Colorado is facing challenges that national institutions, including global financial institutions, because of their structure, are not addressing. Rather than demonizing these institutions and fighting them, Rocky Mountain Public Banking Institute (www.bankingoncolorado.org 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, 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, 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 report to a board or commission defined by the charter of the bank so as to ensure freedom from conflicts of interest, commitment to follow sound banking principles, and service to the public interest. Further, a public bank does not pay exorbitant salaries and bonuses, and they have no advertising, no branches, no tellers, or ATMs, and they do not pay commissions or fees, making it very sound financially. .
Public banking is common around the world, particularly in developing and newly-developed countries. Globally, about 20 percent of banks are publicly owned. The countries with public banks mostly survived the Great Recession of 2008.
Public banking has also played an important role in America’s past. The U.S. Post Office ran the Postal Savings System from 1911 to 1967. 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 major 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 generally do not lend directly consumers and businesses, they can either co-lend with a private 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 restructured loans that can be repaid.
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 This would prevent bailouts that 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 seek to maximize profits for outside investors, which a private bank must do, it can return its earnings to the government.
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