‘Carpetbagger’ banks are draining my city of loanable funds

American banking is the world’s most heavily regulated industry. Besides the well-known litany of laws and alphabet soup of regulations, there are more we don’t hear about.

Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 is one of the most secretive and least understood laws.

It is generally considered good public policy to support loan production offices that increase the flow of credit. The opposite is true for deposit production offices when a bank removes needed loanable funds from a host state to lend in their home state.

Free-market capitalists argue that capital should flow to its highest return, but socially responsible capitalists, like myself, counter that money should flow to its highest and best use. Capitalism with a corporate conscience considers capital’s social impact, especially on low- and moderate-income (LMI) people and communities, including those of color.

When interstate banks siphon off seniors’ savings in deposit-rich states like Florida to lend in their home states, they deprive the host state of needed capital for affordable housing and small businesses. This is what happened in my hometown of Miami, often considered ground zero for the nation’s affordable housing crisis. The situation here is even worse than in San Francisco or New York, where home prices are also high, but incomes are much higher.

The problem began 30 years ago when the politically connected First Union (a successor of Wells Fargo), bought Miami’s biggest bank, Southeast, at an $81 million fire-sale price. Many analysts, including myself, felt Southeast could have been saved.

I then coined the term “banking colony” to refer to states that were being colonized as sources of deposits to be lent in other states. With the subsequent loss of Barnett Bank to NationsBank (now Bank of America), Florida quickly became the largest banking colony based on majority control of deposits by out-of-state banks.

My 1993 book on the Community Reinvestment Act expressed concern over what I called out-of-state “carpetbagger banks” buying up our largest banks and thrifts in Florida and lending the money elsewhere, which further contributed to our affordable housing problem. Florida’s bank colonization 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 area’s housing affordability crisis “is so dire, it now poses as much of a threat to the region as sea level rise.” Another analysis put the level of economic inequality in South Florida on a par with Colombia and second only to New York City.

The COVID-19 pandemic has made a bad affordable housing situation worse with the relocation of wealthy Northeasterners to South Florida. Every “one-percenter” making $500,000 or more and buying a luxury condo or mansion on the water requires a handful of LMI people to clean their home, do laundry, make Amazon deliveries, help take care of their pets and kids, etc.

Many of these service workers, often minorities, were devastated by the pandemic and recession. I therefore proposed a one-time 1% affordable housing surtax on nonresident one-percenters buying Florida real estate valued at $1 million or more.

Life in a banking colony is also a problem for small businesses. A recent analysis of Paycheck Protection Program lending in Florida showed our two biggest banking colonizers, Bank of America and Wells Fargo, with a combined one-third market share, did a very poor PPP lending job. Citibank was even worse, and Chase was the only big bank close to doing an adequate job.

So, what has public policy done about carpetbagger banking and banking colonies?

The short answer is little to nothing. Taking its cue from the 1977 CRA, Section 109 recognized the importance of reinvesting deposits locally by monitoring deposit production offices, with violators potentially being required to shutter them.

However, public companies must report an overall failing CRA rating as a material event. This is not the case for Section 109 violations.

Section 109 is toothless, because big-bank lobbyists conned Congress into keeping violations confidential. This was the exact same thing they did with CRA, until 1990 when Congress made CRA ratings and performance evaluations public in response to the S&L bailout.

Big-bank lobbyists not only ensured Section 109 would be without any regulatory burden, but also exempted credit card and other limited- and special-purpose banks that siphon billions from our big cities but reinvest little to nothing in them. Lobbyists also insisted on a nearly fail-safe, two-step compliance test. First, a loan-to-deposit ratio of at least half that of the banks in the host state and, failing that, a second subjective test to show a bank was “reasonably helping to meet community credit needs.”

Midyear statewide deposit data are available from the Federal Deposit Insurance Corp., but this is not the case with loan data, which must be pieced together from different government sources, including reports of public companies. The best indication, however, of a possible Section 109 violation is a statewide failing “needs to improve” or “substantial noncompliance” rating on an interstate bank’s most recent CRA public performance evaluation.

Good public policy requires that Section 109 evaluations, completed every three to four years concurrently with CRA exams, be made public. This would not only make the public aware of an interstate bank’s commitment to its host state but hopefully encourage banks to improve local lending. Now that CRA reform is back on the front burner, this should be a top priority.

Even more important is the reinstatement of the Office of the Comptroller of the Currency’s 5% deposit reinvestment rule for internet and credit card banks, our modern day carpetbagger banks, to ensure they proportionally reinvest their deposits back into the communities from which they are gathered. Neither of these proposals, however, are as extreme as the recent “carpetbagger bank tax” in Washington State, but that suggests that this is a front-burner issue for the industry.