Public Banking beyond the East Bay

The Friends of the Public Bank East Bay is a founding member of the California Public Banking Alliance, a network of 10 active groups advocating for the creation of local public banks from San Diego in the South to Humboldt County in the North. In 2019 the Alliance successfully passed the California Public Banking Act (AB 857), the first public banking law in the US in a hundred years, the result of a major grassroots effort with support from activists from across the state.

The Public Banking Institute supports local efforts across the US by providing research and legislative support, organizing town halls, and developing educational materials.

California Public Banking Initiatives

Since the passing of the California Public Banking Act in 2019, cities and counties across the state engage in a friendly competition to start the first municipal public bank in the US in a hundred years. Along with the East Bay the following groups are the closest to get a bank started in the near term:

Los Angeles : In October 2021, the LA city council unanimously voted to move forward with the creation of a public bank for the city of LA. The next step for the city is to hire a consultant to write the business plan. Watch their 2021 community teach-in here.

San Francisco : In June 2021 the Board of Supervisors unanimously voted to create a task force exploring the creation of a public bank. The task force includes seven leaders in the realm of community finance and affordable housing development. The City and County has hired the HR&A Team as a consultant, and that Team has published its Lending Gaps and Priorities Analysis for San Francisco.

People for Public Banking Central Coast : Activists and politicians from 3 counties and 7 cities have merged their efforts to create a regional public bank reaching communities from Santa Barbara to Santa Cruz. They are soon expected to issue an RFP for a viability study.

Nationwide Public Banking Initiatives

Seal of the U.S. House of Representatives

Washington D.C.: On December 13, 2023, Congresswoman Rashida Tlaib (MI-12) and Alexandria Ocasio-Cortez (NY-14) introduced the Public Banking Act of 2023, which facilitates the creation of state and local public banks. The bill establishes a robust federal regulatory framework, grant programs, and financial infrastructure to promote public banks and ensure their success. The bill also mandates minimum standards for public banks relating to environmental justice, tenant protections, labor standards, democratic governance, and consumer data privacy.
The full text of the bill is available here. You can follow the bill here.

New York : In 2021 the “New York Public Banking Act” was introduced into the state senate. Similarly to the California Public Banking Act this bill would create the legal pathway to create local public banks in the state. New York City and the city of Rochester are currently working with their city councils to move forward with local public banks. Watch their 2021 town hall with keynote speaker Eric Hardmeyer (former CEO of the Bank of North Dakota) here.

Check out this 2023 Publication:

“The Economic Impact of a NYC Public Bank”

Massachusetts : For the second time in 10 years a law to create a public bank for the state of MA was introduced to the state senate in 2021. The bill would immediately capitalize the bank with $200MM from the state general fund. Watch their January 2022 press conference here.

City of Philadelphia : On March 3, 2022, the city council voted 15-1 to establish the “Philadelphia Public Financial Authority”, a first step to create a Public Bank for Philly. More details in their proposal can be found here. Watch their 2021 town hall with public banking experts from across the country here.

Other active public banking campaigns are popping up across the US:

Check out the website of the Public Banking Institute for most recent updates

PBI

Bank of North Dakota

The Bank of North Dakota (BND) was founded in 1919 and has been financially very successful returning over $1Bn to the state general fund in its first 100 years and in recent years being more profitable than Wall Street Banks.

BND primarily operates as a “banker’s bank” partnering with existing local financial institutions providing loans for infrastructure and small businesses at interest rates as low as 2% (learn more about their 14+ loan programs on their website).

Because of the support of the BND, North Dakota today has the highest density of banks per capita in the US and community banks and credit unions hold 83% of all deposits (vs. 29% in the US). More info here.

BND has helped North Dakota weather the recent financial crises comparably well. In 2008 North Dakota was the only state in the US that increased its business lending and in 2020 it has distributed the most PPP loans per worker than any other state.

Watch BND’s former CEO, Eric Hardmeyer, speak at a recent town hall.

Bank of American Samoa

In 2018 the US territory American Samoa created a public bank addressing the lack of any other lending institution in the territory providing loans and banking services. The bank has since been converted to a private bank. While the scope of the bank was much more limited than other current proposals (the population in the islands is only about 60,000) and focussed on providing retail services to local residents rather than being a banker’s bank for the government, and its existence was limited, the approval of the public bank by the federal regulators has set an important precedent that public banks can be created today.

Public Banks outside the US

Public Banks are very common in many countries outside the US. In fact, more than one quarter of all financial assets worldwide are being held by publicly owned banks. From Costa Rica to Germany to India, public banks have existed in many different shapes and sizes, in the case of the German savings banks for more than 200 years. Public Banks are a proven concept that can work in the US like anywhere else.

Learn more about public banks outside the US in the 2021 survey “Public Banking Around the World: A Comparative Survey of Seven Models” and the 2021 book “Public Banks and COVID-19” that features how public banks were crucial in fighting the economic consequences of the pandemic.

