It’s Time for Public Banks

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Feb. 22, 2021 – Public banks and the holes they can fill.

Wide wealth gaps are persistent in the U.S., driven not only by disparities in income, but disparities in access to wealth-building opportunities like homeownership or savings accounts as well. That inaccessibility can be intentional, such as denying a loan to someone based on their credit (which is understandable on paper but disproportionately impacts people of color). Or it can be incidental, like when a community simply lacks a local bank branch or ATM, for instance.

At the same time, the institutions that manage wealth—your private banks and Wall Street groups—might be stingy, be reckless, or simply suck at their jobs. They might have a bunch of fees that make it expensive for someone to open and maintain an account, take risks that turn out to be bad bets, or otherwise just mismanage the money (your money!) in their care.

These twin issues of inaccessibility and mismanagement aren’t small problems.

A 2019 study from the Federal Deposit Insurance Corporation (FDIC) found 6% of households in the U.S. were “unbanked,” meaning no one in the household has a checking or savings account. While this might seem small, it predominantly includes low income, minority, and rural households. However, an additional 16% were “underbanked,” meaning at least one person has an account but also relies on extra-banking industry measures like payday loans. So all told, over a fifth of U.S. households aren’t “adequately banked”—they lack the tools others use to maintain and build their wealth.

The other issue of mismanagement is more obvious—do you remember the Great Recession? (Granted, a lack of strong regulations played a big part too.)

To address both of these, U.S. governments could incorporate public banks.

Defining Public Banks

The idea of a public bank (PB) is simple: It’s a bank controlled by a government and partially funded by the peoples’ taxes (hence the “public” part). Private investors have no part in how it’s managed, and the bank is run in the public’s interest. Here’s how the Rocky Mountain Public Banking Institute puts it:

In essence, it is an extension of the governing body that created it—state, county, or city government. The governing body for the bank deposits all its revenue, taxes, fees, and other earnings, in the bank. In addition, it can borrow from their bank. The officers of the bank report to a board or commission defined by the charter of the bank so as to ensure freedom from conflicts of interest, commitment to follow sound banking principles, and service to the public interest. Further, a public bank does not pay exorbitant salaries and bonuses, and they have no advertising, no branches, no tellers, or ATMs, and they do not pay commissions or fees, making it very sound financially.

PBs are more accountable than private banks; a PB charter could explicitly restrict risky behavior that could end with a bailout. They also actively work in the public’s favor by providing low-cost banking services and directly funding public projects.

This last point is important, so here’s an example. A city has plans for an infrastructure project, like updates to its public transportation network. Normally, the city would issue municipal bonds to fund the project upfront, meaning it would borrow money from private investors. Those bonds include interest, so the amount owed will increase over time as it would for other types of debt.

But a city with a public bank wouldn’t have to rely on bonds. Instead, the city would just borrow from its PB, or technically “from itself.” Doing so would, at the very least, mean no accrued interest that would be included when issuing bonds to private investors.

PBs could also fund other stuff, like by directly providing loans for college students or local businesses. During economic downturns, these banks could be more reliable community partners than private ones that could otherwise make changes like increasing service fees at a time when their customers are less financially stable.

As mentioned above, the PBs money would be a mix of money already collected by the governing body as well as any interest accrued on some of the accounts and loans the public bank manages. This only makes a PBs efficiency and transparency more important, as it would be handling our tax dollars.

However, this money is one of the biggest hurdles for incorporating a public bank. The initial investment would have to be substantial (millions to billions of dollars, depending on which type of government would run it), and it could take years or even decades for the bank to break even, as a 2019 feasibility study in San Francisco found.

Examples of PBs

You can find PBs in other countries. The gold standard right now would probably be Germany’s public bank system. The country has nearly 400 Sparkassen (savings banks) with 13,000 branches and 50 million customers, as well as five Landesbanken (regional credit institutions). Thanks to these banks’ market share, both have played a big part in the Germany’s Energiewende strategy (the plan to increase Germany’s use of renewable energy sources).

It’s a different story here. There’s only one in the states, and it’s the Bank of North Dakota. Vox has a great piece on the bank (BND), including this explanation for why it was incorporated in 1919:

In the 1900s, North Dakota was, not unlike today, a place overlooked between the already established East Coast and rapidly developing West. The state was largely settled by farmers, who spread themselves sparsely. The low population density meant that local financial institutions had trouble taking root. In effect, North Dakota was a banking desert.

