B of A Bailing on Small Towns

The Boston Globe's Beth Healy reports that Bank of America has initiated a series of cutbacks among small municipal clients, giving them relatively short notice to move on and find another bank to handle their public finances. 

The article reports that the decision comes amid new regulations requiring banks to set aside more deposits:

The changes come at a time when large banks are facing new regulations that make some deposit accounts less lucrative. Others affected in Massachusetts include the City of Fall River and Blue Hills Regional Technical School in Canton.

Fall River Treasurer John Nunes said the 90-day notice was barely enough time to interview a handful of other banks and make a switch. The city has about $4 million in deposits with Bank of America, he said, including accounts for retirement payments and certain school expenses.

“It’s very much a hardship for the municipalities,’’ Nunes said. He said his Bank of America representative told him “this was a nationwide issue.”

Several treasurer groups contacted around the country had not yet heard of the bank’s cutbacks among municipal clients. But many said they were anticipating changes by large banks because of the new regulations.

Gerard Cassidy, a banking analyst and managing director with RBC Capital Markets in Portland, Maine, said the nation’s largest banks are scaling back their less attractive businesses.

“Businesses that pre-financial crisis were profitable or marginally profitable are in some cases much less profitable, because of these new regulations,” he said.

Large banks have been warning corporate clients over the past year that the cost of some deposit accounts is rising. Regulators are requiring banks to set aside more reserves for certain deposits, in order to have sufficient funds on hand in case of large withdrawals in a time of crisis, as happened when financial markets collapsed in 2008.

Bank of America says on its “public sector” Web page that it has “relationships” with 96 percent of state governments, 88 percent of the top 50 US cities, and 82 percent of the top 50 counties.

With smaller municipalities, Cassidy said, Bank of America may simply be making a calculated decision about a low-margin business.

“It’s disruptive in that it’s rather abrupt,’’ said Brooks, the Fitchburg treasurer. 

While city officials report that other banks are interested in their business, I'm curious how broad such interest is if regulations are as prohibitive as the bankers claim. 

48d62cc9274b8263e396832359d916212b56d508.jpgSome claim that it's smaller banks that are hurt by the contemporary regulatory regime, while others, including Elizabeth Warren, dispute that argument. But no one can seriously argue that the regulations are hurting any more than the pride of the big banks. The marginally lower returns that result from B of A's regulatory compliance might be enough to justify severing many small clients as a business decision, but it's not a decision based on some kind of unendurable hardship. If anything, the message is "Dear small town America: New regulations somewhat hinder us from exploiting and ruining you, so we're bailing. Sincerely, B of A."

The move does, however, open up the possibility of municipalities at least exploring opening their own public banks, something that one banker-turned-city-official recently told me would be surprisingly easy to do. 

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