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Public Banks 101

public banks work for you and your community

The details can be complex, but the value of public banking is actually simple to understand.

The following modules explain the most important concepts and features of public banking. 

how are public banks different?

It’s a very simple idea at its core. We all know private banks like Wells Fargo and Bank of America operate to maximize profits for their shareholders, owners, and executives — no matter what crisis communities are facing. (In fact, as we saw in 2008, big banks’ practices have frequently caused economic crises.)

Publicly-owned banks, on the other hand, are legally obligated to operate in the interest of the public, meaning the community as a whole. That means their investment decisions are focused on growing the real, wealth-producing local economy, not the latest speculative scheme to boost private shareholder profits and executive bonuses.

Public banks are run by professional bankers. The local or state government sets up the mission and guidelines to serve the public good. Governance is transparent to the public and, while public banks globally can have different models, it typically includes a community advisory board or community members sit on the board of directors. A public bank on the model of the Bank of North Dakota (currently our only state-owned public bank) holds the state’s deposits and revenues, saving large sums in Wall Street fees. Other public banks, including federal postal banks, hold and manage private deposits. In both models, bank profits benefit the public, not private shareholders.

The Bank of North Dakota is modeled chiefly as a  “bankers’ bank,” which means they partner with local North Dakota banks to help them with liquidity and capitalization, rather than providing checking accounts for individuals (although it does have a few private depositors). The focus is on making loans that serve state and community needs, such as building infrastructure and supporting local businesses. A key advantage over the “revolving funds” that most local governments use for these needs is that a “bank” can leverage its equity at 10 to 1, which means it can turn $100 million in equity into $1 billion in loans. A public bank can also refinance its own municipal debt at lower rates than are provided by the private bond market.

  1. Savings: A public bank can substantially cut costs on municipal and state debt. These savings can then be redirected to pay for other pressing community needs or returned to the public via lower taxes.
  2. “First-responders”: When communities are faced with a crisis, private banks typically reduce their lending or raise rates, profiteering from the crisis to make more money. A public bank, by contrast, jumps in with solutions, extending low-cost credit where needed. The state-owned Bank of North Dakota has repeatedly stepped up over its 100 year history to quickly rescue its communities from natural disasters and economic downturns.
  3. Investment in community needs: Private banks usually don’t reinvest our money in our own communities. Public banks do invest at home, providing local control, local power, and local benefits.
what makes public banks so useful?

Local U.S. governments collectively pay $160 billion annually just for interest on loans. Half the cost of infrastructure is interest, which normally goes to wealthy bondholders. The Bay Bridge Retrofit in Oakland, CA, for instance, cost $6 billion in principal plus another $6 billion in interest. With low rates from a public bank, infrastructure costs can be substantially reduced.

Local governments also pay oversized fees to private banks to manage their deposits and payments. A public bank can provide services and credit “at cost,” returning any profits to the public purse to be used for local development and services. Public banks can also target investment where the big banks have abandoned us: small businesses and local economies. 

Private banking and finance are expensive. In Los Angeles, for example, more is spent on Wall Street fees each year than on the city’s roads. California school districts have financed construction projects with capital appreciation bonds that often cost over 3 times the principal amount of the loan. Debt-strapped governments may be forced to sell off public assets, which means higher user fees and tolls for residents. Public banks can put an end to this enormous drain on communities’ wealth. 

Public banks have a mandate to stimulate their local economies, which means hometown investments and rebuilding. They have lower costs than private banks and don’t need to maximize short-term profits to please shareholders. Instead, they can pour their resources into improving the long-term prospects of the local economy and its infrastructure, benefiting the region as a whole.

what is the track record of public banks?

It may be surprising to discover that 17% of banks around the world are publicly owned with assets just under $49 trillion. The U.S. is far behind, with only one state-owned bank, one in a U.S. Territory, and several Indigenous tribal banks. Many states have agencies called “infrastructure and development banks,” but they are actually revolving funds. They are not chartered depository banks with the ability to leverage their capital at 10 to 1 or to borrow cheaply from the central bank.

The state-owned Bank of North Dakota (BND) has an Advisory Board of seven members appointed by the governor that includes four members of the public along with three local bank officers. Among other functions, they make recommendations to BND’s management for bank objectives and appointments of officers.

The German public development bank KfW has a broad-based 37-member board drawn from German society that includes members from agriculture, crafts, trade and housing associations, as well as four trade unions.

Such direct community involvement in the governance of public banks helps to democratize important financial institutions and ensure their accountability.

Public banks around the world pride themselves on their community commitment and focus. Many have been an essential part of the community for hundreds of years. The German public savings bank group Sparkasse attests, “The commitment to the people who live in their business area is part of the genetic code for the savings banks.” The Sparkasse provide as much as two thirds of the lending required by Germany’s medium-sized companies, earn a significantly higher return on capital than the private banking system, and pay much more in taxes to local and federal governments.

The state-owned Bank of North Dakota was established over 100 years ago and has had a stellar return on investment in recent decades, outperforming even J.P. Morgan Chase and Goldman Sachs. In its 2020 Annual Report wrapping up that crisis year, BND still reported a profit of $141.2 million and a return on investment of 15%. While its 16-year streak of record-breaking profits was broken in 2020, BND’s ability to respond quickly to the crisis enabled the state to distribute unemployment benefits faster than any other state and small businesses secured more Payroll Protection Program (PPP) funds per worker than in any other state.

What are the obstacles?

The public banking movement is seeing growing momentum. The learning curve among legislators that was once an obstacle to passing public banking bills has shrunk as advocates share their knowledge and progress. 

Before PBI Chair Ellen Brown began writing about the Bank of North Dakota in 2008, the idea of public banking was little known in the U.S. outside that state. In the decade since PBI was founded in 2011, interest in the concept and its possibilities has exploded. In the first two months of 2021, 16 new bills to form publicly-owned banks or facilitate their formation were introduced in eight states. At the federal level, three bills for public banking have been introduced in the past two years. Major cities such as Philadelphia, Los Angeles, and San Francisco are actively working on business plans; and grassroots organizations have sprung up in two-thirds of the states.

Take action:
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Resistance to public banking among legislators and government officials has fallen mainly into these categories:

  • Resistance to doing something new that is unfamiliar and perceived to be risky;
  • Concerns about finding the money to capitalize the bank;
  • Reluctance to antagonize Wall Street bankers.

The first has abated as legislators have become more familiar with the public bank model and its promising potential. 

The second has abated as innovative approaches to capitalization have evolved. 

Reluctance to take on Wall Street is also fading as public awareness of the value of public banking grows and legislative efforts have shown that a broad range of important advocacy organizations can be enlisted as enthusiastic supporters of public banking. In New Mexico, the state’s credit union association has strongly endorsed public bank legislation, showing that community banks and credit unions can become supporters. 

PBI serves as a hub for the public banking movement and provides a wealth of resources for legislators and advocates alike. From explainer videos to white papers, books to legislation updates, slide decks to podcasts, the materials here can help you deepen your understanding, organize and spread the word, research previous legislation, and learn from the success of other grassroots public banking groups around the country.

Explore Public Banks 201:
Studies and Reports
Legal Issues
Videos / Podcasts

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