California Should Take Its Business to Community Banks

(This op-ed originally appeared in the Sunday Insight section of San Francisco Chronicle on Sunday, February 14, 2016).

U.S. banks recently surpassed $200billion in fines, penalties and settlements for their misbehavior and fraud related to the 2008 financial crisis. The vast majority of these cases has involved the country’s biggest banks, but thousands of U.S. banks played no role in the fraudulent and criminal activities that led up the financial crisis. It is time for us to embrace the strong tradition of community banking for California’s government bank accounts and stop rewarding big banks that mistreat their customers and abuse our trust.

In the months leading up to the financial crisis, banks engaged in a range of predatory practices: deceptive marketing, inappropriate billing, rigging of benchmark interest rates, manipulation of the foreign exchange market, mortgage and mortgage-backed securities fraud, municipal bond rigging, and discrimination against minority buyers — to name just some of the misdeeds that regulators and criminal justice authorities have discovered.

California Attorney General Kamala Harris has been a national leader in the fight to penalize banks for their actions, and helped to spearhead the National Mortgage Settlement, a joint state-federal settlement from five major banks — Ally/GMAC, Bank of America, Citi, JPMorgan Chase, Wells Fargo — relating to their marketing and sale of residential mortgage-backed securities. After harming Californians, these banks agreed to provide various forms of relief to consumers on both the principal and interest payments of their mortgages.

Despite the top criminal justice official of our state penalizing these banks for defrauding our citizens, these banks still get to do business with the state of California. Throughout the year, the state of California’s bank accounts have cash balances of billions of dollars a day.

John Chiang, the state treasurer, maintains California’s bank accounts with eight banks, including all three that were part of the National Mortgage Settlement. California should not be holding its money at these banks, which have been found, by our own attorney general, to have defrauded our citizens.

Deposits are the lifeblood of banking. They are the raw materials with which banks make loans. As we place the state’s deposits into banks, we are supporting those banks and their activities. California taxpayer dollars should only be used to support those banks that have been working to improve Californians’ financial lives, not destroy them. The only bank out of the eight the state does business with that meets that qualification seems to be San Francisco’s Westamerica Bank.

The state has no lack of alternate banking options: More than 100 banks have a branch in the Golden State. Most of them are local banks serving their community without incident before, during and after the financial crisis. Treasurer Chiang should spread the state’s money to these community banks. Doing so will reward them for good behavior and give them additional resources to help support loans to small businesses and local citizens throughout the state.

Big bankers will argue that that the small banks couldn’t handle the load or get the statewide coverage the treasurer’s office needs to conduct business. Neither is true: It would be easy to set up a network of small community banks to provide the state’s necessary depository coverage. And while there will be some administrative overhead of moving away from the big banks — as the treasurer will spread taxpayer dollars across more, smaller, community banks — modern technology will keep costs marginal.

Off-the-shelf technology solutions, likely already in use at the treasurer’s office, will provide everything we need. I’ve seen these tools in action — I built and sold a financial technology startup to Silicon Valley Bank (which, for the record, has no government business, and is not to my knowledge interested in any). Turns out that the “little guys” can do everything the big ones can — with far fewer shenanigans along the way.

The gains of leaving these big banks behind are clear: We punish fraudsters, support local banks, create financial opportunity across the state, and reward the good guys. The treasurer should act immediately. He needs no legislative action or outside approval. With so many good California banks, he should no longer direct our funds to bad ones.

Zachary Townsend is a partner with the Truman Project and the director of direct channels at Silicon Valley Bank, which he joined as the co-founder of Standard Treasury, a Silicon Valley startup that seeked to simplify banking technology. The views expressed here are his own. To comment, submit your letter to the editor at