Banking Law

Last month, we reported about New Mexico's House of Representatives passing (unanimously) a bill that would have directed the state to move money from New Mexico branches of out-of-state banks to in-state banks. Although that legislation did not make it through the state Senate before the current year's legislative session expired (paid subscription required), there's a chance that it may be resurrected in a special session later this year. If that doesn't happen, the bill's sponsor vows to pass it next year.

According to the Wall Street Journal, New Mexico's legislation is part of a trend.

State lawmakers in Maryland, Massachusetts, Minnesota and New Mexico have introduced legislation that would funnel more money into small financial institutions, which generally have avoided the brunt of criticism over the industry's reluctance to lend.

New York Mayor Michael Bloomberg wants to deposit as much as $25 million in city tax proceeds in credit unions. And Lake Oswego, Ore., a suburb of Portland with about 36,000 residents, is moving $1.2 million from a state investment pool into six community-based banks that support local businesses, community organizations and civic groups.

[...]

This month, the Los Angeles City Council ordered city officials to try to renegotiate an interest-rate swap that is costing the city about $19 million a year. Under the motion, firms that won't buckle would be banned from doing new business with Los Angeles.

It isn't unusual for elected officials to use deposits and their bully pulpit as leverage to spur community development or investments in poor neighborhoods. Richard Alarcón, a Los Angeles city council member, says the tough talk is gaining traction because of the economic crisis. The city council also voted to assign grades to banks with which the city does business, based on their small-business lending, foreclosure prevention and other measurements. City officials have until mid-April to draft an ordinance implementing the measure.

[...]

Last month, C. William Frick, a Democrat from Montgomery County, Md., introduced legislation in the state House of Delegates that would allow state-chartered banks to win the state's business if their bid came within 10% of those from larger banks. Mr. Frick says the move was triggered by concerns about credit-card practices and overdraft fees. "The federally chartered institutions come in here and tell us we can't regulate them because of federal pre-emption," he says. "We are powerless to stop them, yet we give them lucrative state contracts."

Wall Street Journal reporter Ruth Simon points out that from a practical standpoint, all this thunder may not bring much rain.

It isn't easy for state and local governments to abandon big banks no matter how unpopular they are. In Maryland, state payroll contracts usually "end up going to larger banks ... because they need to have branches across the state," says Bernadette Benik, Maryland's chief deputy treasurer.

A reader who is a knowledgeable bank law attorney questions whether these local laws can survive a challenge under The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. He claims that such discrimination against out-of-state-based banks is prohibited under that Act. Although I haven't researched the issue (inasmuch as no one is paying me to do so and I NEVER work for free), as I recall the provisions of that act, they deal with state laws limiting the powers of in-state branches of foreign banks versus the powers of in-state banks, and the laws under discussion do not limit powers of banks, but rather limit the discretion of state officials with respect to the deposit of state funds and/or the awarding of state contracts. Again, I could be wrong, but I don't think such laws run afoul of this particular federal law.

It will be interesting to see if these types of laws gain traction this year and next, or fade out as mere populist spasms generated by local politicians looking to make headlines.