California Considers Public Banking

Inside Subprime: Feb 7, 2019

By Lindsay Frankel

Public banking, an idea that gained popularity during the Occupy Wall Street movement, is now gaining traction as a policy solution in California and other states. As California Gov. Gavin Newsom said during his campaign, “We must break Wall Street’s chokehold on state finance and develop our own state bank.” Lawmakers in Michigan, New Jersey, and Washington have also turned to public banking as potential solution.

Advocates of a state-run bank say that such an institution could provide funding for low-interest student loans, affordable housing, and other projects that commercial institutions typically reject in the interest of turning a profit. But banking industry representatives say that public banking isn’t feasible.

There’s no question that establishing a public bank requires a complex coordination of efforts, but there is evidence that it’s not impossible. North Dakota has had a public bank since 1919, when a Nonpartisan League of farmers took action to combat rising interest rates on agricultural loans. The Bank of North Dakota offers low-interest student loans and subsidized loans to small businesses and farmers, and has been successful in part because of its partnership with private community banks. And American Samoa established a public bank after commercial banks stopped lending to the island in 2016. Drew Roberts, president of the Territorial Bank of Samoa, said it was an arduous task that took 18 months.

But North Dakota’s gross domestic product is a mere fraction of California’s, and the entire population of American Samoa is equivalent to a small city in California. There’s no precedent for the scale of Gov. Newsom’s suggested undertaking. And some argue that the benefits of a public bank would be comparatively limited.

Many public banking advocates are encouraging California lawmakers to start small with local and regional banking, which proponents say would save cities money while using taxpayer dollars in ways that correspond with local priorities. Other cities, including Santa Fe, New Mexico, and Seattle, Washington, have also explored the idea, but when lawmakers have requested feasibility studies, the evidence has indicated that a local bank is only a good idea in theory. And voters have yet to support the establishment of a local bank in California.

Most of the concern revolves around existing California regulations that would make it difficult for a public bank to succeed. While California law mandates that banks in the state be insured, the Federal Deposit Insurance Corporation currently doesn’t insure the Bank of North Dakota or the Territorial Bank of Samoa. And state regulations require that “for every infusion of taxpayer dollars an asset of at least equal value has to be set aside,” which would prevent a public bank from fully utilizing its deposits. Policy changes are required for municipalities to move forward with public banking, something new legislation sponsored by the California Public Banking Alliance could conceivably accomplish. Still remains the question of whether the idea is affordable for cities. A feasibility report for San Francisco estimates that the upfront costs of establishing a municipal bank in the city would be between $75 and $175 million, and there’s no telling what losses may occur on top of that.

With so many unanswered questions, it’s unlikely Gov. Newsom’s desire for a state bank will become a reality anytime soon. Assemblywoman Monique Limón is organizing a joint committee hearing on the issue to discuss it further. “This is the fifth largest economy in the world,” she said. “We can’t afford to get this wrong.”

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