Unlike commercial banks, the mission of public banks would be to invest in public priorities such as affordable housing, small business loans or infrastructure projects. Most could offer consumers “no fee” banking, including a limit or ban on overdraft fees. The Federal Deposit Insurance Corporation would insure the deposits in public banks and guarantee the financial soundness of the institutions, just as the agency does for commercial banks.
For many Americans with little experience with bank accounts, navigating the fees and policies that would make them account holders can be intimidating. And many small business owners seeking loans just can’t meet the standards set by traditional banks.
While some banks have worked to demystify procedures and lower fees, advocates for state- or city-run banks say they can do it better.
The speed and convenience of accessing pandemic aid through direct deposit has highlighted the disadvantages of lacking a bank account, heightening interest in public banks. California this year enacted a law that could put the state on the path to government-run banks, and 13 other states, including Washington, are considering similar legislation, according to the National Conference of State Legislatures.
Supporters say they are trying to create an alternative to commercial banks that could reach the unbanked or steer investment to underserved areas. But detractors, including commercial banks and some skeptical researchers, argue that retail banks already provide consumer-friendly services and that public banks might be magnets for political interference.
Unlike commercial banks, the mission of public banks would be to invest in public priorities such as affordable housing, small business loans or infrastructure projects. Most could offer consumers “no fee” banking, including a limit or ban on overdraft fees. The Federal Deposit Insurance Corporation would insure the deposits in public banks and guarantee the financial soundness of the institutions, just as the agency does for commercial banks.
But the banking industry argues that it already provides consumer-friendly banking and that public banks might be less closely regulated or be susceptible to political interference.
Many retail banks have set up small-dollar, no-fee or very low fee accounts under a program, according to Blair Bernstein, spokesperson for the American Bankers Association, an interest, lobbying and educational group for bankers. Bernstein said there is “no demonstrated need” for a different kind of bank, and that public banks would “expose taxpayers to substantial risk and create an uneven playing field for private-sector financial institutions.”
North Dakota is the only state that has state-run banks, which it launched 102 years ago to offer farmers loans at more favorable rates than those charged by commercial banks. But the idea has divided experts and lawmakers in Washington state.
An analysis by the state Treasurer in 2018, which reviewed a number of studies conducted by other states on public banks, found that setting up a state bank in Washington could cost $100 million to $300 million and put taxpayer money at risk. It also said there was a “high likelihood” of political favoritism.
But another study that same year by the University of Washington found that “such a bank could be structured in a way that presents minimal risk to the state’s credit rating and overall financial health.”
Washington state Sen. Patty Kuderer, a Democrat who is sponsoring a public bank bill, estimated it would take a $10 million loan from the state to cover startup costs.
The Washington legislation only involves the lending side of the public bank concept. It would allow local governments to get a loan from the bank to fund infrastructure projects, such as filling potholes or building public housing, which the cities would then pay back.
Commercial banks, however, were still opposed, she said. The bill passed the Washington Senate last session, on a mostly party-line vote, with Republicans against it, but it ran out of time in the House. It’s back on the agenda for the 2022 session.
State Sen. Mark Schoesler, a Republican who voted against the bill, said he opposed it on principle. “Why should the state be in competition with the private sector, credit unions and banks?”
He also said he opposed the bill because the state “can’t capitalize it without costing us a lot of money and banking shouldn’t be based on political trends.”
Kurderer said she has been trying to reassure commercial banks. “From the beginning I’ve explained to them this is not competition for them. This isn’t going to make a dent in their bottom line. This is another tool in the toolbox for local governments to make an investment in their community.”
Compared with commercial banks, public banks could have a broad mandate that might allow them to do a better job of “representing and reflecting the needs and interests of the public they are serving,” said Michael Pagano, dean emeritus of the College of Urban Planning and Public Affairs at the University of Illinois, Chicago, who has studied the issue.
Pagano said states could require the public banks to invest in certain community priorities, such as low-income housing. That requirement is included in the state-run bank bill now moving through the Washington state Legislature.
But Girard Miller, a retired investment banker and financial author, in a column for Governing argued that the financial technology revolution is lessening the need for state banks.
Internet banking, he wrote, “is bringing capital to previously underserved communities and businesses. It turns out that the capital markets, big data, artificial intelligence and techno-wizardry are filling in many of the niches that supposedly cry out for public banks.”
California has moved toward establishing state- and city-run banks by enacting two laws, one in 2019 calling for a study of how city-run banks would work and another this year to study state-run banks. The analysis, to be completed by 2024, would outline how the banks would work and the market feasibility of such banks.
Many commercial bank customers are stung by fees if their account falls below a minimum balance or has an overdraft, said state Assembly Member Miguel Santiago, a Democrat who sponsored the California law aimed at implementing state-run banks or accounts. The program, called “CalAccounts,” is specifically designed to serve the unbanked.
“We thought there should be a different model for people who don’t have $1,000 in a bank account,” said Santiago, who represents a district including downtown Los Angeles that is more than 60% Latino.
“We are trying to eliminate overdraft fees, and fees for accounts with less than $100 dollars — nickel and diming the banking account,” Santiago said in a phone interview. “If you are a millionaire you probably are not feeling a dollar here, a dollar there. If you are poor, like the neighborhoods I represent, pulling a dollar away here and a dollar away there — it makes a difference.”
