High-profile banking laws driven by politics and model policies are roaring out of state legislatures—our “laboratories of democracy.” And are we headed toward being a country of red-state banks and blue-state banks?
By Craig ColganBecause it meets only every two years, to no one’s surprise the 88th Texas Legislature’s schedule is packed this year. More than 7,000 bills are expected to be filed.
What started in Texas and in a few other states in the last few years has spread. The many anti- and now anti-anti-ESG bills in state legislatures illustrate a larger trend: What happens in any one legislature absolutely will affect matters in other states. And soon. One reason for that is the proliferation of model laws from advocacy groups. While helpful to lawmakers, their use has become an often relied-upon method by legislators seeking to turn a hot issue into legislation quickly.
“This is a dynamic that we have seen in full force over the last year,” says Anthony Pardal, VP in ABA’s Office of Strategic Engagement. “Model policy gives state legislators—who are already constrained by time and resources—ready-made legislation. So, what we’ve seen with policies like anti-ESG, is that they may start in one state, but rarely are they contained there.”
National trends drive state banking issues
The leading banking issue in state legislatures right now is ESG—or, as many in the banking sector refer to it, “forced access”—Pardal says.
During the 2022 legislative session, some legislators sought to use the banking sector to pursue unrelated policy objectives aimed at forcing financial institutions to bank or not bank specific businesses and industries. At first this was centered around the fossil fuels and firearms industries. In 2023, this trend has spread beyond just those two industries, from California, Texas and West Virginia and now into states such as New York, Washington and Oregon.
In New York, for example, one bill would forbid a state-chartered bank from financing or investing in entities operating private prisons, no matter their location. In Oregon, a bill would require human rights and climate considerations for every retirement fund investment.
The language of Florida’s S.B. 110 requires the State Board of Administration to consider only “pecuniary factors” when making investment decisions. In current political terms, this is an anti-ESG bill. The board manages the Florida Retirement System Trust Fund as well as the assets of a variety of other funds in the state.
The bill is part of legislation Gov. Ron DeSantis proposed to codify recent actions he took to “rein in the use of discriminatory ESG practices throughout the financial sector” by:
- Prohibiting large banks, credit card companies and money transmitters from discriminating against consumers for their religious, political or social beliefs.
- Barring financial institutions from considering “ESG credit scores” in banking and lending practices, potentially preventing Floridians from obtaining financial services like loans, lines of credit, and bank accounts.
- Permanently prohibiting State Board of Administration fund managers from considering ESG factors when investing the state’s money.
- Requiring the board’s fund managers to consider only “maximizing the return on investment on behalf of Florida’s retirees.”
The move has more direct effects on investment banks than commercial banks, Pardal points out. But those affected banks do have a considerable presence in Florida. Republican super-majorities in both houses of the Florida legislature suggests that the bill will likely become law.
In Michigan, a different outcome: S.B. 1192 would have required fiduciaries of the state’s public retirement system to also consider only pecuniary factors when making investment decisions. This measure defines a “pecuniary factor” as a factor that the investment fiduciary has determined would have a material effect on the risk or return of an investment with the funding objective of the system. “Material effect” would not include an effect that primarily furthers non-pecuniary, non-economic or non-financial social, political or ideological objectives—in other words, an anti-ESG bill. Its supporters called it a ban on politically motivated investing. The Michigan Bankers Association opposed the bill.
“While it was the first introduced, there were several others that approached prior to this with ESG concerns wishing to do something similar earlier,” says Patricia Herndon, chief policy officer for the Michigan Bankers Association. “We pushed back asking for some pause as we didn’t have anything on the books promoting ESG policies. We reached out to some of our partners (such as SIFMA, a trade association for broker-dealers, investment banks and asset managers) and together responded that we will always have concern with legislation that attempts to restrict a bank’s ability to serve their customers. Our bankers supported our position of educating on the downside of these restrictions.” Both Michigan houses flipped as a result of the 2022 election, which has meant at least a temporary pause for S.B. 1192 and similar bills.
The argument against these anti-ESG bills is, regardless of their intensions, they restrict choices for banks.
“More than anything, this is about the fact that these types of legislation are unnecessary and that banks are best positioned to determine their risk profile,” Pardal adds. “And that government shouldn’t determine who banks cannot lend to or must lend to. The fear is that it could create red-state banks and blue-state banks.”
Climate, crypto, credit unions
Several climate-related bills are back after failing the first time. In California, a bill similar to one opposed by ABA and the California Bankers Association that narrowly failed in 2022 has been reintroduced, requiring reporting of greenhouse gas emissions. New York’s version is similar in that it would require companies to annually disclose and verify their scope one, two and three emissions. These measures would apply only to entities with total revenues that exceed $1 billion in the preceding year, including revenues received by all the business entity’s subsidiaries that do business in these states.
Other issues bankers are concerned about percolating during this year’s state legislature sessions include cryptocurrency. Pardal expects to see a state-issued stablecoin bill from Wyoming and potentially a special purpose depository institution bill in Florida. A bill in New York would create the offense of crypto fraud. These offenses include virtual token fraud, “rug pulls”—when a fraudster pumps a token to investors before disappearing with the funds—private key fraud and fraudulent failure to disclose interest in virtual tokens.
Credit union bills include one in Missouri which would modify the requirements for a credit union’s field of membership. A bill in North Dakota would update the procedures for the voluntary liquidation of credit unions.
Craig Colgan is a senior editor at the ABA Banking Journal, where he also edits the ABA Risk and Compliance and ABA Bank Marketing channels.