Can Public Banks Advance Social Justice?

“Banks” and “social justice” in the same sentence? That’s a new one! But this is exactly the combination being sought in a roughly 10-year old campaign to introduce banks owned by public entities: states, counties, and cities. The following diagram, from the New York City public bank initiatives, gives a simple illustration of the role of a public bank:

Public banks aren’t new, but they’re very rare. A few have been tried and failed. Just one – the state-owned Bank of North Dakota – has lasted the course and still operates quite successfully. Now over 100 years old, BND consistently delivers strong financial results. It also enables the many community banks in North Dakota to serve all segments of society. This is good stewardship of the state’s tax revenues.

BND is frequently cited as proof that every state should have public banks. But of course, North Dakota is not California or New York. The North Dakota model is not directly applicable in other states, but its long term results are encouraging. If they can be successful public banks’ potential impact is quite compelling, especially for more liberal minds.

Why Public Banks? Why Now?

There has been a growing groundswell of concern for decades about how commercial banks work, especially the big ones. Their lending practices have favored the privileged. Their investment policies have supported environmentally unfriendly businesses. States with strong lobbies for “green” energy, minority businesses, and infrastructure support for more impoverished areas have seen particularly strong interest. On the one hand, they see their tax and other revenues held in large banks with values that conflict with state leaders’ political ideals. On the other hand, they cannot devote funds to the businesses and communities that they see needing them the most.

This diagram, from Occupy.com, illustrates (with something of an anti-capitalist bias) the difference between private and public banks:

While I would dispute the idea that public banks replace the evils of derivatives and market speculation with higher employment and lower taxes, it is a simpler model and more in local authority interests. In the long run, though, lower infrastructure costs and local job creation are both possible outcomes.

What Would a Public Bank Do?

Quite simply, a public bank would act as a place for public entities (states, counties, or cities) to deposit funds that aren’t needed immediately, knowing that these funds would boost their economies and serve their social impact objectives. Public entities collect revenues against future needs. In the meantime, funds should serve the community, rather than providing cheap deposits for large banks to lend to businesses that, at best, do not serve the local community.

Public revenues include taxes, fines, fees for services, Federal government grants, and various smaller sources. Any healthy public entity will have short-term cash assets that they do not yet need to spend. Also, they will have longer-term investments that offset long-term liabilities such as pension funds.

The general idea is that instead of holding deposits in commercial banks, public entities would deposit them in their public bank. The bank would ensure that it could return deposits when needed. In the meantime, it would make loans:

• to public agencies to support infrastructure and services needed by less well-served communities or environmentally friendly projects
• to community banks or credit unions to allow them, in turn, to lend to minority-owned businesses in their communities
• directly to underserved local businesses or communities (though not all public banks will offer direct commercial or consumer loans)

Loans would be made at near-commercial rates and would be risk-managed as they would in any bank. They could then pay a modest level of interest on deposits and dividends to the sponsoring public bodies.

The bank could provide other banking services, such as payments, payroll services, and longer-term investments, either directly or in conjunction with community banking partners.

Why Hasn’t This Happened Already?

There have been several barriers to public banks throughout most of the United States.

First of all, state constitutions, in many cases, prohibit the state, or its counties and cities, from lending its revenues to others. The first action to implement public banking, therefore, is to make it legal. The breakthrough came in mid-2019 when California enacted AB 857, which permits creating a limited number of regulated public banks. Several other states, including New York and New Jersey, have legislation progressing through their state assemblies.

Secondly, new banks require significant capital funding. Any public banking bill will require that somebody regulate the public banks. In California, AB 857 requires that the FDIC, which insures retail deposits throughout the US. (See below for some implications of this decision). Under FDIC rules, any loans made by the bank must be backed by capital. While the rules are somewhat complicated, requiring risk-weighting of loan assets and supporting various types of capital, they do require a significant equity investment to set the bank up in the first place.

Thirdly, a public bank must balance several conflicting priorities. Each priority has a different group of stakeholders. Conflicting priorities complicate decision-making and will likely result in conflicts during the bank’s formation and ongoing operations. At a minimum,

• The bank must create a safe, stable, and sustainable return on investment for the owning entities. These are, in effect, the bank’s shareholders.
• Lending practices must favor underserved parts of the community in a manner that generates tangible and measurable social impacts. Social and economic justice advocacy groups will monitor results closely!
• Lending and operational practices must be environmentally neutral at a minimum, and there will be pressure to demonstrate environmental improvements (e.g., investments in renewable energy). Environmental advocacy groups, and associated political interests, will monitor this closely too.

Fourthly, and related to the previous challenge, public banks form in a political context. Since many public officials are elected, they must demonstrate to their constituents that they are appropriately supporting or opposing how public money is used.

Fifthly, and related to the bank’s multiplicity of stakeholders, establishing effective governance is challenging. Every stakeholder wants control (or at least they think they do). I’ve seen this in recent organizing meetings for a regional public bank: for example, activist groups want assurance that the bank won’t deviate from commitments for social, racial, economic, or environmental justice. At the same time, the bank must be responsibly run, and shareholding entities must be confident that their deposits are safe and their planned returns are reasonably assured.

These issues are all over and above the usual difficulties with starting and running a new bank, which in itself is not easy. But if we can overcome them, the benefits can be substantial, as discussed earlier.

What Comes Next

Several steps are necessary to form a public bank.

1. Legislation must support it. California’s AB 857 completes this first step, as will similar bills in other states that are pursuing approvals.
2. Political will must drive it. This is the work of lobbying, political, and community action groups.
3. All stakeholders must, together, agree on mission, scope, priorities, and values.  
4. The bank will require a business plan. The business plan serves several purposes. It serves as the basis for agreement and support from all stakeholders. It is the basis on which regulators and government officials will approve the bank. And it will be the basis for investment decisions for the initial bank shareholders (most likely counties and cities).
5. The organizing body must set up governance structures, including the board and its committees, management team, and advisory groups.
6. Initial capital must be raised from shareholding entities and, to a lesser extent, long-term borrowing. (As noted above, raising a public bank’s initial capital is one of its biggest challenges. Work on this should start early, and the business case should present a compelling investment case.)
7. Before funding, the bank will need public hearings and local government decisions that support starting operations.
8. Once some funding is available, the bank can build its staffing, create lending and many other policies and procedures, build systems, and make partner connections.
9. The bank can then receive deposits and make loans as intended.

This is not a comprehensive list. As you can see, it isn’t a simple matter to set up a public bank. However, the work is worthwhile in order to reap the rewards of responsible management of public funds, greater access for underserved businesses, and stronger investment in environmentally favorable projects.

The simple answer to my initial question – “Can Public Banks Advance Social Justice?” – is “yes! But it won’t be easy.”