Audit of the Municipal Depository Designation Process

The Office of Inspector General (OIG) conducted an audit of the Department of Finance’s (DOF) administration of the process for designating municipal depositories. Banks designated as depositories hold and pay interest on funds deposited by the City and the Chicago Board of Education, essentially serving as the City’s checking accounts. The objectives of the audit were to determine if DOF ensures that banks applying for designation submit the required information, and whether the designation process serves the City’s goal of partnering with institutions that not only have the capacity to fulfill its banking needs, but also provide financial services to Chicago communities in an inclusive and equitable manner.

A community’s access to financing is critical to its prosperity. Financial institutions, however, invest much less in some communities than others. To address this inequality, Chicago and other cities have established responsible banking ordinances (RBOs) to encourage equitable lending by the banks that hold their deposits.

DOF administers Chicago’s RBO through a request for proposal (RFP) process to determine banks’ eligibility. The RFP process is intended to identify banks that can meet the City’s financial needs and have demonstrated a commitment to providing equitable lending and other banking services throughout Chicago.

The municipal depository designation RFP process occurs annually, as required by state law. DOF solicits and reviews banks’ submissions, then identifies eligible depositories in an ordinance. The ordinance is then transmitted to the City Council’s Committee on Finance. The Committee does not always present the ordinance for consideration by the full Council. When it does, following Council proceedings, the Treasurer’s Office determines which of the eligible depositories will hold the City’s deposits. If the full Council does not consider the ordinance, the list of eligible depositories established by the most recent enacted ordinance remains in effect. This audit focused on DOF’s role as the administrator of the process.

OIG concluded that, although DOF ensures that banks submit all documentation required by the RFP, it does not evaluate whether the banks provide inclusive and equitable financial services throughout Chicago. Furthermore, DOF, City Council, and the Treasurer’s Office have not coordinated their roles in the municipal depository designation process to achieve the City’s inclusivity and equity goals.

Although DOF ensures banks’ RFP submissions are complete, it does not evaluate the banks’ community investment and equitable lending efforts. DOF does identify potentially predatory loans, such as those with an interest rate higher than the federal funds rate. In these cases, the Department follows up with banks to inquire about the specific conditions underlying the loans. According to current DOF staff, however, they have never declined to designate a bank as a municipal depository on the basis of such lending conduct. Without undertaking a substantive evaluation of each bank seeking designation, DOF cannot identify demographic disparities in banking activity. Banks may then continue to lend inequitably across Chicago while the City continues to partner with them.

OIG also found that DOF, City Council, and the Treasurer’s Office have not coordinated their efforts in the municipal depository designation process to achieve the City’s objective of encouraging equitable banking practices. The three entities largely act in isolation, and Council designates depositories infrequently. Because Council has not regularly voted on the designation ordinance, one of the City’s previously active banks was able to keep its designation as a municipal depository until March 2021 despite not having responded to the RFP since 2012, and three banks that responded to multiple RFPs since 2016 did not secure designation until March 2021. Moreover, this lack of coordination has hindered meaningful discussion of alternative banking options that may better align with the City’s equitable banking goals. For example, DOF, City Council, and the Treasurer’s Office have all separately expressed interest in allowing credit unions to become municipal depositories. Members of Council and the Treasurer’s Office have supported separate ordinances addressing this issue, but without a coordinated effort, the initiative has failed to gain traction.

OIG recommends that DOF, in collaboration with City Council’s Committee on Finance, develop and implement a process to evaluate banks’ lending and deposit records for equitable financial services provision. This process should include provisions related to sharing evaluation results with Council and applicant banks. We also recommend that DOF collaborate with Council and the Treasurer’s Office to develop a coordinated municipal depository designation process that aligns with the City’s equitable banking goals and allows the City to deposit public funds with banks that share and live up to those goals.

In response to our audit findings and recommendations, DOF stated that it is working with the Treasurer’s Office and City Council committees to determine the information it will request and review from banks in the future. DOF also stated that it and the Treasurer’s Office are updating the 2022 RFP process—in manner compliant with applicable law—to ensure applicant banks have equitable lending practices. DOF committed to forming an evaluation committee with the Treasurer’s Office to ensure banks have met the requirements of the RFP. The Department committed to sharing information related to banks’ predatory and equitable lending with the City Council Committee on Finance.

Finally, DOF stated its commitment to promoting equitable lending opportunities across Chicago communities. The Department stated that municipal depositories may not be the best vehicle for achieving these equitable lending goals, and that it has formed a task force along with the Treasurer’s Office, State Treasurer, and banking institutions to explore alternative solutions.