Public banking gets green light in California

The nation's largest state is officially taking the plunge into public banking, much to the chagrin of commercial bankers.

A bill signed this week by Gov. Gavin Newsom made California only the second state in the nation to legalize a government-owned bank. But unlike the 100-year-old Bank of North Dakota, the new law authorizes California municipalities to open their own banks to accept and reinvest public money.

The California law also sets a new public banking precedent in the country. Whereas North Dakota's public bank is not a member of the Federal Deposit Insurance Corp., a California municipality would have to apply to the FDIC for federal insurance.

Advocates of the law say local governments should have the ability to direct their fund to combating the state's affordable housing crisis and other public woes. Some also see public bank authorization as a possible avenue for providing financial services to cannabis businesses.

David Paul Morris/Bloomberg

The California law drew support from progressive lawmakers including Sen. Bernie Sanders, I-Vt., a Democratic presidential candidate, and Rep. Alexandria Ocasio-Cortez, D-N.Y.

In August, as the bill was moving through the legislature, Sanders posted on Twitter that "it makes a lot more sense to me for cities and states to establish banks that invest in local communities instead of handing over taxpayer dollars to Wall Street banks whose business model is fraud."

Yet the requirement for FDIC will likely lengthen the application process and will require federal regulation for municipal-owned banks, which under the law would also have to seek approval from California's state regulator.

Bankers have criticized the plan, saying public banks are not the safest vehicle to store government funds.

“Despite the rhetoric from public bank advocates, Californians are not clamoring for a public bank option,” the California Bankers Association said in a statement after the bill's signing. “By signing this measure into law, taxpayer dollars have been potentially put at risk.”

Yet the idea of public banking, long decried as government overreach, took on new life after the financial crisis. Nearly half of U.S. states have introduced legislation to create public banks since 2010, according to the Public Banking Institute. In 2018, the Federal Reserve authorized the Territorial Bank of American Samoa to establish the second public bank in the country.

In California, earlier efforts to create a public bank centered around cannabis. In 2018, Los Angeles voters rejected a local ballot initiative that would have created a public bank specifically touted as a way to help cannabis companies that are frequently forced to operate exclusively in cash.

In 2019, advocates of the latest bill pivoted towards affordable housing and other infrastructure initiatives.

California’s new law is set to go into effect Jan. 1, 2020. It will not allow all of California's 482 municipalities to own a bank. Rather, there will be an initial cap of 10 banks statewide and the state will be limited to issuing no more than two public bank licenses per calendar year. Public banks will be exempt from state and local taxes.

The California State Treasurer's Office estimated in 2018 that a public bank focused on servicing the cannabis industry would spend roughly $35 million in startup and compliance costs over a six-year period before launching. Then, assuming the bank would require about $1 billion in capital, the Treasurer’s Office estimated that it would lose money for 12 years and be unable to pay net dividends back to the state for at least 25 years.

But despite slim margins, the Bank of North Dakota’s example over time has been encouraging. The state’s public bank returned $140 million in profit for the 2019 legislative year and has brought $1 billion back to the state over the last two decades.