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RIP, House File 3205. A political autopsy of what killed the bank deposits bill

Here lies House File 3205. Rest in peace.

“I’m going to withdraw it,” the bill’s primary sponsor, Rep. Tim Mahoney, DFL-St. Paul, declared Wednesday. “I think it is dead for the session.”

Had HF 3205 passed, it would have given small banks and credit unions throughout Minnesota preferential treatment over large financial institutions in bidding for deposits of state funds. Similar legislation has been bandied about before, but the timing of Mahoney’s proposal was particularly noteworthy.

During its short life, the bill created a buzz even as the media and policymakers at the Capitol riveted on the state’s formidable budget deficit. Smaller financial institutions touted it as a way to spur economic development, often in outlying parts of the state, even if the deposits are in some cases minimal.

Mahoney’s measure was one of many similar bills across the country that gained traction this year on the strength of widespread public disgust with Wall Street’s banking and investment behemoths for their role in intensifying the nation’s economic downturn — aka “The Great Recession.”

In Minnesota, the leviathans are seen as Wells Fargo and U.S. Bancorp, which together control 48 percent of all commercial bank deposits in the state, according to the Federal Deposit Insurance Corp. Both rank among the country’s 20 largest banks, and U.S. Bancorp controls most of the Minnesota state government’s deposits.

Rep. Tim Mahoney
Rep. Tim Mahoney

Critics brand the two as “Wall Street banks” because their stocks are publicly traded. They also argue that the smaller banks and credit unions have nurtured closer and more enduring relationships with their customers and are more likely to lend to local small-business owners than the very large banks.

Bank trade associations split over proposal
In a rare split, the state’s two leading bank trade associations — almost always on the same page on banking-related legislation in Minnesota in recent years, according to their CEOs — parted company on Mahoney’s bill. One of them even found itself aligned with the credit unions, traditionally the mortal enemy of the banks.

Did U.S. Bancorp oppose the bill?

“Well, of course,” Mahoney said, but he praised the company for being above-board in lobbying for its viewpoint. “I have nothing but respect for U.S. Bancorp.”

Steve Dale, a spokesman for the company, wouldn’t comment directly on the legislation. But he stressed that U.S. Bancorp is headquartered in the Twin Cities, has 10,000 employees in the state and supports the communities it serves.

Mahoney said he dropped the bill at the request of Minneapolis DFL Rep. Phyllis Kahn, after Sen. Dan Sparks, DFL-Austin, sponsor of the companion measure in the Senate, couldn’t get a hearing on it in that chamber. Kahn heads the House State Government Finance panel, often a channel for high-priority bills.

Sen. Dan Sparks
Sen. Dan Sparks

Her unit faces a crowded docket. She put off discussions of HF 3205 in recent days. “How can you ask me to waste 10 to 20 minutes in committee on a bill that can’t pass the Senate?” Mahoney quoted her as asking him. “If it had moved in the Senate, it probably would have passed over here,” he added.

David Skilbred is vice president of government relations for the Independent Community Bankers of Minnesota (ICBM), which backed the bill. Skilbred said the bill’s prospects dimmed because it was introduced relatively late in the session — Feb. 25 in the House, little more than two weeks before the deadline for new bills. Legislators, swamped with 1,317 new bills just since Feb. 4 and 3,725 overall in 2009-10, are focusing on budget-related bills now, he said.

Mahoney’s bill was one of a number of proposals that bubbled up from a DFL task force convened last year to come up with job-generating legislation. He modeled the bill on a proposal that has passed one chamber of the New Mexico Legislature. It wouldn’t have required the state to use smaller banks or credit unions in instances where they lacked the collateral or other capabilities deemed necessary by state bidding procedures.

In an e-mail earlier this week, Mahoney said he was “very pleased to enhance the Wall Street vs. Main Street tension, and keep people thinking of how much the country has bent over backward” to help large banks “to the injury of so many other industries.”

National drive to move money
Similar views have come from the Huffington Post’s Arianna Huffington and the Economic Policy Initiative of the Roosevelt Institute. In December, they launched a national “move your money” campaign urging consumers and governments to redirect deposits from financial institutions designated by the federal government as “too big to fail” to smaller ones claiming closer ties to their neighborhoods.

In Minnesota, the Minnesota Bankers Association (MBA) came out against the bill after the ICBM supported it. For many years, the two groups have consistently joined forces to oppose legislation favoring credit unions or calling for more regulation of the banks.

ICBM membership includes about 250 of Minnesota’s roughly 390 state-based banks and thrifts. The largest of them is Chaska-based Kleinbank with $1.6 billion in assets. Most of the others are small community banks.

The much-larger MBA represents almost all of Minnesota’s banks and thrifts plus about two dozen banks chartered in other states. Its membership includes Wells Fargo, chartered in South Dakota and based in San Francisco, and U.S. Bancorp, chartered in Ohio and based in Minneapolis.

Mahoney’s bill would have required the state to give the smaller institutions a break by using a dollar amount 10 percent below their actual bid to compare their offers for handling the state’s accounts with bids from the large banks. The bill defined the preferred institutions as “community financial institutions” with less than $10 billion in assets.

