Late last year, VICA used this column (Oct. 26, 2009: City Threatens Financial Institutions with Divestment) to raise concerns about a Los Angeles Times op-ed that called for a social responsibility index for financial institutions. The L.A. Times piece (written by L.A. City Councilmember Richard Alarcón) laid out a plan for the city to divest from banks that did not respond quickly enough to the foreclosure crisis and establish social responsibility measures. When VICA first addressed this topic, questions were raised about the role of government in dictating business decisions. VICA considered the threat of divestment to be coercive and noted that when it comes to accountability for business decisions, financial executives are responsible only to their shareholders. VICA also found that the so-called social responsibility measures focused on operation decisions and did not take into account philanthropic efforts, such as charitable donations and encouraging employees to volunteer. In true bureaucratic fashion, it has taken almost a year for this proposal to move through council committees, to a draft ordinance and is now expected to go before the full City Council in October. Monitoring program If passed, the ordinance will create what is being called a responsible banking investment monitoring program. This program will require financial institutions in the city to disclose a tremendous amount of information to the city treasurer that will be taken under consideration during requests for proposals and qualifications. The ordinance still does not consider philanthropy and volunteerism. Institutions that already have city accounts and other banking business are at the risk of losing that business if their information is deemed unsatisfactory by the city treasurer. Bidding preference will be given to financial institutions that fall in the top 20 percent for local reinvestment performance. Under the program banks and financial institutions would be required to issue a statement of community investment goals that includes the number, size and type of small business loans; home mortgages; home improvement loans and community development loans. The institutions would also be required to disclose the number and location of branches, ATM machines, loan production offices and any other methods for delivering banking services. Burdensome requirements These disclosure requirements are burdensome and completely out of the city’s purview. The city has no right to dictate where banks open branches or how they choose to invest their money. These are business decisions that should be left up to the company decision makers, not city bureaucrats. Businesses in L.A. already face some of the highest tax rates and most onerous regulations in the nation. Now, on top of that, banking and financial institutions could be forced to make business decisions based on the city’s arbitrary rating system. Financial institutions are facing new federal regulations and the economic downturn hit the industry particularly hard. In order for a successful economic recovery, we need a strong, active banking system that is under entrepreneurial control – not shrouded in bureaucratic red tape. The business community at large must wonder what industry the city will attempt to micromanage next. It seems as though a government running a multi-million dollar deficit that cannot collect much more than 50 percent of debt-owed should be the last entity doling out business advice. Do you think the disclosures the city will require from financial institutions are reasonable? Should the business community fear similar disclosures and control of business decisions for other industries? Email your responses or thoughts about the column to [email protected].
City Should Stay Out of Banking Operations
