What are Public Banks and How Do They Benefit Us?

Colorado is facing challenges that national institutions, including global financial institutions, because of their structure, are not addressing. Rather than demonizing these institution and fighting them, Be the Change applies the principle “Think globally, act locally” to this issue. We understand that these great banks are hurting local economies everywhere, but that only local action will give immediate relief to our own local communities. And given enough of these local actions we will see global relief. To this end we support the efforts to establish public banks at the city, county, tribal, and state level in Colorado. The justifications for this action are given in the following sections.

What is a Public Bank?

A public bank is a bank that is controlled by and principally funded by a government body rather than by private investors.  In essence, it is an extension of the governing body that created it — state, tribal, county, or city government. The governing body for the bank deposits all its revenue, taxes, fees, and other earnings, in the bank. In addition it can borrow from their bank. The officers of the bank do not report to a board of directors, as they would in a private bank. Instead they report to a commission composed of various government officials defined by the charter of the bank. Further, officers in a public bank are not paid  the exorbitant salaries and benefit packages that the large national and international banks officers command — making it a more affordable way of investing its revenue.

Public banking is common around the world, particularly in developing and newly-developed countries. Globally, about 40 percent of banks are publicly owned. The countries with public banks mostly survived the credit crisis of 2007.

Public banking has also played an important role in America’s past. The U.S. Post Office ran the Postal Savings System from 1910 to 1966. This brought affordable banking services within reach of all Americans. There is currently a movement to reinstate a Post Office Bank — to allow the growing number of unbanked Americans access to banking services.

Public banking has gained new respect in the wake of widespread, ongoing problems with America’s largest national and international banks. There is widespread belief that the banking industry has deep structural flaws that have not been fixed and probably cannot be fixed, given the industry’s influence in Washington. There is the desire to build new and better banking institutions that can operate reliably for benefit of all American consumers and small businesses.

How a Public Bank benefits its constituents?

Public banks can be chartered and managed so they support local lending within the jurisdiction in which they operate. While existing public banks and those currently proposed are prohibited from direct lending to consumers and businesses, they can either co-lend with a community bank or purchase loans made by community banks, allowing those banks to make additional loans that benefit the local economy. Investment is within the governing community, maximizing public good within that community rather than maximizing profits through global investment strategies.

There are exceptions to the policy of not lending directly where it is viewed as directly beneficial to their constituents. For example, the Bank of North Dakota has been authorized by the state to make low-interest-rate loans to students, which they rightly view as beneficial to the state.

One very important effect of the support of community banks is that, because they are a part of the community they fund, they are much less inclined to foreclose on delinquent loans but lean more toward negotiating loan reconstructing agreements.

An interesting aside is that by chartering public banks, the U.S. banking system would be, in part, returning to a banking model similar to the state-level system that was in effect prior to deregulation of the banks started in 1994. It was as a result of this deregulation that our banking system began to be dominated by the big national and international banks.

Public banks can be prohibited from speculating in risky derivatives that can’t be adequately regulated. This would prevent bailouts that ultimately burden the taxpayer. Further because of our fractional reserve banking system, public banks magnify the money the governing entity can deploy for economic development and infrastructure investment, up to ten dollars of investment in loans for local interests from each dollar the governing entity sends to its public bank.

Like a private bank, a public bank charges interest to borrowers, which generates earnings. Since it does not pay dividends or be required to show earnings to outside investors, which a private bank must do, it can return its earnings to the government. Or it can forgo some of these earnings and offer that governmental entity below-market borrowing costs. In either case, the governing entity benefits.

For further information, we invite you to view the following two videos. The first gives a general view of the structure and benefits of public banking. The second looks specifically at the Bank of North Dakota.

An Introduction to State Banks

The Bank of North Dakota

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