The city government of Chicago moves hundreds of millions of dollars in and out of the bank every few months. Taxes, fees, fines and bond sale proceeds come in; paychecks, contractor payments and other spending or investments go out.

As of December 31, 2020, Chicago had $725 million in the bank — multiple banks, actually, as the city typically designates more than a dozen banks every year as municipal depositories.

The City of Chicago requires banks seeking designation as municipal depositories to have an authorized representative sign a pledge every year that the bank will avoid discrimination in lending on the basis of neighborhood, race, national origin, sex, source of income, sexual orientation and other factors. The pledge notes that failure to comply can result in losing designation as a municipal depository. It’s been this way since 1974, when Chicago passed its Responsible Banking Ordinance, the first such ordinance of its kind. Many cities across the country have since passed their own responsible banking ordinances — some more stringent, some less so.

But according to a newly published audit from the city’s inspector general, Chicago has never actually denied a bank the privilege of holding municipal deposits on the basis of violating the pledge not to discriminate — despite mountains of evidence that the banks where it holds deposits are discriminating against Chicago’s Black and brown neighborhoods and residents. The city even collects some of that evidence every year as part of its annual selection process for municipal depositories — and most of the data is publicly available anyway — but according to the audit the city simply does not use that evidence in its evaluation of banks’ applications to hold municipal deposits.

The audit’s arrival at the end of August is timely, as Chicago City Council is set to vote today on a measure that would update and strengthen Chicago’s Responsible Banking Ordinance and the city’s annual municipal depository designation process.

“It caught a lot of us off guard, but in a positive way, and we couldn’t have asked for better timing,” says Horacio Mendez, president and CEO of the Woodstock Institute, a financial services watchdog group in Chicago. “This [audit] really is wind at our backs to justify that there needs to be greater accountability.”

There is so much about access to credit that doesn’t work for majority Black and brown neighborhoods in Chicago. Holding Chicago’s municipal depositories accountable on a more regular basis for pledging not to discriminate against those neighborhoods won’t resolve all of it overnight.

If you want to take out a mortgage to buy a home, you need a down payment, which family wealth can often support. But according to the Federal Reserve, white families on average today have seven times more wealth than Black families, and six times more than Hispanic families. That’s a consequence of previous generations of racial discrimination in housing, employment, and criminal justice. It’s one of the main reasons why Black homeownership rates have remained stubbornly far behind white homeownership rates for decades.

If you want to buy a vacant home or small commercial property on the south side or west side of Chicago, and there are plenty of them, the property is likely in such poor shape that the cost of necessary rehab is higher than the market value of the property. But banks generally only lend up to a portion of the market value for any property, leaving what’s known as the “appraisal gap” between what a bank will lend and what’s needed to make a property fit for use. It affects both residential and commercial properties.

Throw in racial segregation in neighborhoods, like Chicago has, and a vicious cycle occurs. In many predominantly Black or brown neighborhoods across the south side and west side of Chicago, the combination of lack of family wealth to support down payments along with appraisal gaps results in very few if any mortgages made in those neighborhoods, which means few if any “comps” — comparable sales of similar properties, which banks and appraisers use to determine market values. If there aren’t enough comps in the area, the bank can’t determine a market value, which can doom a loan request.

And even if you are fortunate to fundraise enough philanthropic dollars to buy and rehab a few dilapidated or vacant properties, on the south side of Chicago it can still be a daunting maze to find out who actually has control over those properties so you can offer to buy them.

No one is expecting Chicago’s annual municipal depository designation process to fix all of the above. But some believe it can and should be a regular platform for an open discussion of those challenges with the banks who apply to hold public dollars.

For decades, there has been no such open discussion at all. The law requires the city’s Department of Finance to solicit proposals from municipal depositories yearly, collecting required information from banks, and to submit a list of banks for final approval to the Chicago City Council.

But in a strange quirk of Chicago policy, the city council does not have to vote to approve the list of municipal depository designations every year. In years when the council doesn’t vote on the list, the previously designated municipal depositories simply carry over. It’s intentional — for instance, the city does not want to be holding up the paychecks of 31,000 municipal employees because of city council not voting on the list for any reason. The last time Chicago City Council actually voted on the list was in 2015.

Even when Chicago aldermen have voted on the annual municipal depositories list from the Department of Finance, hearings or any kind of open discussion about it were out of the question under Alderman Ed Burke, the long-time former chair of the council’s finance committee, who lost that position in 2019 after being federally indicted on corruption charges (though he remains free on $10,000 bail and still holds office as an alderman).

Alderman Scott Waguespack took over in 2019 as chair of the finance committee. Climbing out from more than 30 decades of committee practices and operating principles is not easy for anyone to explain on the record.

“That’s a tough question,” Waguespack says. “Across the board we’ve seen issues like this municipal depositories pledge, we’ve had laws in place that were never really enforced.”

Not only that, over most of those 30 years there was only five-term Mayor Richard M. Daley followed by two-term Mayor Rahm Emmanuel, neither of whom showed any interest in open discussions about the city’s selection of municipal depositories.

Fall of 2020 was the first time under Waguespack’s chairpersonship that the Department of Finance submitted a municipal depositories list for approval, and for the first time in decades there was more than a pro-forma rubber stamping of the list.

“We could have probably pushed through and passed it as is, when it came up, but we actually held it for a few months,” Waguespack says. “What we were trying to do was say we recognized the seriousness of it. I’m not sure I’m doing anything different than anyone else who came in and took over from someone else who’d been there for 30 years.”

