Why Should We Build a Public Bank?

Once upon a time, the United States had a much more diverse financial system. But by the end of the first Gilded Age, large Wall Street institutions had established a virtual stranglehold over the plumbing of our economy. That might change if AB857, a bill to allow the creation of publicly-owned financial institutions, passes in California. Having cleared the State Assembly in May, it’s currently making its way through the Senate. Even the New York Times has taken notice.  

What is a public bank? There are many possibilities and no set template. Currently, there are only two public banks in the U.S.: the Bank of North Dakota, which has been around for a century now and is quite successful, but pursues investments along similar lines to the Wall Street model that proponents of the California bill are trying to escape; and the Territorial Bank of American Samoa, which just opened its account with the Federal Reserve last year. 

If the charter amendment passes, it will open the door for San Francisco to establish its own municipal bank via ballot initiative, an effort the SF Public Bank Coalition is already gearing up for. San Francisco has a chance to be a real trailblazer in this area. This brings both great opportunities and risks. 

The first challenge is to figure out how to talk about them in a way comprehensible to voters. Banking is a complicated subject, and the finance industry benefits greatly from the aura of mysticism that surrounds its operations. You can spend years delving into the arcana of financial management and still have lots to learn, but the fundamentals are actually quite straightforward.

How does it work?

The SF Municipal Bank Feasibility Taskforce report presents two models that, when combined, constitute what most people think of as a public bank. The first is to duplicate the functions of a commercial bank in managing the city’s $100 million in short-term accounts and processing approximately $13 billion in payments that cycle through the city’s accounts each year. Currently, most of these functions are performed by Bank of America and U.S. Bank, two massive commercial institutions.

Taking control of its own banking would allow the city to divest from for-profit banks that also support fossil fuel companies, the military-industrial complex, and other evils. It would give us greater control over where exactly our money is invested, and strike a small blow against the global dominance of megabanks. While San Francisco accounts for only a tiny fraction of Bank of America’s total deposits, the effects would quickly cease to be insignificant if other large cities followed our lead.

The second model is to create what is in essence a large-scale revolving loan fund for subsidizing investment in businesses that provide public goods like affordable housing and green infrastructure. Such a fund would offer an alternative source of financing at a lower-than-traditional interest rate for projects in the public good.

When most people talk about a public bank, they’re talking about an institution that can do both of these things at once–a combination of models one and two. This is the most expensive and risky option, but also the only one capable of revolutionizing the way the city’s money is used.

What none of these options involve is “retail” banking–i.e. offering checking and savings accounts to individuals and small businesses. Doing so would put the Public Bank into the position of competing directly with existing community banks and credit unions for customers. It would also require a much more complicated form of charter from the state. 

What are we trying to accomplish?

A public bank can help the city accomplish a number of goals. In addition to divesting from harmful industries and increasing the city’s control over its finances, the public bank could increase the transparency and accountability of the city’s financial operations, incorporating voters more into its decision-making processes with respect to the types of projects it funds. 

These are likely to include public goods that commercial banks are reluctant to support–including, potentially, low-cost student loans and support for smaller-scale community-based financial institutions, like credit unions and smaller community banks. For the sake of simplifying their projections, the Task Force report assumed that the Bank’s focus would be exclusively on financing affordable housing development, but there are many other possibilities. In Germany, for example, a massive network of public banking institutions played a key role in developing a thriving renewables industry, which now generates almost 50% of the total energy the country consumes. 

Over the long term, the prospects grow more exciting. One municipal bank is not going to radically change the financial industry, but a network of them might–particularly when the next financial crisis comes. Building out alternative economic structures is absolutely central to any hope we have for re-envisioning our broken political system–whether that means progressive reform of the sort touted by Elizabeth Warren or anticapitalist revolution. 

So long as big projects–infrastructure, green energy, large-scale housing development–can only be accomplished with Wall Street support, corporate banks control our society’s ground of possibility. 

How do we create it?

Not overnight. Whatever the final form, the bank will be expensive to establish, and it will require a phased-in approach. We will probably need to work from two different sides at once. 

The first side is to centralize and expand the loan programs the city already operates, which are currently spread across many different departments–notably including the Mayor’s Office of Economic and Housing Development and the San Francisco Office of Economic and Workforce Development. Given that the city already has experience managing these types of programs, the technical challenges to establishing a master fund should not be prohibitive. Over the long term, a public bank could increase efficiency by avoiding duplication of functions.

The other side is day-to-day money management. Here it may be possible to purchase an existing bank and use the skeleton to build a municipal financial management operation. Over the medium term, this operation is not going to save money: the city currently pays Bank of America less than it receives in interest on its deposits. But this is likely the only way to meet the goal of divestment from harmful industries.

What are the risks?

The risks are significant. The money going into the bank will be taxpayers’ money, which the city uses for funding existing social programs, as well as paying to keep the many services it provides running day-to-day. For this reason, traditional banks invest municipal funds in exceptionally conservative areas. Most of SF’s deposits are backed by securities issued or guaranteed by the U.S. Treasury, specifically Fannie Mae and Freddie Mac bonds. 

There’s no reason that the public bank can’t manage the city’s money as effectively as a traditional banking institution; but in order to do so, at least over the short term, it’s mostly going to be copying the current model. Because the money it hosts will be vital to the city’s operations, a public bank will have less scope for innovation than a nontraditional community-based lender like a credit union or financial collective, and will probably channel much of its public service through the latter type of organization.

The other major challenge will be funding the bank. First, there’s the question of capitalization: federal regulations require that banks hold assets about 10% in excess of their liabilities to absorb losses. This money is essentially lost to the city, since it can’t be touched without endangering the bank’s ability to borrow. 

Second, the bank is likely to require ongoing subsidies in excess of the initial capitalization for at least 10 years. As the Task Force report projects, a path toward financial sustainability exists, but it’s a slow one. If the kind of loans we want the public bank to make were lucrative, commercial banks would already be making them. The imperatives of profit and of the public good are rarely compatible.

In general, so long as we have a centralized global financial system run through Wall Street, there’s bound to be a constant push-pull between our desire to make a democratic, innovative, and accountable public bank and the need to work within the existing capitalist system to keep the city’s finances afloat. Navigating these tensions will require a delicate balancing act.

Why should we support it?

The expense is probably the most compelling argument against establishing a public bank. The Task Force Report gives an estimated total cost of $3.9 billion for the combined model to reach breakeven–that’s an aggregate of start-up costs, subsidies, and initial capitalization. Many folks in the SF Public Bank Coalition think those numbers are too high. But let’s take them at face value for our purposes here. The more important question: what’s the cost of not building a public bank? 

$3.9 billion might sound like a lot, but it’s a drop in the bucket compared to the recent $30 billion taxpayer-funded PG&E bailout–and from here out, every year will probably bring higher climate-change related costs. As it stands now, the city’s economic health is inextricably intertwined with that of the global financial system, which hurtles from crisis to crisis and depends for its viability on an ever-increasing supply of unpayable debt. Even in the most stable times, Wall Street institutions function as a laundering service for money that encumbered workers extract from the world’s rapidly depleting natural resources. 

We cannot opt out of this system overnight. But we can begin to develop something better. And when the next financial crisis comes, we’ll be in a much stronger position to support our regional economy if we’ve already invested in establishing channels for local reinvestment and laid the foundation for a culture of democratic, innovative finance.