
Has the Time Come for City-Run Public Banks? - pseudolus
https://www.citylab.com/equity/2019/07/public-banks-local-financing-community-california-ab-857/593104/
======
Lazare
Politically, I certainly see the appeal.

From finance/economics point of view...I dunno. If I was cynical, I might say
it seems like we're being asked why city funds should be parked in accounts
making safe, legal, loans which are likely to paid back, when we could just
let the amazing SF city government use the money as a slush fund to make loans
to their pet causes and politically connected businesses.

Phrased like that, it doesn't sound amazing! Or as the article puts it:

> There’s been some suggestion that these types of banks would lend to
> entities that might not otherwise be creditworthy,” Beth Mills, a
> spokesperson for the California Banking Association, told CityLab.

Yeah, and most of those suggestions are coming straight from the mouths of the
proposals supporters. If you're struggling to find loans for your ambitious
infrastructure project, is it... maybe... _possibly_... that the proposal
doesn't make a ton of financial sense? What's your city's (or state's) track
record on these projects? Would a neutral analyst fear that you're fudging the
revenue estimates and lowballing the costs? What _is_ the risk of overruns?
Bluntly, how credit worthy _is_ the project?

> “Every politician is talking about affordable housing, but it would be so
> much more powerful if they had a bank that was financing affordable
> housing,” said Jacob.

No doubt. But _will building affordable housing be profitable_? And if not,
will the project be able to repay the loans? (Or if so, why are banks not
willing to finance it?)

There's a real "dog that didn't bark" feeling to this article, at least for
me.

~~~
bsder
I'm not a big fan of "Bank of Los Angeles/San Francisco/etc" but I would be a
much bigger fan of "Bank of California".

It should be geared toward serving as a _bank_ , first, and an investment
vehicle, second or minimally, and its records should be _excruciatingly,
painfully_ transparent. It also needs to serve as a backstop for those who
find the current banking system too expensive or too exclusionary. Paycheck
cashers are predatory vermin who need to be put out of business.

I view disconnecting from Bank of America, Wells Fargo, and their ilk simply
to be a bonus.

~~~
kalleboo
In many countries the post office offers (or used to offer) banking services
in a less commercial way than the private banks. Although now many countries
have sold out/privatized their postal systems.
[https://en.wikipedia.org/wiki/Postal_savings_system](https://en.wikipedia.org/wiki/Postal_savings_system)

~~~
fennecfoxen
The postal savings systems are designed to help people get access to basic
banking and bill-pay services. They may help expand access to these systems to
those who might not otherwise have it. It is not the worst idea for a city to
open one of these, though they would probably partner with an actual bank to
help keep down technology and administrative expenses.

Tellingly, postal savings systems are not designed as a way for the government
to get money for projects that no sane lender would underwrite. The real
purpose of the proposals we see here is to make the government less
accountable to taxpayers and reality so they can underwrite their fantasy
spending schemes with free money from their own bank. The endgame is the
bank's inglorious failure, a federal bailout, and incoherent ramblings about
how this is all the fault of the evil capitalists who hate poor people.

------
mdasen
I'm left wondering how much benefit there is with public banks.

First, we already have not-for-profit credit unions and member-owned
cooperative banks. Why does the bank need to be owned and run by the city?

I'm a big fan of credit unions. They offer a not-for-profit alternative to
banks. However, when you look at their rates, they aren't some order of
magnitude different from banks. They can often be better, but they usually
aren't so far off because ultimately banks remain reasonably competitive.

I guess my question is: how would a city-run bank do substantially better than
a credit union?

The article talks about trying to finance affordable housing, but one of the
biggest impediments to affordable housing tends to be residents opposing it,
not its financing. Even then, housing financing is a quite competitive market
and the question becomes whether the city-run bank would issue riskier loans
with less possibility of repayment. However, if the city lends with a lower
repayment rate, that's just a subsidy. I think the government needs to spend
on affordable housing, but this just seems like a way of doing it
inefficiently (but sneaking it by taxpayers who don't notice it since the city
isn't "deciding" to spend money on affordable housing).

Either you lend money at rates similar to what credit unions lend at for
projects of similar risk or you decide to lend at lower rates or to riskier
projects and lose money - essentially offering subsidized loans.

It sounds like advocates 1) dislike for-profit banks (and it can be easy to
feel that way) and 2) want to lend to/invest in projects likely to have a bad
repayment rate or worse returns, but fit something they want for other
reasons. Really, it sounds like they want subsidized loans to substitute for
grant money the cities won't give them.

Now, I think combatting global warming is of huge importance and I think we're
facing an affordable housing crisis. However, I don't see a city-run bank as
the solution to these problems.

Frankly, the reason it's a bad idea can be seen when one thinks about
pensions. Why don't we have the public pensions of California invest in these
socially responsible projects? Because we've made a commitment to those
retirees and if we invest in underperforming projects, taxpayers will have to
make up the rest - and there will be less money for all the good projects we
want to accomplish.

There is an opportunity for a city-owned bank to offer benefits. If it's as
efficiently run as a private bank, the city would essentially reap the profits
from it. However, they could also reap those benefits from using a credit
union. I guess I'm left wondering why advocates don't try and get cities to
move their money to a credit union first. That's probably where I distrust
their idea most. It feels like they want a city-owned bank because they think
once the city spends millions setting it up, the city won't be able to back
away from it and they'll be able to siphon money out of it for socially
responsible projects.

I'm guessing that cities have explored credit unions. Seattle wanted to dump
Wells Fargo in a 9-0 vote and found that no one else could really handle their
business. Seattle tried many things including slicing up its business into
smaller chunks and trying to court smaller banks.

It's also important to note that while cities have a lot of yearly revenue, it
doesn't just sit in the bank to really be invested or lent. Seattle puts $3B
through Wells Fargo each year, but has an average daily balance of only $10M.
The article says that they "park" money in banks, but I don't think that's
really the case (at least it certainly isn't in Seattle).

