuesday to introduce a responsible banking law to its books, forcing banks that wish to do business with City Hall to demonstrate their commitment to investing in New York. Los Angeles’s city council did the same on Tuesday. This isn’t terribly uncommon for cities to pass legislation of this nature, but it is certainly notable when the Capitol of Capital does so, especially considering its billionaire mayor made his money in the financial services industry.
Mayor Bloomberg isn’t at all happy with the rule, which passed 44-4, and which would make banks disclose both “investments and business practices in neighborhoods,” as well as creating a “community-investment advisory board,” according to Bloomberg.
In fact, the mayor plans on vetoing the measure. The New York Times reported that Mayor Bloomberg thinks there’s already enough regulatory burdens on banks:
In a brief interview Friday…Mr. Bloomberg said he strongly opposed new restrictions on where the city could put its deposits, which can be as much as $7 billion. “You would think, between the federal government and the state government, we’d have enough bank regulations,” Mr. Bloomberg said. “I don’t know why the City Council thinks that they have the expertise, or can really add anything other than just adding costs to banks to try to comply.”
Many municipalities have introduced similar legislation following the foreclosure crisis, the logic being simple: if banks’ strategies are damaging our community and tax base, why should City Hall do business with them? It can be interpreted as punitive, on the one hand, but city legislatures likely see it as a way of encouraging banks to behave more responsibly. After all, helping city hall do its payroll isn’t the only gig in town.
Cities as far left as Berkeley, Calif., to as stalwart as Cleveland and Pittsburgh have introduced similar legislation. Unlike New York, however, none of these cities are home to the bulk of the financial services industry. When thousands of homes in Cleveland are foreclosed on by Citibank or Chase, Cleveland’s loss is effectively New York’s gain. A New York bank can auction these homes off at the Cuyahoga county courthouse, selling directly to another New York-based bank or home flipper, and Cleveland loses again. This is why it makes sense for Cleveland to have a responsible banking initiative, even if it hasn’t protected the city from Wall Street’s whims.
For New York to follow Cleveland and Berkeley’s lead is interesting because the city is packed with financial services workers who get rich off of Wall Street’s business — both the good and the bad. But of course New York City is hardly a small place, nor is it an even playing field — the West Village and East New York might only be an hour apart on the subway, but the differences are likely vaster than they were in times past. In fact, East New York was recently the site of an Occupy protest wherein Occupy East New York reclaimed a foreclosed home for a homeless family.
Banks might point out that the Community Reinvestment Act of 1977 already forces banks to behave responsibly on a local level — they’d be both wrong and right. The CRA, which was created to help undo the racist FHA-approved practice of “redlining,” demands that banks must lend to poorer customers within their footprints; in cities where they have branches, they must lend to people from poor areas in the city. Some commentators on the right frequently place blame on CRA for causing the foreclosure crisis, and the argument goes like this: CRA forced banks to lend to people who might not otherwise quality, and this is what ultimately led to the crisis. This likely overestimates the efficacy of CRA, which can only be enforced when a bank wishes to acquire or merge with another bank or apply for more bank branches. It’s not a particularly burdensome regulation, if you consider how potentially rare opportunities for enforcement are — the FDIC cannot simply shut a bank down for shirking its CRA duties.
And similarly, responsible banking acts are emblematic of how difficult it is for localities to sink their claws into footloose capital. Handling City Hall’s money likely isn’t likely to be the biggest contract a bank can land in New York. But it’s a worthwhile symbolic victory for city councils that are otherwise helpless in the face of a complex and interconnected global financial system, and frequently home to pointless political grandstanding besides. It’s truly cynical, however, for New York’s billionaire mayor to veto the bill, which would likely be as toothless as any existing regulation on the financial industry.
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