Suppose you park your car in a parking lot. You pay the parking attendant for the service, and they use your car while you are gone to get paid for rideshares, grocery deliveries, or even “services” you might object to, such as running errands for gun shop owners. Essentially, the attendant has made money from an asset that belongs to you and has charged you for it.
This happens daily when local governments “park” public funds in banks. Public funds amounting to billions of dollars are turned into private profits for “services” using your assets.
Today, our communities face multiple challenges—ranging from accelerating climate change to growing income inequality, from refugee crises to housing crises, and from basic food access to self-serving financial systems. And while banking may not be the first solution to come to mind, it is a crucial piece of the puzzle.
Why Even Think About Banking?
Currently, almost every US jurisdiction banks with Wall Street. Cities, counties, regions, and states pay banks costly service fees and far more in debt service. Banks use those deposits to earn private profits on loans. All that money goes to the priorities Wall Street serves, which include not only toxic investments but also shareholder profits.
However, public banks offer an opportunity to shift the balance of power in favor of local economies, enabling communities to take control of their own financial destiny. If governments can work with a publicly owned bank that makes modest profits and reinvests those profits in the communities that own it, they can participate in a restorative local economy.
At Public Bank East Bay (PBEB)—a proposed public bank that seeks to serve the communities of Richmond, CA, (in Contra Costa County) and Berkeley and Oakland (in Alameda County)—we believe that public money should serve the people’s needs, not private profits.
The People’s Money for the People’s Needs
What difference could a public bank make? It turns out, quite a lot.
Public banks are “owned” by a local government or coalition of local governments and focus on stable, accountable, and supportive lending. While not yet prevalent in the United States, public banking is common globally.
Unlike big commercial banks, most public banks (and all California public banks under state law) will be nonprofits and use their earnings from loan interest and fees to reinvest in local economies and large-scale community-wide projects. And the interest and fees they charge are generally lower than a borrower would get at a commercial bank, resulting in a growing and sustainable cycle of lending that helps local communities thrive.
This is possible because public banks are budgeted to bring in sufficient profits for growth and dividends rather than high profits to enrich the C-suite staff and shareholders. Public banks, especially in California, are envisioned as “wholesale” banks exclusively serving local governments.
They can also take deposits from various private organizations (such as foundations, unions, and pension funds) but do not provide accounts to individuals. Their operating costs are notably low, as a public bank does not incur expenses related to excessive salaries, bonuses, commissions, shareholder profits, advertising, physical branches, tellers, or ATMs.
In a public bank, all programs are led by professional bankers under regulatory oversight. PBEB has recruited a board of directors (subject to regulatory approval) of banking experts, elected officials from participating jurisdictions, and subject matter experts on issues like clean energy and affordable housing.
In California, public banks are barred from competing with local financial institutions. Instead, public banks partner with local banks to expand community-driven impacts. A local bank, credit union, or community development finance institution (CDFI) can approach the public bank with a loan they cannot (or prefer not to) cover by themselves, such as an affordable housing development, and ask the public bank to fund a portion of that loan.
Similarly, public banks can approach these entities to help fund community-driven projects. This kind of risk-sharing and co-investing is one of the most valuable features of the public banking model.
How Can a Public Bank Support the Local Economy?
One benefit of establishing a public bank is that it enables public entities to engage in fractional reserve banking. This practice enables commercial banks to make billions of dollars every year. It is worth taking a moment to understand how this works, allowing banks to lend more money than they have. First, it is important to rethink what is being lent. It isn’t money, it is credit. A bank can issue as much credit as they want, within some limits.
“In a fractional reserve system, only a fraction of a bank’s deposits needs to be held in cash or in a commercial bank’s deposit account at the central bank. The magnitude of this fraction is specified by the reserve requirement, the reciprocal of which indicates the multiple of reserves that banks are able to lend out. If the reserve requirement is 10% (i.e., 0.1) then the multiplier is 10, meaning banks are able to lend out 10 times more than their reserves.…”
“When a bank makes a loan, there are two corresponding entries that are made on its balance sheet, one on the assets side and one on the liabilities side. The loan counts as an asset to the bank and it is simultaneously offset by a newly created deposit, which is a liability of the bank to the depositor holder.”
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Henry Levy, Alameda County’s treasurer, notes that the use of fractional reserve banking by a public bank enables it to leverage county money to lend out far more in loans than the capital the county and other capitalizing governments provide.
How to Create a Public Bank
In 2019, California passed AB 857, allowing public banking under Federal Deposit Insurance Corporation (FDIC) oversight and regulation by the state Department of Financial Protection and Innovation (DFPI). Public banks must obtain a DFPI charter and meet the same financial and regulatory standards as traditional commercial banks.
While the benefits of public banks are clear, creating one is complex. Here are some steps that PBEB has gone through:
- Build Community Support: The first step is to raise public awareness and build a broad coalition of supporters. Most elected officials, regulators, and the public are unaware of what a public bank is. This isn’t surprising since there is only one in the United States today.
