California could improve economic development and save on debt service by diversifying and relocalizing its banking. As a major global bank customer, the state should use its leverage to make banking safer, more competitive and innovative for state and local governments, businesses and citizens.
Lack of bank competition can lead to tight credit markets, high loan interest rates and constraining business credit access on fair terms, further stalling the economic recovery. Out-of-state banks may show little loyalty to, or understanding of, California's unique traits and needs. The San Francisco-Oakland-San Jose banking market is virtually monopolized, with five major banks (four headquartered out of state) controlling more than 75 percent of all deposits, strong grounds for the U.S. Department of Justice to disapprove further mergers.
A California-headquartered bank, one in which the state has deposits or, through securities, part ownership, might act differently. California could also increase its paltry earnings by investing in California corporations' highly rated bonds. What if the state deposited and invested its funds to support local and newly forming banks?
The state treasurer earned an annual yield of only 0.367 percent in April on $69 billion of state and local governments' highly liquid investments, mostly placed out of state and in foreign banks where funds are unlikely to be used to revive California's economy. Such a yield is merely a rounding error compared with the state's borrowing costs on its debt burden that amounts to nearly 8 percent of revenue -- among the highest in the nation. This example repeats at the local government, corporate, foundation, university, individual depositor and investor levels.
Why do governments and others in California send money elsewhere, only to reborrow it at much higher rates locally? Why does government put funds into banks without a reciprocal investment in state bonds to ensure a vibrant local market for public finance?
When banks misstep in managing risk, or in lending so aggressively that they bundle, bubble and burst local real estate values, or sequester funds and refuse to lend to small and medium-size companies that are the engines of the state's strategy for economic recovery, what is the consequence? Do the banks lose the state's banking business?
Last month, JPMorgan Chase announced a trading loss of at least $2 billion, and bankers overvalued Facebook's IPO at $104 billion. Jamie Dimon is a seasoned banker who took his eye off the ball and found Chase's money mismanaged, renewing calls for strengthening regulation in fear of losses with taxpayer-insured deposits. Facebook entrusted the pricing of its company to elite Wall Street investment bankers using outdated tools based on market behaviors of the past rather than making a long-term commitment to the company's growing needs for financing acquisitions and infrastructure. California is entrusting its future to bankers it neither controls nor has partnership status to tame.
Perhaps the state and large counties should own pieces of the banks that depend on their business and deposits like Switzerland, Germany, the United Kingdom and other local authorities do. At least as shareholders and shareholder rights advocates, they can hold banks accountable and share in the profits. Better yet, proposals to create new types of bank innovations for California, to update Industrial Age banking for the Information Age, and to study the role of publicly owned banks, could unleash innovations beyond the limited range of victim's choices available here and now.