Policy Spotlight
Public Banking

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Author: Bryna Godar
The public banking movement has gained significant momentum in recent years, with groups across the country looking into the viability of government-owned banks for their communities. From a “pot bank” in Los Angeles to a “public infrastructure bank” in Massachusetts, proponents of public banking view it as a way to address community needs and better leverage taxpayer funds to benefit the public.

The idea of public banking in the U.S. isn’t a new one — the state-owned Bank of North Dakota has been operating for 100 years, gaining widespread bipartisan support despite initial political opposition. And early banks in the U.S. were sometimes owned partially or entirely by states, like in Vermont. But the idea has gained new momentum in the years since the 2008 financial crisis. According to the Public Banking Institute, 15 states and 11 municipalities are taking official steps to explore public banking, and more than 50 organizations are promoting public banks.

The public banking movement is not without its critics, however. In 2011, the Federal Reserve Bank of Boston produced a feasibility report advising against the idea, and members of the banking industry have mounted opposition to the idea in New Mexico and elsewhere. Some of the greatest challenges public banks face include high up-front costs, risks of corruption, and the overall difficulty of integrating a new institution into the banking industry.

This article will provide an overview of public banking, including a discussion of the Bank of North Dakota and the growing public banking movement nationwide.

What is a public bank?

Put simply, a public bank is a financial institution that is owned by the government and funded by public revenues. It has many characteristics similar to commercial banks but is run by the state, city, or other government entity and is beholden to the public rather than shareholders.

Understanding the structure of public banks therefore requires some discussion of the current design of commercial banking. Commercial banks have three main functions that are important for this explanation: money creation, revenue production, and credit allocation.[1]

Money creation

Commercial banks create money through the joint use of loans and deposit accounts. (For more detail, see Roundtable No. 1 on Banking and Money Creation.) When a bank lends $100 to a customer, the bank does not lend out $100 of its own reserves. Instead, it “creates” the $100 by simultaneously recording a $100 loan that the customer owes the bank and crediting the customer’s deposit account with $100. The customer can then start using that $100 that didn’t exist prior to the transaction, although it must eventually pay $100 back to the bank. The bank’s balance sheet meanwhile remains in balance because both its assets (the loan) and its liabilities (the deposit account) increase the same amount.

Revenue production

Banks profit from this money creation system by charging interest on loans. If the loan in the example above has an interest rate of 10 percent annually, the customer then owes $10 in interest by the end of the first year of the loan, in addition to the $100 principal. This $10 becomes the bank’s revenue.

An additional way commercial banks earn revenue is through interest from the Federal Reserve. Banks have accounts at the Federal Reserve that function similarly to individual deposit accounts. In 2008, banks started earning interest on these accounts, providing another source of revenue.

Credit allocation

With the ability to create money and profit from that money creation, commercial banks are then able to decide where to allocate credit. If, say, the housing sector seems very profitable, banks can expand credit in that sector while declining to extend credit in a less lucrative area. They additionally decide who to loan to and how much interest to charge based on markers like income, employment history, repayment history, and credit score.

Banks are the only way money enters the economy other than government spending, so this ability to inject money in certain sectors affords banks the opportunity to significantly shape the economic landscape. And this power comes with a past and present of discriminatory lending practices, both by private banks and by government organizations.

How public banks fit in

Public banks would function similarly to commercial banks, but all of these powers would be vested in the public and their representatives instead of shareholders and executives. This means that money creation would be done by the public, the public would earn revenues from that money creation, and the public could decide how and when to allocate credit. The exact way this operates depends greatly on the design and mission of the particular bank, but some options include prioritizing low-interest student loans, small business development, or agriculture loans. The Bank of North Dakota offers one example of these principles in practice.

The Bank of North Dakota

The Bank of North Dakota was established in 1919 in response to frustration among farmers about high interest rates from big banks. Its founding mission was to promote agriculture, commerce, and industry in North Dakota while being helpful to and assisting in the development of other financial institutions.