At PBEB, we’ve focused on educating our community about how a public bank differs from private commercial banks. We also stress that professional, responsible bankers run public banks under strict regulatory oversight
By attending and organizing public forums, educational events, and media campaigns, we have raised awareness about the benefits of public banking. Different people have different questions. Some people want to “look under the hood” at how the mechanics work (inputs) and others want to know how a public bank will help them and their community. Support from both community-based organizations and elected officials is crucial, as creating a public bank requires public and political buy-in.
- Map a Legislative and Regulatory Game Plan: The regulatory process for establishing a public bank is complex but necessary. Banks must meet stringent capital requirements, including how much money they must hold in reserve compared to what they lend out, and their financial stability is closely scrutinized by both state and federal regulators.
These regulations, while important for safeguarding both private and public funds, can also slow the process of establishing a public bank. PBEB has worked with some extraordinary public banking advocates, lawyers, and finance experts to craft a detailed business plan and ensure that our bank will meet regulatory requirements.
- Prepare for Opposition from Private Banks: Wall Street banks are almost certain to oppose the creation of public banks because they see them (correctly) as competition. Local community banks must also be educated about how they can be supported by a public bank, in order to build a strong coalition to counteract Wall Street opposition.
- Conduct a Viability or Feasibility Study: Viability studies (or feasibility studies) are a likely step on the path. If undertaken (as required in California), this study should include an evaluation of potential risks, the capital needed to start the bank, projected operating costs and expected revenue streams. This study can help convince policymakers and stakeholders of the bank’s viability.
- Ensure Initial Capitalization: When a bank is “capitalized,” it has sufficient capital (money) to start up and support its lending activities, cover its operational costs, and buffer against financial risks. Bank capital must be permanently stored in the bank, recoverable only in case of bank closure or replacement from another source. Public banks need substantial capital to launch, typically at least $25 million. In most scenarios, the local government or group of local governments that will “own” the public bank will provide all or some of the capitalization—that’s how they become owners.
Local governments will have to wrestle with the issue of where the money comes from, be that from their operating budget or their investment pool. Additional capitalization sources could include philanthropic organizations (like foundations), pension funds, and unions.
By demonstrating the long-term financial benefits of a public bank—such as reduced interest payments on municipal projects—local jurisdictions and foundations can be convinced to support initial capitalization.
Navigating the intricacies of capitalization requires a combination of savvy about local governments, an engaged community that will pressure lawmakers, and a sense of the philanthropic landscape in your area.
- Write a Business Plan: A bank can apply for its charter with a basic business plan, generally around 100 pages long, setting forth the concept of the bank, the local landscape, the bank’s initial policies and governance structure, the marketing plans, the risk management plan, and much more.
Along with the business plan, the regulators will expect three years of detailed financial projections, an identified CEO, and a proposed board of directors. The business plan, financials, and individuals must be carefully reviewed and vetted by experienced bank chartering consultants before any submission is made to the regulators.
- Obtain a Bank Charter: In the United States, all banks must be chartered by the federal or state government. This process, in addition to drafting the business plan mentioned above, requires raising the required capital, deciding on whether to file under federal or state regulatory authorities, working with the regulators, and (if required by your state or desirable for other reasons) submitting an insurance application with the FDIC.
Regulatory review will be rigorous and often relentless, including extensive interviews with every proposed director and staff member, as well as extreme scrutiny of the business plan and proposed financials. Securing a charter can take many months or even years and requires compliance with strict regulatory standards to ensure the bank’s safety and soundness.
Why It Is Worth It: A Bank for the People by the People
For us, creating a public bank in the East Bay is not just a financial necessity but a moral imperative. At a time when corporate interests dominate our economic landscape, a public bank offers a path toward financial liberation for our community.
By keeping public money in public hands, a public bank can invest in affordable housing, clean energy, and small-business growth.
The Jain Family Institute and the Berggruen Institute have prepared a municipal bank interactive balance sheet simulator in cooperation with advocates of Public Bank Los Angeles. Employing this methodology, PBEB—with a $40 million initial capitalization, financing costs averaging 5 percent, and a capital ratio of 10 percent over a period of 10 years—could bring Alameda County:
- 3,800 housing units built or preserved, adding to property tax revenue and saving considerable monies in homeless services
- 1,000 new worker-owners created through investments in worker co-ops, adding to income tax and sales tax revenue
- Six megawatts’ worth of additional green energy generation capacity (meeting the energy needs of approximately 1500 homes for a year) via investments in wind turbines and solar panels, adding to income tax and sales tax revenue while cleaning the air
Together, we can create a financial system that serves the people.
Are you ready?
Portions of this article rely heavily on the capstone project “Public Bank East Bay,” prepared by Sarah Albert for the University of California, Berkeley’s Goldman School of Public Policy, May 2024.
