The establishment of publicly owned banks – those owned by some form of government — could give rise to a new lending entity in Pennsylvania that some say would directly compete with traditional banks.
With credit unions and financial institutions expanding their reach and footprint into areas previously occupied by traditional banks, some say publicly owned banks create another unequal business climate for an initiative loaded with risks.
With a publicly owned bank, a public entity, such as a state or local government, owns the bank and would fund it through an initial reserve fund. With a publicly owned bank structure, the bank returns profits to the general fund instead of stockholders. In addition, a publicly owned bank does not have any ATMs, branches, tellers, or marketing and advertising costs, which is why proponents do not consider them retail banks.
Advocates point to The Bank of North Dakota, the nation’s oldest and only publicly owned bank as being a model to replicate in other states and municipalities. This bank, which recently turned 100, partners with community banks, credit unions, financial institutions and development agencies to provide credit for locally directed economic development.
While the U.S. has only one public bank, the public banking movement is very active, according to Walt McRee, senior advisor and former chairperson of the Public Banking Institute, a California-based not-for-profit organization seeking to create public banks.
McRee described The Bank of North Dakota as one that’s a versatile and flexible partner for banking interests, which differs from the traditional model of privately-owned banks, where money is issued as debt, with interest that goes to the bank.
In Pennsylvania, proponents are working to create a publicly owned bank for the state in addition to one that would serve the municipality of Philadelphia, and that the city would own. Though there is no legislation in place advocating for the creation of either, a study under way in Philadelphia would determine the feasibility.
“We keep building support and now Philly has advanced to the study phase, and we are preparing state legislation to introduce this year, to make it an issue in the 2020 elections,” said Mike Krauss, chairman of the Pennsylvania Public Bank Project, a not-for-profit based in Levittown, and a founding director of PBI. “We want to bring forward a bipartisan group to circulate the legislation.”
The organization would like to bring forward a co-sponsored memo as the first step toward getting lawmakers to create a bill. The study for Philadelphia has funding and the search for a consultant is underway, Krauss said. Philadelphia City Council set aside funds for $25,000 for the study, he added.
Krauss, who has been working on this effort since 2014, admitted the process has been slow and involves educating people on what public banks are and how they work, while also trying to get lawmakers to go against the idea of how banking has been done forever, he added.
Nevertheless, he believes it’s a national movement, noting that other municipalities and states have completed studies over the past four years.
“I think the need is evident,” Krauss said. “The benefits are very very clear. They [publicly owned banks] work with and strengthen the local banking industry. You keep your money and invest it in the local community. The bank’s profits come back to the commonwealth or the city as non-tax revenue, lower debt service.”
However, some see concerns with government intruding on the banking world.
“Many times, the government is trying to get into things that they shouldn’t be getting into,” said Kevin Schmidt, president and CEO of Neffs National Bank. “Who is going to regulate this? What federal entity is going to oversee the state banks?”
Schmidt also raised concerns over whether they would need to buy insurance through the Federal Deposit Insurance Corporation if the bank has a loss. He also questioned what happens if the bank goes bankrupt and who would pay for any losses.
Krauss said there would be low probability of a public bank going bankrupt. As an example, the Bank of North Dakota has an industry low default number on account of the double vetting of loans from both the public bank and the public bank partner. In addition, the public bank would employ salaried staff only, with no bonuses and commissions to make deals, he said. Furthermore, the public bank would keep all the decisions in the hands of the professional bank staff, he said, with no politics involved.
Nevertheless, the Independent Community Bankers of America, an organization based in Washington, D.C., issued a statement emphasizing what it sees as the risks associated with publicly owned banks.
The deposits of publicly owned banks that forgo FDIC insurance would be backed by the full faith and credit of the state or municipality, which would pose substantial risks to taxpayers, the ICBA said.
Echoing those concerns, the Pennsylvania Bankers Association of Harrisburg issued a statement that it does not see any need for public banks. Furthermore, the state government already administers community and economic loan programs, a number of which are open to participation by banks, said Duncan Campbell, president and CEO of the Pennsylvania Bankers Association, in a statement.
Campbell also said a public bank would place state funds at risk because it could not obtain deposit insurance from the FDIC.
However, Krauss said a publicly owned bank would not need to buy insurance but would be self-insured.
“Deposit taking and lending are highly regulated businesses,” Campbell said. “Banks have extensive federal obligations to know their customers, trace the source of the funds, file reports on suspicious activities and work with law enforcement. A public bank could be susceptible to political pressure to make loan decisions on factors other than sound underwriting criteria, placing public money at significant risk.”
Furthermore, public banks would also directly compete with community banks, diverting deposits from local communities, according to the ICBA.
“I don’t see it becoming more popular as some would like it be,” said Aaron Stetter, executive vice president of policy and political operations at the ICBA. “We are opposed to the establishment of all forms of publicly owned banks. I understand the argument that on the face of it, a public bank would be altruistic…but it opens up other problems.”
One of those problems would be the question of who regulates them, he added.
“I think the largest megabanks, they are a popular foil for this,” Stetter said.
Creating public institutions such as publicly owned banks would bring a different host of problems, he added.
Instead, Congress should exert greater oversight of “the too big to fail banks,” he added.
Furthermore, Stetter sees a history of “mission creep” with publicly owned banks that could expand beyond the scope of the original intent. As an example, credit unions and the Farm Credit System have expanded beyond their original scope.
“That comes to the detriment of tax-paying community banks,” Stetter said.
The private banking sector already provides capital and other services to businesses and consumers and tax revenue to governments, Campbell said.
“The banking industry welcomes competition, but government competition is not necessary or helpful and could diminish economic growth, reduce jobs and tax revenue and hinder communities,” Campbell said.
However, some say publicly owned banks could provide much needed funding in ways that banks do not.
Aside from getting more affordable credit into the community, public banks can also make direct loans to school districts instead of issuing a bond, Krauss said.
Those needs that a city would otherwise go more into debt to fund would be funded through a public bank that could refinance that cost, McRee added.
Krauss doesn’t view publicly owned banks as competing with private banks because they can lend directly to a government entity, such as a school board or water authority for construction and also in partnership with a local bank or credit union to their customers, including business or mortgage loans. The local bank would keep servicing customers and the publicly owned bank would not offer retail banking services, such as credit cards or checking and savings accounts, Krauss said.
In this sense, publicly owned banks are a non-compete, he added.
“Community banks are drying up and going away,” McRee said. When these banks go away, small businesses suffer, since many get their loans from small banks, he added.
Supporting a state’s infrastructure and small businesses are two areas that publicly owned banks could help with, he added.
“The public bank brings into play a new source of capital for supporting government and community needs,” McRee said.
As an example, the financial institutions in North Dakota collaborate with the state’s public bank on loans and for 15 years, North Dakota Bank has had a 17 percent to 26 percent return on equity, he said.
The state also came out of the Great Recession largely unscathed, he said.
“It has all the positive metrics that you want to see for a healthy economy,” McRee said.
With the North Dakota model, bankers who know how to access risk are the ones who manage the bank, he added. This puts the special interests a couple of arm’s length away from the operation in North Dakota.
The North Dakota model is just one way to establish a publicly owned bank, he added.
Sign In
Free Newsletter