In keeping with that mission, BND provides most of its services in partnership with local banks and credit unions instead of working directly with individuals. The main way it does this is through participation loans, which are originated by local banks and credit unions and funded in part by BND. In terms of money creation, these participation loans resemble individual loans to the banks originating the loans — the originating bank has an account with BND, and BND both creates a loan on its balance sheet and credits the originating bank’s account with the funding. The difference is that the individual borrower, not the originating bank, is responsible for paying the principal plus interest. The originating bank then distributes that payment to BND according to the terms of their participation agreement. About half of the bank’s $4.6 billion loan portfolio in 2018 consisted of this type of loan. The remainder was comprised of state loans, residential mortgages, and student loans. Student loans are the only significant area in which the bank works directly with borrowers. The bank’s residential mortgages are mostly purchased on the secondary market, allowing local banks to free up lending capacity without giving new business to competitors.

The bank also operates in some ways like a small central bank, providing coin and currency, clearing checks, holding deposit accounts for banks, and offering the ability to settle Federal Reserve activity through BND accounts. It also assists local banks with short-term liquidity needs and buys up loans from banks during financial downturns to help increase their capital ratios.

In terms of design, the bank has several interesting features that distinguish it from commercial banks. Firstly, all state funds and funds of all state penal, education, and industrial institutions must be deposited in BND under state law. Consequently, the majority of BND’s deposits come from state taxes and fees, with the rest coming from corporate accounts, city and county governments, and residents. Additionally, in contrast to most commercial banks, BND is not a member of the Federal Deposit Insurance Corporation, instead guaranteeing all BND deposits with the full faith and credit of the State of North Dakota.

Many agree that BND played a positive role in stabilizing the state’s economy through the Great Recession, but there is uncertainty about how large that role was, especially given the state’s oil boom and strong agricultural sector. The bank’s more quantifiable impacts include contributing to the state’s general fund and supporting local banks and credit unions. Since its first transfer of $1,725 in 1945, BND has contributed more than $1 billion back to the state’s general fund. In the past decade, its annual contribution has varied widely, from $2.8 million in 2011 to $186.9 million in 2017. For reference, the state’s 2017-2019 two-year budget was $13.55 billion, with $4.3 billion of that coming from the general fund.

BND’s support to smaller banks has meanwhile fostered a diverse local lending market, with nearly six times as many local financial institutions per person than the country overall. According to the Institute for Local Self-Reliance, banks and credit unions with less than $10 billion in assets accounted for only 29 percent of deposits nationally in 2014 — in North Dakota, they accounted for 83 percent of the market.

The growing public banking movement

States and municipalities around the country are realizing the potential benefits that public banking may provide. As of early 2020, fourteen states, as well as Washington, D.C., and multiple municipalities, had initiated studies, task forces, or ballot initiatives to explore public banking feasibility. Much of this momentum has developed from efforts led by community groups. Local organizations opposed to major Wall Street banks have partnered with government officials, unions, and local businesses to advocate for public banks that will prioritize economic development and funnel profits back into the community.

In New Mexico, for example, community-based groups began to pursue the idea of public banking in 2012. After determining that New Mexico’s political climate was not yet receptive to a statewide public bank, activists centered their attention on municipal efforts in Santa Fe and Albuquerque. Although an initial Santa Fe report found that a public banking initiative would be feasible, a city task force later determined that Santa Fe’s finances were not sufficient to establish a bank at the municipal level. Consequently, multiple groups have united efforts in the Alliance for Local Economic Prosperity to pursue public banking at the state level.

In California, activists successfully advanced legislation that will make it easier for municipalities to establish their own public banks. Signed into law in October 2019, Assembly Bill 857 gives municipalities the power to establish public banks and provides a framework for that process. In tandem with that legislation, major cities like San Francisco and Los Angeles have been examining the feasibility of municipal banks, and New York legislators started considering a similar proposal for their state.

In Massachusetts, meanwhile, public banking advocates have galvanized the movement around local concerns about infrastructure. The Mass Public Banking working group has advanced legislation that would establish a public bank tailored to offer infrastructure financing to Massachusetts municipalities. The idea is currently being studied in the Massachusetts Legislature.

New Mexico, California, and Massachusetts are a small sample of the states where public banking movements have been growing. Efforts to establish a public bank in the U.S. territory American Samoa succeeded in 2018, and more than fifty organizations around the country are working to promote public banking.