~~~
Lazare
> However, if the city lends with a lower repayment rate, that's just a
> subsidy. I think the government needs to spend on affordable housing, but
> this just seems like a way of doing it inefficiently (but sneaking it by
> taxpayers who don't notice it since the city isn't "deciding" to spend money
> on affordable housing).

It does feel like that's the (mostly unstated) goal here.

------
qznc
We have that in Germany:
[https://en.m.wikipedia.org/wiki/German_public_bank](https://en.m.wikipedia.org/wiki/German_public_bank)

For day to day common needs Sparkasse are the most popular banks. Usually
private banks will give you better offers. Sparkasse is big, slow, and
burocratic. Maybe that is just the size though.

~~~
hobofan
> Sparkasse is big, slow, and burocratic. Maybe that is just the size though.

It's not just the size, but also it's decentralized governance and high
turnover. A friend of mine who worked for them as an independent project
manager for some marketing related IT-changes had to travel all over the
country to get buy-in from the regional Sparkassen-groups for the project.
Mind you, those weren't some earth shattering changes, but nevertheless he was
the ~7th PM on that project which had already been in the works for 3 years.

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dluan
Like most progressive issues in the US these days, this issue has taken a lot
of inspiration from Europe, notably in Germany where public banks have been
around for a while. The public banks there help to fund infrastructure
investments and renewable energy projects.

The recent effort in LA probably successfully pushed the issue the furthest,
despite not passing the vote. It got the issue to resurface after the initial
interest from the VC-funded weed startups.

Bob Hasegawa, a Washington state senator, has also spent a lot of time
advocating for a public bank in Washington and Seattle.

~~~
hollerith
The US federal government and the 50 US state governments have been deeply
involved in banking for many decades -- as regulators. What would be new is
for the government of a US _city_ to become involved in banking.

Which leads me to ask you, Do any of the _Kreise_ (roughly analogous to the
county governments of the US) or the _Gemeinden_ (municipal governments) of
Germany operate a bank?

~~~
dluan
The Bank of North Dakota is a state owned enterprise. It operates ~$8B in
assets. In 2017, it recorded record profits for the 14th year in a row. It
survived the 2008 financial crisis and is serving its citizens just fine.

~~~
hollerith
OK, but operating a bank is not particularly different IMHO from regulating
the hell out of the banks with branches in your territory, which again all 50
US states have been doing for decades. (Very small US state governments with
no particular opinions on how to regulate banks will probably have copied the
regulations of a larger state government.)

My question was whether any European _city_ operates (or regulates) a bank.

(I'm almost certain that at least some of the larger European and US cities
run their own _pension funds_ , but I want to know if the government of some
European city offers bank-like services to people other than its employees.)

~~~
dluan
Sure. In Scotland for example, municipal banks are everywhere. North
Lanarkshire, West Lothian, North Ayrshire, Clydebank, and East Dunbartonshire
Municipal Bank all take deposits and lend to borrowers. They do everything
you'd expect a commercial bank would do.

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pjc50
Never mind "too big to fail", small banks are often "too small to succeed"!

Spain used to have a network of city banks called the _cajas_. They suffered
from exactly the sort of cronyism people here are worrying about, and the
financial crisis blew almost all of them away.
[https://en.wikipedia.org/wiki/Savings_bank_(Spain)](https://en.wikipedia.org/wiki/Savings_bank_\(Spain\))

------
caymanjim
This is a horrible idea. Banks that operate based on the whims of the public
are going to invest in stupid but popular projects that are doomed to fail.
Popular ideas align poorly with financially-sensible ideas. Banks don't want
to fund public housing and other social programs because they are risky and
will probably lose money. A city like San Francisco is going to fund feel-good
measures that are doomed to fail. Then they're just going to need to be bailed
out, and the taxpayers are going to suffer.

~~~
wwweston
On the other hand, banks that operate in private are likely to invest in
stupid and unpopular projects that are doomed to fail.

Of course, in theory, private banks have incentives not to invest in projects
doomed to fail, and the invariably upright careful professionals staffing them
have similarly aligned incentives.

