Why don’t we have a public banking option in the U.S.?
Amid the recent implosions of Silicon Valley Bank and Signature Bank, advocacy groups have continued to push for what they call a safer alternative to the private sector: banking services provided by the government.
Organizations that support the idea recently wrote to New York state legislative leaders asking them to pass the New York Public Banking Act — a bill that would give local governments the authority to establish government-owned, or public banks. Private banks, they say, “engage in risky and abusive activities that run counter to the state’s public policy objectives.”
Only one state-owned bank operates in this country: the Bank of North Dakota, which says it cooperates, rather than competes, with local banks and lends to infrastructure projects and health care providers.
The country used to have a banking system based in the U.S. Postal Service that allowed customers to deposit cash at their local post office, Marketplace has reported.
Deposits were backed by the government, making them an attractive option at a time when federal deposit insurance hadn’t been implemented. But by 1967, the USPS had discontinued the service after private banks offered higher interest rates, eroding its appeal.
Terri Friedline, an associate professor of social work at the University of Michigan, said that private-bank lobbying has made it difficult to establish a public option. But momentum for public banking has been growing.
Around the country, there are proposals to create banks owned by states and municipalities, Friedline said.
The Postal Service also rolled out check cashing at several locations in 2021, including Washington, D.C., and Baltimore. And there are calls for the Federal Reserve to establish accounts that would be accessible to the general public
Activists and some scholars and lawmakers say that public banks could provide financial services to people who have trouble accessing banks. They would help finance community projects and charge fewer profit-padding fees than private-sector banks do, according to advocates.
Public banks could help people with low incomes
But there is no “one vision” of public banking, said Raúl Carrillo, an associate research scholar at Yale Law School.
“There are many visions, I would argue, and those vary by jurisdiction, by the purpose of the bank, by where they see private entities fitting in or not fitting in, who the clientele is, etc.,” Carrillo explained.
Some of the proposals he’s seen focus on wholesale banking, which serves larger companies and other banks, while others would provide services for everyday consumers who wouldn’t have to worry about withdrawal or overdraft fees.
“The idea is to have a safer, less extractive, more protected consumer experience,” he said.
A major aim of a government-sponsored or post office-based bank could be to help lower-income depositors, said Patricia McCoy, a law professor at Boston College.
“It would have a mission to help anybody who wanted to have a bank account open one and serve customers with relatively small deposits. A postal bank, depending on its model, also might get involved in community development lending, or lending in inner-city neighborhoods that have not had enough banks in the recent past,” McCoy said.
In other words, they would serve the underserved. That view is shared by Friedline at UM, who said private banks have failed to “fully and equitably” provide checking and savings accounts to a full range of customers. Public banks can step into that breach. “My opinion is that we need many different options,” she said.
Roughly 5.9 million U.S. households, or 4.5% of them, had no checking or savings account with a bank or credit union in 2021, according to data from the Federal Deposit Insurance Corp.
Postal banking would be useful for people who routinely visit the post office and those who live in areas with no bank branches nearby, Friedline said. She also noted that the Postal Service is one of the country’s most respected government institutions.
But others might want to choose, for example, a credit union supported by their state public bank, Friedline noted.
“State- and municipal-owned banks are intended to be publicly accountable, transparent, democratic,” Friedline said. “Many of the proposals have different oversight boards or governing bodies that include members of the community.”
And, she added, public banks could help finance projects a community needs but a private bank would pass on.
The challenges of public banking
Critics of public banking say it’s too costly, requiring millions or even billions of dollars. It could actually drain resources that could be used for infrastructure or community development projects. That’s what Rob Nichols, president and CEO of the American Bankers Association trade group, wrote in The Philadelphia Inquirer.
But San Francisco-based 48 Hills, a progressive publication, pointed to a draft proposal for a public bank in the city, calling it financially feasible.
While public banks might avert some of the risks associated with private banks, McCoy of Boston College noted that public banks may face their own challenges.
“If it made loans, the question is: Would the mixture of the borrowers be a riskier borrower base than a bank that serves very affluent individuals?” McCoy said.
She said she’s confident, though, that a well-run public bank could manage these issues.
“It would be very important to have a highly experienced chief risk officer who would map out every risk that the bank faces and come up with a risk management plan,” McCoy said.
McCoy also said that accounts with smaller balances tend to be more costly for banks because they provide less money to loan out and collect interest on.
Where do public banking proposals stand?
Advocates across the country have taken steps to establish public banks in New York City, parts of California, Philadelphia and other places.
But some plans are in limbo, like the one in Philadelphia. The City Council voted in favor of creating the Philadelphia Public Financial Authority, which would allow the city to create a public bank. A spokesperson for the mayor’s office, however, told The Inquirer that the city doesn’t plan to help create or fund the PPFA.
Over in California, Gov. Gavin Newsom signed a bill in 2019 to allow cities and counties to create public banks. Two years later, the Los Angeles City Council approved the creation of a business plan for a city bank.
In San Francisco, an advisory committee recently completed a draft proposal for how a public bank would operate, which includes guidelines on the amount of upfront money needed when launched. If established, it would become the first of its kind.
Public banks, as envisioned by advocates, wouldn’t focus on serving shareholders. They wouldn’t undertake risky ventures in the pursuit of profit.
Public banking is “generally just going to be a safer, more boring place,” Carrillo said.
Boring, sometimes, is a good thing.
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