Transcending Finance with Public Banking
By Trinity Tran, Co-founder of the California Public Banking Alliance (CPBA), Public Bank LA (PBLA), IFTF Equitable Enterprise Initiative Fellow (@tran_scends)
This essay is a part of a series. Read the overview “Imagining Equity: Explorations into the Future of Enterprise” here.
Public banking is on the rise, offering a transformative solution to deeply rooted issues that have long plagued the financial system. From recent banking collapses to massive fines imposed on Wall Street banks for fraudulent activities such as illegal foreclosures, abusive lending, and market manipulation — change is overdue. These same megabanks hold over $730 billion of local government funds, tying up community resources and restricting opportunities. In response, cities and states are pushing back, seizing control of their financial futures and pursuing alternatives to big banks that put the values and the well-being of their constituents first — directing critically-needed capital back into their communities.
Los Angeles is a prime example: the City pays over $340 million in banking fees and over $1.3 billion in interest just to borrow from commercial banks each year. At the same time, more than $2 billion of City funds are invested in fossil fuel companies and multinational banks. This means that taxpayers are essentially bankrolling private profits at their own expense, while the City is left struggling to balance its budgets between paying back loans and investing in crucial needs like affordable housing and quality schools. Wall Street behemoths like Wells Fargo, Bank of America, Goldman Sachs, and JPMorgan Chase have repeatedly proven that their top priority is profit, with little regard for public welfare. A banking solution that prioritizes serving community needs over lining the pockets of private interests is essential. The future of our financial system depends on it.
The case for public banks
The public banking movement is an emerging force that, in just a few years, has sparked a change in local government’s perspective on reclaiming public funds from private banks for the benefit of local constituencies. From California to New York, grassroots activists are working to reclaim public money and redirect its flow, moving away from a profit-based system towards one centered on civic needs and equitable, sustainable economic development. Their aim is to reimagine banking as a public resource, putting the greater good first.
The movement for public banks is making real progress. In California, the Public Banking Act (AB 857), signed into law by Governor Gavin Newsom in October 2019, was a defining moment in the world of finance. This groundbreaking legislation allows cities and regions in California to establish their own public banks, giving taxpayers a say in where their money is invested. These public banks will operate under the same financial and regulatory standards as commercial banks, with experienced bankers and financial experts at the helm. However, the key difference is that public bankers prioritize the public interest — rather than corporate profits — financing projects that benefit the community and are financially sustainable.
The Public Banking Act raises the bar for transparency and accountability. AB 857 public banks will adhere to open-book management principles and strictly comply with California’s disclosure laws, including the Brown Act and Public Records Act. Structured as either non-profit public benefit or mutual benefit corporations, these banks will be owned by cities and/or counties. Independent boards, composed of financial experts and community representatives, will oversee the banks, ensuring they act in the best interest of the public and eliminate conflicts of interest that exist in the current system. These boards will be answerable to the public, not City Hall, and are committed to investing the public’s money in a responsible, transparent manner.
But it’s not just about accountability — public banks have the power to ignite change and transform communities by providing low-interest loans to small businesses, schools, and municipal agencies. By redirecting capital to local investments, public banks can substantially cut the cost of infrastructure projects and drive sustainable economic growth in underserved areas. Public banks aid cities in investing in the things that matter most to their communities, like affordable housing, clean energy, public transit, and cooperative ownership to revitalize urban centers.
Cost savings is another huge benefit of public banks. Consider Los Angeles and its ongoing affordable housing crisis. The conversation around the high cost of housing often overlooks the equally high cost of debt. Every bond measure the city issues results in taxpayers paying over $0.50 on the dollar. Take Proposition HHH, a bond measure passed by LA voters in 2016, which aims to build 10,000 units of supportive and affordable housing over ten years. It will cost Los Angeles close to $700 million in debt service in addition to the $1.2 billion in construction costs.
A public bank could help avoid these pricey bonds altogether. By redirecting the $700 million in debt service for HHH towards constructing new housing units, the proposed LA Public Bank could help build an additional 1,400 much-needed homes and simplify the complex web of affordable housing financing by centralizing funding, giving affordable housing developers the cash they need to quickly and efficiently purchase and preserve existing housing and build new affordable housing options. The City could save millions in interest payments while providing more affordable housing options for residents. The choice is clear: public banking is a win-win solution for taxpayers and communities, a fiscally responsible decision that truly puts the people first.
By partnering with local credit unions and community banks, public banks can drive the growth of local economies and fill the gap left by the disappearance of many small banks. In recent years, the number of banks serving Americans has plummeted from 12,500 community banks to under 5,000, leaving many communities without access to essential financial services. As Ellen Brown, the founder of the Public Banking Institute, points out, killing off local community banks is disastrous for the small businesses that rely on them, leading to economic turmoil in communities that are dependent on these small businesses. By collaborating with existing local financial institutions, public banks will help stabilize local economies.