Which is why we can't think of any high profile examples of private banks
needing to be bailed out by taxpayers, right?

~~~
adventured
> Which is why we can't think of any high profile examples of private banks
> needing to be bailed out by taxpayers, right?

Which says nothing about whether the frequency of bailouts would be much
higher or not if all banks were government owned & operated. As bad as TARP
was - while still earning a profit for the government - the government bank
scenario may have been even worse. You can see examples in this thread of the
incompetence of government banking in Europe, in Germany for example. If the
Germans can't operate a government bank at a superior level, California's
government would be an epic disaster.

------
ww520
Let the Post Office operates as a bank. City level bank has too small of a
scope to be efficient. Post Office has the network, infrastructure, and
branches in place that can easily expand into financial services. Japan's Post
has banking service and it has work well.

~~~
lwhalen
Came here hoping someone would say this. Apparently the USPS used to operate
as a bank 'way back in the day':
[https://www.nerdwallet.com/blog/banking/post-office-
banking-...](https://www.nerdwallet.com/blog/banking/post-office-banking-2/)

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elygre
It seems to me that a profitable bank is private, while an unprofitable bank
magically becomes a public concern.

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pkaye
Couldn't they just go with a local credit union?

~~~
clintonb
Probably not. As another commenter noted with Seattle, the needs of larger
organizations often exceed the capabilities of smaller banks and credit
unions.

Holding cash is easy. The backend processing—processing check deposits,
sending checks, corporate cards, etc.—requires a lot of investment that most
smaller banks and credit unions outsource. Wells Fargo and Bank of America
have the benefit of having built all of this already.

------
gridlockd
> “When you’re backed by a city, you have a democratic constituency to hold
> the bank accountable,” said Sushil Jacob.

What does that actually mean in practice though? Several cities in the US have
literally gone bankrupt. Sure, there's people that are "accountable" for that.
Maybe some of them lost their mediocre little jobs or didn't get re-elected.
So what?

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thebeefytaco
As I see it, one of the major issues with banks recently is that they've all
conglomerated into a few large ones, so there isn't much choice or competition
anymore. (Chart:
[https://upload.wikimedia.org/wikipedia/commons/b/be/Graph_of...](https://upload.wikimedia.org/wikipedia/commons/b/be/Graph_of_Bank_Mergers_in_USA.svg))
Backing those industries with public funds has already led to them making
riskier investments, as they know the public will cover their losses.

A public (i.e. subsidized) bank has no incentive or need to compete or appease
its customers, so I fail to see how this would make things better and not
worse.

------
goodcanadian
Possibly relevant, Alberta Treasury Branches:
[https://en.m.wikipedia.org/wiki/ATB_Financial](https://en.m.wikipedia.org/wiki/ATB_Financial)

------
pishpash
If they are independent with a clear mandate like the Fed, then it can be
decided on the mandate's merit. If it's an open-ended government controlled
socialist bank, hell no.

------
sfthrower89
This article fails to even mention the most important part of municipalities
wanting their own banking system: Not giving money to banks.

In the early 2000s San Francisco found that we were paying we were paying (I
think it was Wells Fargo) for the privilege of making interest off of us. We
weren't making interest, but the fees were forever going up.

When we came within just a few votes of creating a bank, we miraculously got a
better deal.

Considering that these big banks aren't really working in the public interest
and are instead playing "too big to fail games" , any bank big enough for our
business will never actually have any legal or moral incentive to act in our
best interest.

Also consider the unbanked. America's banking system is the least fair in the
world. Banks which use chexsystems to force poor people into the world of
payday loan banking, just shouldn't have the right to federal funds, let alone
local funds.

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SllX
A Bank of California might make sense, and be a good place for the State and
local governments to park their funds, in addition to offering private
banking, so long as it has a mandate to be profitable.

A network of credit unions across the State to handle community finance and
banking, that might make sense; it’s for residents or people of a particular
class (police, students, teachers, or people who reside in a particular
county) to park their accounts. I mean it’s essentially community banking with
a shared interest group, and having enough of them endorsed by the State would
take political pressure off the Bank of California to expand into areas which
would be unprofitable.

Postal Savings Unions, as a kind of last resort for people who can’t open an
account anywhere else, to encourage savings? Why not. As long as you don’t
have to go through Congress, the State of California night even be able to
enter into a contract with USPS to provide that for people here, and maybe
even use the post offices around the State as a backbone for a new ATM
network, better if we can eliminate ATM fees for these institutions.

Take all of these together, and you’ve got the workings of a pretty decently
sized network of local, publicly interested banking and savings institutions
and hopefully none of them too big to fail or too small to be profitable.

That said, city run banks? I love my city, as much as I complain about it, I
grew up here, and I would _not_ trust the Board of Supervisors to stake the
creditworthiness of the City and County of San Francisco on a Public Bank.
Doing it at the State level is still risky, but it might be a risk worth
taking since California _isn’t_ a monoculture much as our critics might think
it to be, and that is a much larger pool of funds that wouldn’t be enriching
large private national and international banks. There might be real savings to
be had for taxpayers there.

I don’t believe that to be true about San Francisco. We might be bigger than
North Dakota, but I think it is a poor fit for our city’s culture to get into
banking. At least a credit union (there are several here already) funded by
residents is a lot more insulated from our own political machinery, even if
the constituency is mostly overlapping.