Chicago City Council held two hearings on municipal depositories, and ultimately did not vote on the 2020 list. While the non-vote allowed the city’s existing municipal depositories to remain the same, it was touted as a protest move to withhold what had often been a quiet routine vote.

Those actions were shaped in large part by last year’s reporting from WBEZ public radio that analyzed public data showing for every $1 banks loaned in Chicago’s white neighborhoods, they invested just 12 cents in the city’s black neighborhoods and 13 cents in Latino areas. According to the analysis, JPMorgan Chase, one of the city’s municipal depositories, lent 41 times more money in white neighborhoods than black neighborhoods.

During the hearings, aldermen were extremely vocal in support of moving deposits out of large banks shown to be neglecting large and predominantly Black or brown neighborhoods and into local community banks that they believed would be more likely to lend in those neighborhoods. But it’s not that simple.

Part of the challenge is the standardized practice of requiring collateral to hold municipal deposits. Federal deposit insurance only goes up to $250,000 per depositor, but since many city governments need to keep amounts far beyond that deposited in banks, as protection against potential losses they typically require banks holding their deposits to pledge other assets as collateral. Eligible collateral depends on the city, and in Chicago those assets may include U.S. government bonds, mortgage-backed securities from Fannie Mae or Freddie Mac, municipal bonds or a Federal Home Loan Bank letter of credit. For every $100 in municipal deposits from the City of Chicago, municipal depositories must pledge $102 dollars in collateral. Many cities only require collateral in dollar-for-dollar ratios.

Large banks may already have more than enough eligible assets on their books to pledge as collateral for municipal deposits. Smaller banks may need to purchase more collateral, and right now with interest rates at historic lows, those assets won’t bring in much revenue. During the hearings earlier this year, Chicago City Comptroller Reshma Soni said her office reached out to 54 other banks to ask them to apply to hold the city’s deposits, but she said they told her federal interest rates currently at 0% meant it wasn’t financially feasible for smaller banking institutions to take on municipal deposits.

Holding those deposits themselves isn’t actually very profitable. The large banks that take municipal deposits also do so in part because, as Mendez, the watchdog group president, explains, they see it as a tool to strengthen their business relationships with city finance staff and city council finance committees, whose approval they need to underwrite more lucrative municipal bond sales.

“Banking a city isn’t very good business,” says Mendez, a banker himself earlier in his career, often raising municipal deposits for the community banks he worked for in California. “It’s typically very expensive….[but] they want a piece of the bond offerings, that’s where the big banks really make their money, and they’re hoping to get an inside track by handling the day to day banking for the city.”

Another challenge for small banks is that municipal deposits fluctuate wildly on a month-to-month basis, as tax payments come in some months but not others, bond sale proceeds may come in sporadically throughout the year but in massive amounts as much as a billion dollars at a time, and many payments also go out in fits and starts. While banks have access to plenty of tools to cope with natural ebbs and flows in deposits, larger banks with massive balance sheets can absorb those ebbs and flows more easily than smaller banks.

There are some tweaks like reducing collateral requirements for municipal deposits that could make it easier for more local community banks to hold portions of municipal deposits and leverage them to increase lending in Black and brown neighborhoods. The City of Chicago also has a much larger $9 billion investment portfolio that is part of its short, medium and long-term cash flow management strategy. City Treasurer Melissa Conyears-Ervin and her predecessor Kurt Summers have both made efforts to bring more racial representation into the private firms who manage that portfolio on behalf of the city. City council could also mandate some of the longer-term dollars in that portfolio be deposited instead in local community banks. The city would likely lose out on some investment income, but it could gain more local lending in return.

The inspector general’s audit recommends that the Department of Finance, City Treasurer and council finance committee coordinate to explore other solutions like changing the law to allow credit unions to serve as municipal depositories, or join San Francisco, Philadelphia and other cities where policymakers have been looking into the possibility of starting city-owned banks to hold city deposits and use them to support more local lending.

For now, Chicago policymakers want to acknowledge big banks are going to remain part of the municipal depositories picture. That’s why the new Lending Equity Ordinance, sponsored by housing committee chair Harry Osterman and expected to pass today, adds new requirements that banks with 500 or more employees provide data on diversity in staffing as part of their annual applications to be designated as municipal depositories. Many large banks have already said they are committed to racial diversity or equity in hiring. But Mendez says there are few meaningful avenues for the public to hold them accountable for those commitments on an ongoing basis. Chicago’s municipal depository designation process could become an avenue for that.

Banks already collect demographic data on every job application and report it to the Equal Employment Opportunity Commission. Ideally, the city would simply ask for that data, barring any specific applicant names, addresses or other personally identifying information. And while it still won’t solve everything about banking that doesn’t work for Black and brown neighborhoods, more diverse staffing does get at one of the other hidden barriers to credit that tend to exclude them.

“If you have two white middle aged men named Chip staffing your branch on the south side of Chicago, you’re probably not going to do a lot of business,” Mendez says. “People want to do business with people they know, who know them, whom they have shared life experiences with, and maybe live in some of the same neighborhoods they do. This stuff matters.”

The bill also requires that the city council hold annual hearings to discuss municipal depository applications — which Mendez is especially excited about, as it gives his institution a major annual event as an anchor for its work. The most recent drafts of the legislation also include new requirements for banks to report commercial lending data.

“I want to reward financial institutions that are on the right path,” Mendez says. “They don’t have to fix everything all at once, but where they’ve made incremental progress I want to celebrate that and where they’re lagging I want to call that out. I’m salivating at that annual opportunity.”