Public Banking Key Terms

AB 857 : the Public Banking Act

Signed into law in October 2019, this sets out the guidelines under which California counties, cities, and regions can form public banks.

AB857

Capital

Public bank capital, also known as equity capital, is the money that the bank’s owners (counties, cities, and government agencies in the case of public banks) invest to start the bank. Equity capital cannot be withdrawn; it can be lent. It does not have to be collateralized.

Charter City

Many of the larger cities and counties in California have their own charters. Becoming a charter city allows voters to determine how their city government is organized and, with respect to municipal affairs, enact legislation different than that adopted by the state. Under AB 857, California charter cities which wish to form local public banks do not require a referendum.

Collateral

The assets on which a lender can draw to make up a defaulted loan (such as the house a bank can seize if the homeowner doesn’t pay the mortgage). In the case of collateralized deposits in California banks, there are very specific rules, some of the most important of which can be summarized as follows:

On the same date that the local agency’s funds are placed pursuant to subdivision (b) by the private sector entity, the selected depository institution shall receive an amount of insured deposits from other financial institutions that, in total, are equal to, or greater than, the full amount of the principal that the local agency initially deposited through the selected depository institution for investment pursuant to subdivision (b).

(a) Eligible securities, except (most) promissory notes secured by first mortgages and first trust deeds, and letters of credit issued by the Federal Home Loan Bank of San Francisco, shall have a market value of at least 10 percent in excess of the total amount of all deposits of a depository secured by the eligible securities.

(b) Promissory notes secured by first mortgages and first trust deeds shall have a market value at least 50 percent in excess of the total amount of all deposits of a depository secured by those eligible securities.

(c) Letters of credit issued by the Federal Home Loan Bank of San Francisco shall have a market value of at least 5 percent in excess of the total amount of all deposits of a depository secured by those eligible securities.

Community Bank

An informal designation that usually refers to smaller, more locally focused and/or owned banks. Banks under around $1B in assets are sometimes called ‘community banks’ due to their size, but this does not always reflect local ownership or investment. For our purposes, we use the term to refer to locally or regionally owned and operated financial institutions. Community banks are for-profit entities.

Credit Union

A financial institution owned by its members. Credit unions are nonprofit entities that are controlled by a board elected by their members, who are their customers, rather than by shareholders in the case of a bank. Credit unions seek to earn profit but uses it to grow its activities and services for members’ benefit, although they do sometimes pay dividends.

Deposits

The money held in checking and short-term savings accounts by a bank on behalf of its customers. Public banks under California AB 857 may only provide banking services like checking accounts to retail and business customers in partnership with community banks and credit unions. As a result, AB 857 banks will likely only accept deposits from public entities (cities, counties, and public agencies such as school boards, water districts and transit districts).

Under California law, all public money must be held by financial institutions which prove to hold sufficient collateral, usually 110% of the deposited amount. Because these deposits are public money, they must be collateralized by cash or treasuries of equal or greater value, allowing public agencies to withdraw any funds with 24 hour notice. This restricts how these deposits can be leveraged in the bank’s lending activity.

Discount Window

A credit facility provided by the Federal Reserve to banks, sort of like a line of credit. By using the discount window, banks can borrow money for very short terms (often overnight) at extremely favorable rates. The discount window is intended to maintain the stability of the payments system and banking services by ensuring that banks can never be so over extended that they can’t meet their short term obligations. The rate of interest charged to banks for borrowing from this credit facility is widely regarded as the benchmark interest rate that sets the floor for lending across global finance, including interest paid on treasury bills, prime and sub-prime mortgages, and credit cards.

Fractional Reserve Lending

The technical term for how banks can lend up to ten times their deposits. This ‘power’ that banks have to multiply money derives from their ability to issue currency in the form of new deposits tied to loans, and federal and international regulation which permits them to hold a fraction of their total obligations to depositors in the form of actual currency, with the remainder invested in loans and other securities.

Loan Screens

The criteria a bank uses in making loan decisions. While many of these are purely financial, we anticipate that public banks will have both negative screens (“the Public Bank of the East Bay does not invest in private prisons”) and positive screens (“Our mission is to get affordable money into underserved neighborhoods, and small businesses owned by people of color.”)

Mutual Benefit Corporation

A corporation formed for common gain purposes. This is one of the two forms of corporation allowed under AB857, and perhaps the most likely one for a local California public bank to adopt. These corporations are managed by members of the corporation (in our case, cities, counties, and other public agencies).