Marshall MacKay
Marshall McKay

Marshall MacKay, president and CEO of the community bankers’ association, said his association “strongly supported” the Mahoney bill. In the interview and a commentary that appeared March 12 in the Finance & Commerce newspaper, MacKay said the smaller institutions should get the deposits because the funds would give these institutions a greater capacity to make loans in their communities.

MacKay argues that the rationale behind the Mahoney legislation lined up well with the principles of the Community Reinvestment Act, the 33-year-old federal law that requires depository institutions to meet the credit needs of their communities.

“Wells Fargo is not a community bank,” MacKay said. “U.S. Bancorp is not a community bank.”

Bill termed protectionist
After the ICBM backed the legislation, the MBA came out against it. Joe Witt, president and CEO of the larger association, said his board discussed the Mahoney bill in an unusually lengthy conference call and then voted unanimously to oppose it. The MBA’s 16-member board consists of Witt, representatives from 13 community banks and one each from Wells Fargo and U.S. Bancorp.

Joe Witt
Joe Witt

Describing the legislation as protectionist, Witt said all banks — regardless of their size or headquarters site — contribute to their communities. He called the bill’s 10 percent preference for the smaller institutions bad public policy, particularly for its favorable treatment of credit unions that already benefit from “significant tax and regulatory advantages” over banks.

“Everybody out there hates the banks,” Witt added, calling such blanket criticism a bum rap. The taxpayer bailouts flowing from the meltdown have come largely at AIG, General Motors, Chrysler and other nonbanking companies, he said.

Jim Conrad is president of the University National Bank in St. Paul, a member of both associations. Conrad called the Mahoney bill a work in progress and said he favored it for the spirit it expressed. “Community banks can be an excellent conduit to leverage the state’s deposit dollars into productive community loans, which in turn help create or retain jobs and generate tax revenue,” he said.

Peggy Gunn, a spokesperson for Wells Fargo, said the company’s policy was not to comment on pending legislation.

Mara Humphrey, vice president for government affairs for the Minnesota Credit Union Network, said the state’s credit unions supported the legislation. In particular, they backed a provision in Mahoney’s bill calling for a study of the potential benefit of steering more deposits from local governments to smaller institutions, she said.

Where the money is
Mahoney’s bill raised the question of how large deposits of public funds are in Minnesota and where they’re funneled now. For bidding purposes, finance officials at the state’s Minnesota Management and Budget unit classify the funds in two categories:

• 264 major accounts, dominated by a handful of large funds — notably the state’s general fund and accounts from the departments of Revenue and Health and Human Services. For bidding purposes, the state lumps these accounts into a single deposit package, which it awards to a single institution once every five years. U.S. Bancorp won the most recent bid for these funds, which won’t be rebid until Jan. 1, 2013. The amount of money in all of these accounts combined varies widely but can be as high as $100 million, according to Joe Howe, the state’s director of treasury operations. Howe says the state tries to keep this amount as low as possible.

• 397 minor accounts from state parks and various other units, also bid on five-year cycles but in all cases bid separately. Howe says 268 of these accounts are at community banks, 84 at U.S. Bancorp and 45 at Wells Fargo. Their average size is about $20,000, bringing the total amount of money in all 397 funds to just under $8 million, below the average in the major account package won by U.S. Bancorp.

The state estimated that if all of the accounts now held by U.S. Bancorp and Wells Fargo were moved to smaller institutions, the legislation would have cost the state $109,000 to $112,000 annually for each of the three fiscal years starting in 2011. That estimate, which included a small charge for the study of local government deposit policies, was largely for service charges to handle the package of major accounts. It assumed higher service charges from the smaller institutions because of the 10 percent edge they would have gotten.

Hoping for harder looks
Bob Vogel, president and CEO at the $85 million-asset New Market Bank in New Market, would like to see the analysis of local government deposit practices. Vogel, whose institution is a member of both bank trade associations, says his bank could lend more to businesses if it had more deposits from governments.

Vogel also wants state officials to take a hard look at their bidding process for state funds. He suspects that some of the questions the state asks in its requests for proposals (RFP) from smaller banks scare them away from bidding.

“The complexity of the RFP itself might be over the top so as to make it overly difficult for the community banks to bid,” Vogel says.

Skilbred, from the community bankers’ association, said he hopes the provision in the Mahoney bill calling for studies of both state and local government deposits, and also a pilot proposal to look into the deployment of deposits of the Minnesota State Colleges and Universities system, will still win approval in separate legislation. The MNSCU study proposal, in a bill sponsored by Rep. Tom Rukavina, DFL-Virginia, has backing from both banking associations.

Meanwhile, Mahoney said he would talk with state officials to see if changes to state deposit practices can be made without legislation.

Will the St. Paul legislator be back with his bank deposits bill next year, assuming he is re-elected in November? “I might be interested in introducing some form of it,” he said.

Dave Beal writes about business and the economy. He can be reached at davebiz (at) q (dot) com.

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