Public Banks: A Lousy Idea Whose Time May Come

New York State’s legislative session came to an end on Saturday. Fortunately, another year went by without the passage of legislation, supported by the Chairs of the Assembly and Senate Banks Committees, to create a so-called public bank.

The idea has been around for a while, and despite its very obvious flaws and few legislative successes, it refuses to go away. Ten states and municipalities currently have proposals, and the idea has adherents in the progressive wing of the Democratic Party, which has grown increasingly frustrated with the perceived lack of help from mainstream banking institutions, particularly when it comes to minority-owned small businesses and marijuana banking services.

There is no set definition for what a public bank would be, but what all the proposals have in common is the creation of a bank funded with public funds, such as municipal and state deposits. Banks would be chartered and, presumably, eligible for FDIC insurance. Boards would be chosen by public officials and sometimes there is an advisory board of community advocates and banking experts.

To supporters of this proposal, public banks could magically take on all the responsibilities that financial institutions refuse to take on. For example, marijuana businesses need loans, so why not have this bank independently provide them with the needed liquidity? We need economic development, so why not use public funds to underwrite businesses in the poorest parts of the state? It certainly does have a facial appeal. Public banks are not just a bad idea; they ultimately compete against credit unions for political oxygen. It’s hard to make important but relatively incremental changes sound important if other advocates say there is a bank out there that will cure the world’s problems. It’s like arguing that Santa Clause shouldn’t get his license renewed.

Now for reality: Using taxpayer money to underwrite questionable loans is, of course, a recipe for financial disaster. And, the U.S. government is already, as christened by Politico, the real Bank of America. Currently there are trillions of outstanding loans in areas as diverse as farming to student loans to residential housing,

If its track record is any indication, the government is really good at handing out loans but is not cut out to decide who doesn’t get a loan. After all, it’s only been a little more than a decade since Fannie and Freddie went bankrupt, and right now the Biden Administration and the Supreme Court are debating the legality of writing off billions of dollars of student loans owed to the US Treasury. And even if I thought that government officials could be good bankers, a public bank would still have to comply with federal laws such as the Bank Secrecy Act and Controlled Substances Act.

What really frustrates me about the public banks discussion is that so much of what advocates say they want to accomplish could be achieved more quickly and efficiently by giving more power to credit unions. For instance, Congresswoman Maxine Waters’ proposal to give credit unions greater flexibility to open branches in underserved communities is a commonsense way of incentivizing established institutions to take on the responsibility of helping people most in need of financial services. And to the extent that state governments across the country want to more efficiently use public deposits, then why not simply let credit unions in all fifty states accept municipal deposits?

What’s more, the interest in public banking reflects a larger trend in which the industry’s natural allies (those individuals who most fervently believe that the mainstream banking system cannot by itself adequately address the needs of poor and working-class individuals) are increasingly skeptical that the credit union model adequately addresses the financial needs of persons of modest means.

In addition to the public bank debate, we have seen a push to allow post offices to once again provide banking services. Also, we’ve seen Illinois become the second state in the nation to implement state-level CRA requirements for credit unions.

So here is my punch line: I am more convinced than ever that the real challenge to the continued growth of the credit union industry does not come from the banking industry but from disenchantment, no matter how unfounded, that not enough is being done to advance financial inclusion. The good news is that credit unions have a great story to tell, but it is imperative that every institution not simply assume that the wider community is aware of the value they are adding to their members’ lives.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.