Should Cities Have to Patronize Small, Local Banks?

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Illustration by Alexander Ho for TIME

Many Americans expressed their dissatisfaction with escalating bank fees by eschewing megabanks in favor of smaller institutions or credit unions. Should cities do the same thing? Last week, the city council in Berkeley, Calif., voted unanimously to study whether or not they should pull $350 million in funds out of Wells Fargo and deposit it instead with a community bank or credit union. “Wells Fargo Bank … was a key part of the subprime lending crisis which led to our overall economic collapse,” council members wrote in their proposal. But could a big bank actually be better for taxpayer interests? The city has banked with Wells Fargo for eight years, and its contract is up at the end of 2012. Wells Fargo could lose not only Berkeley’s significant deposit, but also millions in service fees. (The city paid $1.2 million on the existing contract.)

The council’s agenda stipulated that Berkeley’s city manager look into “alternative bank[s], including but not limited to Community Banks, membership-based Credit Unions or Community Development Financial Institutions.”

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“[Councilman Jesse] Arreguin said changing the account would “send a statement that we are investing our taxpayer dollars in a fiscally sound and moral way,” local media outlet Inside Bay Area reports.

Statements like this, as well as the unanimity of the council’s vote to explore leaving Wells Fargo, indicate the popularity and appeal of the small-bank movement on a municipal level. But will making a stand in support of small banks wind up costing Berkeley taxpayers more? It’s certainly possible.

A 2009 document submitted by the city manager recommends renewing the city’s contract with Wells Fargo, noting, “To improve efficiency and controls, the City had to replace other bank accounts with the Wells Fargo Bank accounts.” The document also points out that city employees would have to be retrained if a new banking system was implemented; it lists features like comprehensive online banking and adequate access to armored cars for transporting cash like the coins collected from parking meters as other reasons why Wells Fargo should get the contract renewal.

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“Another advantage to extending the contract is that the City is getting the best credit card processing rate through Wells Fargo Bank,” the manager’s recommendation adds. Inside Bay Area also points out that Wells Fargo has been a generous donor for the city, giving $3 million over the past three years to 89 different local nonprofit groups.

While it’s certainly not a bad idea for any city to periodically review its vendor contracts to make sure it’s getting the best deal, as recently as 2009, Wells Fargo was the institution that fit that bill for Berkeley. As much as local elected officials and citizens might want to show support for small banks and credit unions, that support shouldn’t come at the expense of taxpayers.

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