House Bill 4, was up for a first hearing for sponsor testimony in the House Financial Institutions Committee. The stated purpose of the bill by the proponents is to target perceived bias and “economic boycotts” by financial institutions and other businesses. However, the bill adopts an alarmingly broad definition that describes an economic boycott as when a company or financial institution takes any action that negatively impacts a company or consumer because the company or consumer engages in specific industries, including fossil fuel energy, mining, agriculture, firearms and knives. As introduced by Rep. Tom Young (R-Dayton) and Rep. Angie King (R-Celina), the bill also requires that the Treasurer of State to create a list of the companies and financial institutions that engage in these economic boycotts and make that list publicly available. Any institution on this list would be prohibited from having a public contract. Similar to what OBL has seen in other states, HB 4 would severely infringe on banks’ decision making as well as open all banks up to significant liability for denying credit or services to almost any consumer or business.
OBL will continue to engage with all elected officials to protect the industry from government interference no matter where it comes from whether it is the statehouse, the Whitehouse, or anywhere in between. Below is additional information on this issue that OBL has compiled and prepared to provide additional background on these types of issues. If you have any questions or need additional information, please contact OBL VP of State GR & General Counsel Don Boyd.
There are numerous reasons why a bank may choose to do or not do business with a particular company or a particular industry. Banks need the flexibility to operate pursuant to federal and state laws and regulations, and to manage all forms of risk in a safe and prudent manner. It is important to note that one bank’s decision not to do business with an industry or company does not mean that that industry or company will be denied the “right to participate in lawful commerce”—it just means they may need to seek services at another bank. Further, a bank’s decision not to do business with a particular industry may not be due to any stance on the industry itself but instead could be a result of a lack of expertise in that industry. Many banks focus on certain areas or industries and would not be equipped to take on certain clients even if the bank wanted to.
Our dual banking system – made up of thousands of state and federally-chartered financial institutions of all sizes –serves consumers, local businesses, national corporations and state and local governments throughout the United States. Our national and local economies are enhanced by a legal framework that allows banks to deliver products and services to all customers at the lowest cost possible. This helps drive our economy forward, facilitating the availability of innovative and cost-effective financial products across the economic spectrum while ensuring strong consumer protection. The freedom of banks to make decisions based on business needs and management of its financial, operational, reputational, or regulatory risks, without government intervention, makes this possible.
Below is a non-exhaustive list of the issues and concerns raised by legislation OBL has reviewed on these and similar topics:
· Government Interference in the Free Market. OBL opposes government intervention in the private decisions of banks from both sides of the aisle and at all levels of government. This type of legislation is no different in that it is trying to use public contracts as a mechanism of government to influence the free market and punish banks and other businesses who make decisions in the contrary to the author’s political views.
· Scope & Taxpayer Cost. Banks provide a wide variety of services to the government including holding collateralized public deposits, treasury management services, accounts payable services, municipal debt services, and investment services for public pension dollars. In these relationships, banks bid against other banks in a process designed to provide the government with the most competitive total bid for banking services. Legislation that requires the state to put unrelated policy considerations ahead of the needs of taxpayers does a disservice to the state’s role as a steward of taxpayer dollars. By considering non-service elements in state contract decisions, the state will pay higher prices for banking services or be forced to choose a vendor that cannot offer the government the highest level of service.
· Safety & Soundness. Banks must consider a wide array of potential risks when entering or terminating business relationships. State legislation that prohibits banks from exercising discretion in their evaluation of customer relationships introduces significant safety and soundness concerns. This is particularly important because bank deposits are guaranteed by the Federal Deposit Insurance Corporation (FDIC). To effectively manage safety and soundness risk a bank must consider concentrations in certain industries, as well as operational and compliance risk. Moreover, banks must prudently assess financial, reputational, and litigation risk exposure and take into account shareholder considerations when establishing policies and evaluating banking relationships.
· Corporate Governance. Bank board of directors and corporate officers are under a fiduciary responsibility to manage their business in the best interest of their owners/shareholders. As such, they must have the flexibility to respond to shareholders in the manner they see fit. In fact, all business owners should be entitled to direct the focus and flow of their work, and to deny service for any reason that does not violate anti-discrimination laws. That is true regardless of whether the business owner is a sole proprietor turning a customer away at the door, or a shareholder voting to influence bank policy.
· “Discrimination” Language. Legislation limiting the state’s ability to do business with a bank with a firearms or energy company policy typically characterizes that bank as “discriminating” against or “boycotting” certain industries. Overly broad definitions of discrimination and boycott conflict with the bank’s ability to exercise prudent risk management and may limit the state’s choice in a financial service provider.
· Increased Future Risk. This model of legislation has the potential to be used for any political or social issue from either side of the aisle which presents significant risk to both Ohio’s financial industry and Ohio’s business climate. It also could impose significant increased cost for Ohio’s governmental entities and in turn Ohio taxpayers if political and social issues are used to limit who can potentially do business with the government. Taken to its logical conclusion, if numerous bills like this pass and each one potentially excludes some market participants, at the end, competition for government business could be significantly impaired to the point that either unqualified or high-cost options may be the only options. This does not take into consideration the potential pendulum swings each time party control changes. This market interference is bad for Ohio’s business climate, bad for taxpayers, and, thus, bad for the state.
· Which Law to Violate. As stated above, this legislative framework can be used by both sides of the aisle, at any level of government, and both legislatively and regulatorily. Given that there could be additional and conflicting mandates, it puts banks and other businesses in the extremely unpleasant position of trying to determine what law or regulation to violate. Do banks follow the direction of their federal regulators, who can close their doors, or potentially exclude doing business with states who implement this type of legislation?
· Conflict of Law. In addition to determining which law to violate, some aspects may directly conflict with federal laws and regulations such as the Bank Secrecy Act (BSA), Anti-Money Laundering (AML) laws, as well as key aspects of bank Know Your Customer/Client (KYC) requirements.
· Legal Risk. By introducing additional liability or civil penalties, the legislation essentially requires a bank or other business to prove why a decision was made each time there was a negative decision relative to particular industry. If the decision was credit related, and with some other categories of traditional banking practices, the bank would be unlikely to be able to communicate that due to disclosure rules. This would put the bank in the position of having to say that it made the decision for lawful reasons but without being able to adequately defend the decision based on restrictions in other laws and regulations.
These are the types of risk calculations that banks do on a daily basis to determine whether to lend money or take on customers. Banks must continue to be free to make these decisions for the safety and soundness of their individual institutions and the industry as a whole without having to try to parse out why or whether a decision was made solely on the business being in a specified industry. Further, as mentioned above, some banks focus on particular industries or have expertise in certain areas. A bank may choose not to do business with certain industries, not because of a stance on the industry itself, but because they do not have expertise in that area even if they wanted to take them on as a customer. Once again, banks must be free to make these decisions and should not be forced to take on customers that are outside the scope of their expertise without fear of not being able to sign a public contract.