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Defending Responsible Banking
The Wall Street Journal turned its hyperbole machine up to “11” in today’s editorial, in broadly condemning the New York City Responsible Banking Act (“a meteor headed straight for the world’s financial sector“). The editorial dismisses the idea that the banking industry has any particular obligation to meet community credit needs, such as affordable housing, foreclosure prevention, and other community development goals.
In Defense of the Responsible Banking Act
The Wall Street Journal turned its hyperbole machine up to “11” in today’s editorial, in broadly condemning the New York City Responsible Banking Act (“a meteor headed straight for the world’s financial sector“). The editorial dismisses the idea that the banking industry has any particular obligation to meet community credit needs, such as affordable housing, foreclosure prevention, and other community development goals. In fact, because banks have such an essential role in the economy and because of the public backing they receive, they actually are required to answer to many state and federal laws – such as the Community Reinvestment Act (CRA), the Truth in Lending Act, the Fair Housing Act – to lend equitably and responsibly to all populations. These laws came about years ago in response to redlining and disinvestment in low-income communities of color nationwide.
Because banks have this special role, they also have an added responsibility to affirmatively meet the credit needs of the communities in which they do business and reinvest. Banks receive significant taxpayer-backed public benefits, including access to low-cost money from the Federal Reserve discount window and also deposit insurance from the Federal Deposit Insurance Corporation (FDIC). And, as we learned from the most recent financial crisis, banks benefit from a federal safety net whereby the Federal Reserve and Treasury Department can provide emergency financing to banks in times of crisis. Locally, banks benefit from the considerable business they do with the City of New York – over $150 billion flow to and through banks and financial institutions which hold over $6 billion in deposits at any one time. To imply that banks have no responsibility to reinvest and should not be judged on these activities, including community development philanthropy, is patently false.
Yet, large portions of NYC have long been and remain underserved by the financial sector. Before Judge Failla shot down the RBA, the Community Investment Advisory Board conducted a needs assessment based largely on publicly available data. The report reveals real, long-standing, disparities in underserved communities: low-income, minority populations receive fewer home loans, more subprime loans, fewer small business loans, and have much less access to traditional bank branches and products. The poorest neighborhoods in the Bronx, for example, have the lowest concentrations of bank branches and the largest concentration of check cashers. Southeast Queens, a largely minority community, has among the highest denial rates and highest concentration of subprime loans in the city. We also know from years of studies that some of these same communities were hit the hardest by the foreclosure crisis. They were the first to be targeted by irresponsible lenders (banks and non-banks) and then slowest to receive relief. This has cost residents and the City millions of dollars in lost wealth and tax dollars.
For all these reasons, the City has a vested interest in designating and doing business with banks that act responsibly in our City and doing less business with banks that do not. The longstanding City Banking Commission has always had the mandate to evaluate a banks’ community service record when choosing eligible banks.
The Responsible Banking Act is at its heart a transparency law that helps the City and its residents understand how banks are reinvesting specifically in NYC. It provides a regular process for the public to weigh in on local needs and how banks are responding. The Responsible Banking Act is a commonsense transparency tool for NYC residents, NYC government and elected officials, banks, and even CRA regulators to use to encourage and promote responsible bank reinvestment. Quite the opposite of the catastrophe predicted in the Wall Street Journal editorial, it has the potential to help ward off the next one. We have temporarily lost this valuable tool, but we are not giving up – we urge the city to appeal and explore other options to carry out these important goals.