Partnership Loans

Often loans have more than one lender. Multiple lenders combine their funds. Sometimes these lenders have different expectations of the same loan, such as differing rates of interest to be earned from payments. These partnership loans (also called correspondent or warehouse loans) allow different types of lenders to work together to meet a borrower’s needs while taking different risks. If a bank, particularly a community bank, or a credit union, thinks that a loan application is good and deserves to be funded, but is outside the bank’s guidelines for amount of loan, specifics of applicant credit, or some other factor, it may ask other banks to “partner” with it in making the loan. As public banks under AB 857 will not make many direct loans, we anticipate deep, rich partnership loan arrangements with many local community banks and credit unions.

Public Bank

Under AB 857, a local California bank which takes deposits from public entities, makes loans in cooperation with community banks and credit unions, and returns profits to the depositor entities.

Quantitative Easing

A monetary policy whereby a central bank (the Federal Reserve in the United States) purchases at scale government bonds or other financial assets in order to inject money into the economy to expand economic activity. The Federal Reserve has relied heavily on this practice in 2020, purchasing trillions in mortgage-backed securities and corporate debt. This activity raised the price of those assets, crowding private capital into investments that policy makers hoped would stimulate the economy.

Key Organizations

Bank of North Dakota

The most prominent and oldest public bank in the United States (established 1919). The Bank of North Dakota (BND) is often held up as a model for current public banks, because of its role in the state’s financial health and its long-term profitability.

BND

California Public Banking Alliance

A coalition of local organizations in California trying to open AB 857 local public banks in their areas. The California Public Banking Alliance (CPBA) also works toward statewide and national public banking legislation. Friends of the Public Bank East Bay is a member of the CPBA.

CPBA

Public Banking Institute

The Public Banking Institute (PBI) is a long-established national advocacy organization working on making public banking a reality.

PBI

California Reinvestment Coalition

A California nonprofit corporation whose 300 member organizations provide services to low-income communities and communities of color. CRC advocates for bank and corporate investment, lending, and financial services that expand access to affordable housing, small business ownership, good jobs, and other resources that build household and community wealth. CRC is partnering with the California Public Banking Alliance on legislation which would be the first step to turning the I-Bank into a state public bank.

CA Reinvestment Coalition

Department of Financial Protection and Innovation

(Formerly the Department of Business Oversight) the Department of Financial Protection and Innovation (DFPI) is the agency that sets all regulations for California businesses, including banks, and charters all California banks. The agency has currently proposed draft regulations for California public banks, which are being reviewed.

DFPI

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) is a federal agency that provides deposit insurance to depositors in U.S. banks and savings and loan associations. Maximum FDIC insurance is $250,000, so public bank deposits will not be substantially covered by FDIC insurance; nonetheless, AB 857 requires FDIC approval for California local public banks.

FDIC

Federal Reserve

The Federal Reserve is the considered “central banking system of the United States of America.” The Federal Reserve is not a governmental agency, but works extremely closely with the U.S. Treasury Department. It provides many services to U.S. banks, including its “discount window,” where banks regularly borrow money overnight at very low rates.

Federal Reserve

I-Bank

The California State Infrastructure and Economic Development Bank, commonly referred to as the I-Bank, is not really a bank but a revolving loan fund. The state contributes money to the I-Bank, and the I-Bank lends it to small businesses and nonprofits. The California Public Banking Alliance is drafting and supporting legislation which is the first step toward converting the I-Bank into a true state public bank.

I-Bank

New Economy Coalition

Democracy Policy Network

PBEB Publications

GOVERNANCE PROPOSAL

This is our recent draft of our community-centered plan for structuring the East Bay Public Bank, which will be subject to modification throughout the chartering process. It includes:

Composition and operation of the bank’s Board of Directors
Creating an Academy to provide training for potential directors and
Framework for loan policies unique to a public bank

The plan makes use of extensive research into existing comparable institutions, proposed frameworks for public banks, and community outreach and involvement.

PBEB Governance Proposal

Viability Study

In March 2022 the Friends of Public Bank East Bay released our viability study. This Viability Study demonstrates that the Public Bank East Bay (“PBEB”), a cooperative venture among the cities of Oakland, Berkeley, and Richmond and Alameda County, is a viable entity which can:

Achieve fiscal stability within the first three years
Provide loan support to underserved sectors of the local economy
Address local infrastructure needs
Reduce local government dependency on Wall Street banks
Decrease local fossil fuel and other harmful investments
Partner with local financial institutions to the economic and social benefit of all
Mitigate economic inequity in the region
Serve as a model for public banks around the state and the country

PBEB Viability Study

SURVEY OF BLACK-OWNED BUSINESSES

For the PBEB viability study, the Friends of Public Bank East Bay commissioned the Bay Area Organization of Black-Owned Businesses to design and administer a small survey on the borrowing needs of their members. This was extremely useful in building the viability study.

Survey

2023 Resource Booklet

The Friends of Public Bank East Bay is a founding member of the California Public Banking Alliance, a statewide organization promoting local public banking. The Alliance has just released a remarkably detailed and comprehensive look at all things public banking. Please read, and distribute widely!