Rationales for public banking

The touted benefits of public banking are numerous, including everything from spurring economic development to funding public infrastructure projects. The specific impact of a public bank would depend greatly on its structure, its mission, and the community in which it exists. Some of the potential benefits public banking proposals have focused on thus far include:

  • Enhancing accountability: Given that a public bank is owned by the government and funded by public revenues, including taxpayer money, proponents of the system view it as a way to enhance accountability and transparency in banking.
  • Lowering debt costs for local governments and funding public infrastructure projects: Because public banks are dedicated to serving the public instead of investors, they can charge lower interest rates on loans to state and local governments, making enough revenue to operate without the need to pay high salaries or investors.
  • Funneling interest profits back into the community: In commercial banking, interest payments on loans go to banks’ and shareholders’ profits. In public banking, interest payments on loans similarly go toward bank profits, but these can then be funneled back into the community through appropriations to a state general fund or through community development programs. In 2018, BND had a net income of $160 million, with a return on equity of approximately 18.5 percent. For reference, JPMorgan Chase’s return on equity was 11.9 percent at the end of 2018.
  • Strengthening local banks: In line with the Bank of North Dakota model, new public banks could partner with local banks and credit unions to boost their lending capacity.
  • Benefitting from Federal Reserve interest rates: In 2008, the Federal Reserve started paying interest to depository institutions on their reserves. A public bank can similarly earn interest on its reserves, using that interest to further benefit the public. BND, for example, earned $1.545 million on its reserves in 2018.
  • Spurring economic development: Depending on its structure and the needs of the community, a public bank can provide additional credit to the community through small business loans or other types of funding. The Bank of North Dakota, for example, uses its profits to fund “mission-driven loan programs,” including interest buydowns and below-market-rate loans for economic development and infrastructure projects.
  • Providing banking access to the cannabis industry: In states where it is legal to grow and sell marijuana, processors and retailers are still operating largely on a cash-only basis due to ongoing federal prohibition. Some are looking to public banks as a way to fill that banking need, although the federal government is also considering a bill that would allow banks to maintain accounts for state-approved cannabis businesses.
  • Stabilizing the economy: Although many agree a public bank would not single-handedly save an economy, it may have the potential to cushion the blow by expanding credit at a time when the rest of the economy is contracting.
  • Lowering interest rates on student loans or other lending: Public banks could additionally provide low-interest loans directly to individuals if the community identifies such a need. The Bank of North Dakota, for example, expanded its services in recent decades to include student loans. Its loans for North Dakota students for the start of the 2019-2020 school year have a fixed interest rate of 4.74 percent, higher than the federal undergraduate rate of 4.53 percent but lower than many private lenders. Its variable interest rate is meanwhile 3.93 percent but hovered around 2 percent from late 2009 until 2016. Although the bank still encourages students to utilize federal loans first, it offers a state alternative to private lending.

Public banking challenges

With its growing momentum, public banking has also attracted a host of critics. Many worry that starting a public bank will have significant short-term costs that may not be outweighed by any long-term gains. A Los Angeles inquiry into public banking costs described the ultimate price of a public bank as “exorbitant.” San Francisco similarly found that public banking would be an uncertain investment regardless of design.

Outside of the initial costs, some critics are concerned about public banks’ susceptibility to political influence. Without proper safeguards, loans could be given based on political clout rather than creditworthiness, fostering corruption and potentially destabilizing the banks.

The idea of public banking has also faced opposition from the banking industry. The president and CEO of the Bank of North Dakota has stressed that the bank is successful because it partners with North Dakota’s financial institutions instead of acting as a competitor. But some activists have specifically rallied around the idea of public banking as an alternative to big banks, setting up a potentially steep political hurdle.

Despite these challenges, the problems that the public banking movement intends to solve, whether economic inequality or infrastructure investment, are not going away. If designed well, public banks could offer one way to address these concerns.


[1] For a more thorough discussion of these functions, see Morgan Ricks, The Money Problem: Rethinking Financial Regulation (2015) and Andrew Jackson & Ben Dyson, Modernising Money: Why Our Monetary System is Broken and How it Can be Fixed (2012).