Public banking is not a utopian idea — it’s a proven solution that’s been successfully implemented in the United States and internationally. Worldwide, over 900 banks are publicly owned, generating nearly $49 trillion in global wealth. While city-owned public banks are a novel concept in America, the Bank of North Dakota (BND) is a notable example of a state-run legacy public bank. With a 15% return on investment in 2021 and a history of consistent profits stretching back over a century, the BND has come out on top during every financial crisis, often returning a surplus to the state’s general fund. In partnership with North Dakota’s community banks and credit unions, the BND also rolled out one of the most accessible Paycheck Protection Program (PPP) programs in the country, providing crucial support to the state’s small businesses during the COVID-19 crisis. If more existed, public banks could have provided relief for the 40% of Black-owned businesses that shut their doors during the pandemic.
Public banks have the power to make a real impact in communities of color that have long suffered from systemic bias and racial disparities. By prioritizing investments in marginalized communities, public banks can help tackle these issues head-on. For example, today’s private bank lenders reject mortgage applications from qualified Black applicants at a rate 80% higher than white applicants, while commercial banks charge exorbitant fees that hit the pockets of those who can least afford them, fueling a vicious cycle of poverty and financial hardship. A Roosevelt Institute study revealed a shocking statistic — 30% of attempts by Spanish speakers and canvassers of color to open accounts at California banks were unsuccessful. The failures of the banking industry continue to leave millions of Americans on the sidelines, and public banking seeks to remedy this issue. One of its primary goals is to expand banking services for the unbanked and underbanked, who often are pushed toward predatory alternatives like check cashers and payday lenders.
Public banking continues to gain momentum
In 2021, California made headway with its second public banking law, the California Public Banking Option Act (AB 1177), spearheaded by Assemblymember Miguel Santiago and co-sponsored by the California Public Banking Alliance, SEIU California, and the California Reinvestment Coalition. When put into action, CalAccount will be the first state-mandated program to provide 10 million unbanked and underbanked Californians with access to basic financial services without paying fees or penalties. Initially, private financial institutions will provide these services in partnership with the state, but the legislation paves the way for public banks to participate once they become operational. Participating banks must meet public interest and ethical standards, potentially inspiring reforms for big banks. The CalAccount Blue Ribbon Commission, under the leadership of California State Treasurer Fiona Ma, is set to complete the market analysis for the program by July 2024.
At the national level, Representatives Alexandria Ocasio-Cortez and Rashida Tlaib introduced the federal Public Banking Act (H.R. 8721), which encourages the creation of public banks at the state and municipal levels. The legislation also aims to make the federal public banking framework inclusive of historically excluded and marginalized groups and to ban fossil fuel-related investments.
The idea of public banking is making its way into mainstream politics, with several California cities and counties taking concrete steps toward establishing their own banks. The state’s regulatory agency, the Department of Financial Protection and Innovation (DFPI) finalized the legal code for public banks in January 2022. With these regulations in place, activists are currently working with local governments to launch city and regional public banks.
The City of Los Angeles has issued a request for proposal (RFP) to conduct a viability study and create a business plan for a municipal-owned bank — a major step taken by the world’s third-largest metropolitan economy. San Francisco’s Board of Supervisors also authorized a working group of financial and community experts to develop strategies for opening a public bank. Advocates in California’s East Bay completed a viability study for a regional public bank and are now pushing forward with a solid business plan, while communities in the Central Coast region of California are collaborating towards establishing a regional public bank that will serve five counties. And in the state capital of Sacramento, the city treasurer and elected officials are allocating funds for a business plan for a public bank.
Building a network of public banks at the local and state levels is crucial for creating a more just financial system for future generations. Without a radical redesign of the current system, dominated by a few large banks, public funds will continue to benefit Wall Street speculators at the expense of rebuilding our communities. Wall Street bankers and pundits argue that the government is bound to mismanage public banks. Yet, they conveniently ignore their own ineptitude when the Federal Reserve and Treasury provide trillions of dollars in bailouts to keep them afloat. The recent failures of Silicon Valley and Signature Banks serve as a reminder of the vital role that government plays in maintaining stability in the financial system.
Opponents of public banking raise concerns about start-up costs, but cities have various funding options including federal and state funding sources, existing investments, bonds, well-funded reserves, and redirecting taxpayer revenue from private banks. When it comes to existing deposits, moving them from Wall Street banks to a public bank can allow loan repayments to benefit the community and generate interest payments to the bank, making an even greater impact.
The U.S. stands at a crossroads. We can either continue down the path of recurring economic disasters that hurt working families and cripple local economies, or we can take a stand against big banks by creating public banks that challenge their monopolies. Public banks that operate in the public’s interest will redefine the work of banking as a public utility and demonstrate what democratic control of our financial system can be.
As we look to the future, it’s essential that we create publicly-owned financial institutions that are rooted in equity and aligned with our social objectives. These institutions will keep critical funds invested in the community, ensuring everyone can benefit from economic growth. Cities have a rich history of key public institutions like public schools, hospitals, libraries, transportation systems, and utilities — it’s time to embrace the idea that public banks, designed to serve the public good, are necessary for a fairer financial system. Now is the time to add public banking to that list as a cornerstone of our social and economic infrastructure, solidifying a commitment to building a better world for people and the planet.