City Governments Reignite Debate Over Public Banks
Banks are transforming branches, rolling out new products and experimenting with alternative data, in an effort to bring more people into the financial mainstream. Such initiatives might have been a footnote in the past, but they have grown into a serious business strategy lately.
Ten financial institutions, including four banks, will accept the new IDNYC card as a primary form of identification for new accounts. Community advocates hope the move will help more immigrants and unbanked individuals use banking products.
With some proposals still outstanding, mortgage bond market participants are concerned that eminent domain attempts would spread if a municipality makes inroads with a proposal.
Lawmakers in several major U.S. cities have revived a financial crisis-era debate over public banks.
Officials in Santa Fe and Seattle have recently endorsed the idea of forming municipal banks to support affordable housing efforts and lending to the underbanked. Some bankers, though skeptical, said they're interested in learning if such initiatives could help them make more loans.
"If there are other sources of revenue for lending, I think banks would clearly be interested," said John Anderson, executive vice president of the New Mexico Bankers Association. "I think it's one of understanding how this would work. To me it's a fairly unique idea to have a municipal bank. I think we're in a wait-and-see mode."
Interest among bankers is notable in light of the industry's long-held opposition to public banking. It's also significant because it could create strange bedfellows: Small banks in search of revenue; local politicians in search of populist programs; and an industry fringe group in search of support.
Public banking generated a flurry of attention during the financial crisis, as activists associated with the Occupy Wall Street movement pushed lawmakers mostly at the state level to cut ties with the nation's biggest banks.
Activists accused big banks of playing an outsized role in the crisis and profiting off of taxpayer funds. They urged lawmakers to form institutions similar to the Bank of North Dakota, which was created in 1919 and holds the state's deposits and provides loan guarantees. More than 20 state legislatures have explored the issue, said Mike Krauss, a director at the Public Banking Institute.
"The logic behind [the public bank movement] is that states are using intermediary financial service providers, like Wells Fargo, to handle financial services," said Reilly White, a business professor at the University of New Mexico. "And a complaint and I think it's not correct to think this way is that profits are going outside the state."
The Bank of North Dakota's structure highlights some of the differences between a public and private bank. All state monies must be deposited in the bank; most of those funds come from tax collections and state fees, though North Dakota residents are also able to make deposits. The bank is not insured by the Federal Deposit Insurance Corp., so deposits are guaranteed by the state.
North Dakota's bank is governed by an industrial commission that includes the governor, state attorney general and agricultural commissioner. It also has an advisory board appointed by the governor, as well as an executive committee that consists of the bank's corporate-level employees.
With few political victories to point to, advocates have set their sights on smaller-scale initiatives by talking to city officials. "Municipalities have the same capacity, but frankly it's an easier lift," said Krauss, who organizes state-level efforts in Pennsylvania.
The public banking movement has so far lacked an educational campaign about "why having our public money in Wall Street banks is a bad idea," said Ellen Brown, a former lawyer who founded the Public Banking Institute, a group formed to advocate for state- and municipal-owned banks.
Educational elements are a key part of recent efforts to form public banks. "It's not like gay marriage, or something where you can just walk in with a petition in a supermarket," Brown said.
One of public banking's most vocal supporters is Santa Fe Mayor Javier Gonzales. A former commercial lending executive and state Democratic Party chairman, he was elected mayor early last year on a platform that included establishing a public bank.
"Cities are the places where innovation is taking place," Gonzales said.
So far, he's pushed the issue with the Santa Fe City Council, and he generated buzz around the issue by hosting an all-day public forum. Public banking in Santa Fe is still in the "discovery stage," Gonzales said, adding that formal legislation has not yet been introduced.
The Santa Fe City Council last month approved money for a feasibility study to look into the costs and benefits of a municipal bank. The city is also exploring whether it has a legal pathway to do so.
The primary goal is to form partnerships with local banks to expand lending to residents who are "on the marginal side" of being creditworthy, Gonzales said. "Community banks and lending institutions ... need to be allowed to make loans to small businesses without the threat of a federal regulator saying, 'That's too risky,' " he said.
A municipal bank could also hold city's deposits a service that, based on city documents, is primarily handled by Wells Fargo. A representative for the San Francisco company declined a request for comment.
But Gonzales insists that big banks aren't his target.
"More so than a message to the big banks, it's a message to the banking regulators: You have created a regulatory environment that has locked out people who need access to grow after the recession," Gonzales said.
Gonzales, who expects to move forward with legislation this year, has some support from councilmembers.
Courting community bankers will be a challenge. With no public bank created in the past century, advocates face a high burden of proof showing that there's a market need.
Previous studies have pointed to the high costs and unclear benefits of establishing a public bank. It would require a significant initial investment of capital, and could expose taxpayer funds to high-risk financing, according to a 2011 study commissioned by the Massachusetts legislature.
There's also the issue of potential competition. Bankers in communities throughout New Mexico are dealing with relatively low loan demand, said Ken Clayton, president at the $182 million-asset Western Bank in Artesia, N.M. And there isn't much room for a new player in the market, he said.
"You're looking to make loans, and now you have a bank saying that they're going to lend to people that banks won't," said Clayton, who is also president of the New Mexico Bankers Association. "It doesn't add up."
A debate over public banking is also taking place in Seattle, where Councilmember Nick Licata, who chairs the city's finance committee, has held a committee hearing on the issue and organized a community forum. A municipal bank could increase funding for local priorities, such as affordable housing, Licata said in a recent interview.
Licata said he intends to "start small," and build support with local financial institutions before introducing legislation, though he declined to provide details. "There's a lot of interest, not just from your typical folks who would like to see a larger public sector helping the public, but from people who are integrated into the market community," he said.
It will likely take years for cities to sort through the financial and regulatory issues necessary to form a municipal bank. But it's an issue that often resonates with voters. In the meantime, advocates will benefit by simply pushing the debate, said Violeta Diaz, a professor of finance at New Mexico State University.
"It usually becomes a political issue," she said.