Denver Direct: Move Our Money

Friday, February 19, 2010

Move Our Money

You may be aware of a movement suggesting that you move your money out of too-big-to-fail banks (TARP recipients) into smaller community banks as a way to protest the actions of these giant banks. We noticed some time ago that our City tax payments were going to Dallas, Texas, and, lacking a knowledgeable City Council person, we turned to our Council person-at-large, Doug Linkhart, who always answers our email questions. (You might consider doing the same if your City Councilperson is unresponsive.)

In response to Linkhart’s inquiry:

The City’s Acting Treasurer, Steve Ellington has asked that I respond to your inquiry of February 5th about why the City is not using a local bank to process its lockbox services. The short answer is that the City will be releasing its RFP for banking services, including lockbox processing later this year. As a result, the City will be able to evaluate if a local solution can provide better benefits. It is important to recognize that banking relationships are very intricate and the awarding of services is leveraged a number of ways to benefit the City.

Background: When the City issued its RFP and awarded its primary banking relationship with JP Morgan, the bank had a local lockbox processing site. After the Federal Reserve Bank provided notice that it was going to cease clearing physical checks in Denver (thorough the Kansas City Reserve’s branch here in Denver) JP Morgan made the business decision to relocate its lockbox services to Dallas to be closer to the Federal Reserve Bank clearing site. While there are three known local lockbox providers of sufficient size to be able to service the City, by having the processing site in the locality of the Dallas Federal Reserve Bank, JP Morgan Chase can provide the City credit on its payments the same day the payments are processed by the bank. These funds can then be invested one to three days sooner, than having the checks processed locally and then transported to Dallas to clear through the Federal Reserve.

Time Line for Bidding Banking Services: Treasury expects to issue its RFP for banking services in the fourth quarter of this year. We can evaluate the pricing and benefits of having lockbox services locally as part of that process. The banking industry has been undergoing very significant changes, including greater use of imaging, which may mitigate the Federal Reserve processing at some point in the future. However, it is important to keep in mind that the City’s relationships with its banks have many facets to consider. For example, by having a number of services provided by JP Morgan Bank, the bank is motivated to apply its capital to the benefit of the City on debt issues. JP Morgan provides stand by purchase agreements and letters of credit on City debt transactions that other banks have declined to participate given the current difficult financial markets. Two of the local processors are not banks, and awarding them the services would mean the City might be unable to leverage its relationship if one of the nonbanks were selected to provide lockbox services.

But, until we have the responses, it is difficult to ascertain and quantify what a competitor can provide. If you have any additional questions, please let me know.

Bob Gibson

Director of Financial Management