The details can be complex, but the value of public banking is actually simple to understand.
With public banks, interest and profits flow to the community that owns the bank.
It’s a very simple idea at its core. We all know private banks like Wells Fargo and Bank of America operate to maximize profits for their shareholders, owners, and executives — no matter what crisis communities are facing. (In fact, as we saw in 2008, big banks’ practices have frequently caused economic crises.)
Publicly-owned banks, on the other hand, are legally obligated to operate in the interest of the public, meaning the community as a whole. That means their investment decisions are focused on growing the real, wealth-producing local economy, not the latest speculative scheme to boost private shareholder profits and executive bonuses.
How this works
Public banks are run by professional bankers. The local or state government sets up the mission and guidelines to serve the public good. Governance is transparent to the public and, while public banks globally can have different models, it typically includes a community advisory board or community members sit on the board of directors. A public bank on the model of the Bank of North Dakota (currently our only state-owned public bank) holds the state’s deposits and revenues, saving large sums in Wall Street fees. Other public banks, including federal postal banks, hold and manage private deposits. In both models, bank profits benefit the public, not private shareholders.
The Bank of North Dakota is modeled chiefly as a “bankers’ bank,” which means they partner with local North Dakota banks to help them with liquidity and capitalization, rather than providing checking accounts for individuals (although it does have a few private depositors). The focus is on making loans that serve state and community needs, such as building infrastructure and supporting local businesses. A key advantage over the “revolving funds” that most local governments use for these needs is that a “bank” can leverage its equity at 10 to 1, which means it can turn $100 million in equity into $1 billion in loans. A public bank can also refinance its own municipal debt at lower rates than are provided by the private bond market.
What it means to you
- Savings: A public bank can substantially cut costs on municipal and state debt. These savings can then be redirected to pay for other pressing community needs or returned to the public via lower taxes.
- “First-responders”: When communities are faced with a crisis, private banks typically reduce their lending or raise rates, profiteering from the crisis to make more money. A public bank, by contrast, jumps in with solutions, extending low-cost credit where needed. The state-owned Bank of North Dakota has repeatedly stepped up over its 100 year history to quickly rescue its communities from natural disasters and economic downturns.
- Investment in community needs: Private banks usually don’t reinvest our money in our own communities. Public banks do invest at home, providing local control, local power, and local benefits.
Lower interest rates can save states and cities significant sums. Investment goes to the real economy on main street.
Local U.S. governments collectively pay $160 billion annually just for interest on loans. Half the cost of infrastructure is interest, which normally goes to wealthy bondholders. The Bay Bridge Retrofit in Oakland, CA, for instance, cost $6 billion in principal plus another $6 billion in interest. With low rates from a public bank, infrastructure costs can be substantially reduced.
Local governments also pay oversized fees to private banks to manage their deposits and payments. A public bank can provide services and credit “at cost,” returning any profits to the public purse to be used for local development and services. Public banks can also target investment where the big banks have abandoned us: small businesses and local economies.
States and cities can save billions
Private banking and finance are expensive. In Los Angeles, for example, more is spent on Wall Street fees each year than on the city’s roads. California school districts have financed construction projects with capital appreciation bonds that often cost over 3 times the principal amount of the loan. Debt-strapped governments may be forced to sell off public assets, which means higher user fees and tolls for residents. Public banks can put an end to this enormous drain on communities’ wealth.
Local economies can thrive with true investment
Public banks have a mandate to stimulate their local economies, which means hometown investments and rebuilding. They have lower costs than private banks and don’t need to maximize short-term profits to please shareholders. Instead, they can pour their resources into improving the long-term prospects of the local economy and its infrastructure, benefiting the region as a whole.
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