CHICAGO – Facing the potential loss of some banking relationships it needs to access the capital markets, Chicago put the brakes on an ordinance that would ban doing bond deals with financial institutions that don’t agree to impose certain gun control policies on their retail business clients.
Sponsors will work with banking industry officials to address their concerns that the measure is too broad to enforce and would likely, in turn, prompt some banks to simply forgo city work.
“We will hold this for further discussions with the affected parties,” Finance Committee Chairman Edward Burke said after a banking industry official testified during a Finance Committee hearing Monday. “We have to craft this in a way that is going to permit the purpose, the intention" to leverage the city’s influence “with business entities to create a sound public policy.”
The delay was welcomed by Chicago’s chief financial officer, Carole Brown, who said the city’s access to the capital markets could be harmed if banking ties were impaired by the ordinance.
“In its current form, we were concerned that we wouldn’t be able to identify banks we could do business with” due to its broadness, Brown said in response to reporter questions after the measure was tabled.
The ordinance as proposed would have negatively “impacted our ability to access the capital markets and also affected our ability to have relationships with our municipal depositories so we will work with the banks, with the bank institutions … to try to come up with language that addresses the intent of council but doesn’t hamper our ability” to do business, Brown said.
Burke and Mayor Rahm Emanuel announced that they had introduced the ordinance in a joint press release March 29. It would require that financial institutions file an affidavit along with their economic disclosure forms verifying that their retail business clients adhere to certain policies.
Those policies include banning the sale of "bump stock" attachments that allow semiautomatic rifles to fire faster, barring the sale of high capacity magazines, and banning the sale of firearms to persons under 21 or to those who have not passed a background check.
Burke cited moves earlier this year by Citi and more recently by Bank of America Merrill Lynch to impose gun sales restrictions on some clients as proof it can be accomplished by other banks.
“I think sometimes these financial institutions overreact and it takes them time to realize that they can indeed be a part of the solution rather than a part of the problem,” Burke said. He cited the initial opposition of financial firms to previous rules imposed on bankers such as the disclosure of past slavery ties and requirement that firms cut ties with South Africa under a 1990 anti-apartheid measure.
The “Safe Guns Policy” – a popular move among council members – comes amid heightened attention on Chicago violent crime rates and renewed efforts toward gun control measures in the state legislature and nationally in the aftermath of the Parkland, Florida, school massacre.
A representative for the banking industry ticked off a long list of complaints and warnings over the difficulty banks would face enforcing the restrictions on their clients.
The definition of financial institution is “exceptionally broad” and the definition of retailer client is also “quite broad,” said Ben Jackson, vice president of government relations at the Illinois Bankers Association.
“The ordinance creates an impossible standard for financial institutions to comply with" and the legal departments of some banks would simply decide the institution couldn't sign the city's affidavit, he said.
Jackson warned the requirements could run afoul of state and federal bank regulatory policies. “Local governments can’t impose regulations even when disguised in the procurement process,” Jackson said.
Given the broad language of the ordinance, banks would find it “impossible” to police the activities all of its retail clients, he said. Banks could be subject to client lawsuits for their new policies. The ordinance also lacks a waiver provision if there is a compelling business reason, Jackson said.
“No financial institution shall be eligible to do business with the city … or be awarded a contract with the city, or any renewal or extension thereof, if the financial institution has not adopted a safe gun sales policy applicable to its retailer clients, partners, or customers. A safe gun sales policy shall be a requirement of all City of Chicago employee pension plan investment policies,” the proposed ordinance said.
The ban would apply to a firm’s eligibility to work with the city as a depository, underwrite municipal bond issues, or engage in a myriad of other financial transactions.
It defines “financial institution” to include banks, savings and loan associations, thrifts, credit unions, mortgage bankers, trust companies, savings banks, investment banks, securities brokers, municipal securities brokers, securities dealers, municipal securities dealers, securities underwriters, municipal securities underwriters, etc.
A “retailer client, partner, or customer" is defined as any person or business entity that offers for sale at retail firearms, assault weapons, ammunition, or high capacity magazines and who offers credit cards backed by the financial institution, borrows money, raises capital, or uses banking services through the financial institution.
“We do believe there is a path to draft a new law here which meets the city of Chicago’s policy objectives and establishes clear guidelines while avoiding standards that would create unmanageable compliance requirements for financial institutions,” Jackson said.
The city has a strong incentive to maintain relationships with banks because it relies on them not just for underwriting but for credit lines and liquidity support. The banks showed patience with the city giving it time to resolve a potential $2.2 billion liquidity crisis after Moody's cut the city's rating to junk in 2015, triggering defaults on credit lines and various liquidity and swap contracts.
At the same time, banks have an incentive to comply with any eventual ordinance because the city was the third largest bond issuer in the Midwest region last year, selling $2.8 billion of debt with a special purpose entity selling an additional $744 million, according to 2017 data from Thomson Reuters.