That decentralization, combined with the predatory nature of the gilded age—an era of economic deregulation and extreme income inequality—left North Dakota’s fledgling economy vulnerable to the whims of corporate banks. Financial capitals such as Chicago and Minneapolis could inflate farmers’ loan rates or undercut grain prices without fear of reprise.

Eventually, a “populist progressive political party” was organized by a former Socialist, and it included public banking in its platform. The party swept through state and local elections, and a $2 million allocation for the BND was approved shortly after. As the BND explains itself, the bank was created with a mission to “promote agriculture, commerce, and industry” and “be helpful to and assist in the development of… financial institutions… within the State.”

The BND offers many of the services we covered earlier, though its loans services aren’t as direct. Instead, it largely works with local banks and credit unions to make services as accessible as possible. The BND has significantly expanded in-state community banking, and here’s one way to measure this, albeit from 2014:

Not only has the BND expanded access and services, but it’s been considerably stable over the past several years. In 2019, the bank reported $4.5 billion for its loan portfolio and its 16th consecutive year of record profits of $169 million. It’s a public bank after all—profits should be marginal. Still, the BND has seen steady growth here thanks to its own reliability and measured management.

That same year, California enacted legislation that would allow local governments to establish their own PBs. Meanwhile, American Samoa has had its Territorial Bank for a few years.

Real-world Examples of PBs’ Potential

Access to banking and wealth-increasing opportunities aren’t universally available in the U.S., with prominent racial disparities tracing back to the Great Depression and New Deal programs. PBs could be instrumental in closing these racial gaps, as well as how effectively a community uses its own money.

In Chicago, an investigation last year found that big private banks were lending far more often and approving far larger loans to white mortgage applicants than to black applicants. While the banks themselves have faced criticism and made some public changes, this still means countless black families and individuals needlessly missed out on homeownership.

In an op-ed for the Chicago Sun-Times, a group of progressive state and local lawmakers wrote that a public bank could effectively address this problem and others thanks to its pro-people mission. A PB could fill this hole left by private banks, and fund other projects like building affordable housing or expanding broadband access. Ameya Pawar, one of this op-ed’s authors, also pointed out separately that, by doing these things, a public bank in Chicago could be instrumental in cutting the city’s large outstanding debt since it wouldn’t need to issue as many municipal bonds.

Similarly, folks in Philadelphia have been arguing a PB could boost communities of color. Philly is the poorest big city in the U.S., with around a quarter of the city’s population living in poverty. At the same time, Black Philadelphians own only 2.5% of the local businesses despite making up about 44% of the city’s population; these businesses also have 1/14th the median revenue of white-owned businesses in town. City Councilmember Derek Green believes a PB would go a long way in undoing these disparities and fighting poverty, especially if the bank’s primary focus were on small business loans.

Finally, I would add that PBs could have played a huge role in how we’ve confronted the current pandemic-recession. Imagine how much more effective CARES Act programs like the Paycheck Protection Program would have been if the federal government partnered with state and local PBs to distribute the loans. Or, how much more quickly economic stimulus checks could have reached lower income communities—those who would be more likely to have a public bank account and be in need of direct assistance. Or, how much better the post-COVID economic outlook would be for states and local governments had they relied on PBs rather than private banks and actors (i.e., had they avoided much of the debt they had preceding our economic crisis).

Banking is a crucial part of how our communities maintain and improve themselves, and how individuals and families build their wealth. Lacking a publicly-operated alternative to private banks simply ensures that cities and states accrue unnecessarily massive debt and many of our neighbors lack proper banking access. It’s time for public banks.

Related reading:

  • Although better than private banks, PBs aren’t fully insulated from the same drawbacks. Germany’s system did have trouble grappling with the Great Recession.
  • Here‘s a pro/con on whether Philadelphia should incorporate a PB from the Philadelphia Inquirer.
  • If the upfront cost of establishing a public bank is insurmountable, we could also look into postal banking. This would offer some of the same benefits—savings accounts and direct, low-interest loans for individuals—but use the existing USPS infrastructure. I covered this last year.
  • Want to look into economic inequality more? Check out these pieces from and the Urban Institute, and this piece from Forbes on some ideas on how to better address it.

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