For many Americans with limited or no experience with bank accounts, navigating the fees and policies that would make them account holders can be intimidating. And many small business owners seeking loans just can’t meet the standards set by traditional banks.
While many retail banks have worked to demystify procedures and lower fees, advocates for state- or city-run banks say they can do it better by putting the public good ahead of profits.
The speed and convenience of accessing pandemic aid through direct deposit has highlighted the disadvantages of lacking a bank account, heightening interest in public banks. California this year enacted a law that could put the state on the path to government-run banks, and 13 other states considered similar legislation, according to the National Conference of State Legislatures.
Supporters say they are trying to create an alternative to commercial banks that could reach the unbanked or steer investment to underserved areas. But detractors, including commercial banks and some skeptical researchers, argue that retail banks already provide consumer-friendly services and that public banks might be magnets for political interference.
North Dakota is the only state that has state-run banks, which it launched 102 years ago to offer farmers loans at more favorable rates than those charged by commercial banks.
Unlike commercial banks, the mission of public banks would be to invest in public priorities such as affordable housing, small business loans or infrastructure projects. Most proposed public banks would offer consumers “no fee” banking, including a limit or ban on overdraft fees. The Federal Deposit Insurance Corporation would insure the deposits in public banks and guarantee the financial soundness of the institutions, just as the agency does for commercial banks.
New York state Sen. James Sanders Jr., a Democrat from Queens who is sponsoring a public bank bill, noted in an interview that bank branches are disappearing from some neighborhoods.
“Banks have pulled out of so many communities, we now have banking deserts just as we have food deserts,” Sanders said. And as banks move more of their services online, he said, they have become less accessible to people who lack reliable broadband or who aren’t tech savvy.
Commercial banks “have a fiduciary responsibility to their stockholders,” Sanders said. “A public bank has a fiduciary responsibility also, but they have it to the customers. They are looking out for what’s in the best interest of the people who own the bank—the people of the state.”
But the traditional banking industry argues that it already provides consumer-friendly banking and that public banks might be less closely regulated or be susceptible to political interference.
Many retail banks have set up small-dollar, no-fee or very low fee accounts under a program called Bank On certification, according to Blair Bernstein, spokesperson for the American Bankers Association, an interest, lobbying and educational group for bankers. The certification program is sponsored by the Cities for Financial Empowerment Fund organization, a coalition of financial institutions and nonprofits that set up standards to attract new low-income consumers.
Bernstein said there is “no demonstrated need” for a different kind of bank, and that public banks would “expose taxpayers to substantial risk and create an uneven playing field for private-sector financial institutions.”
California has moved toward establishing state- and city-run banks by enacting two laws, one in 2019 calling for a study of how city-run banks would work and another this year to study state-run banks. The analysis, to be completed by 2024, would outline how the banks would work and the market feasibility of such banks. The Assembly then would vote on whether to launch the banks.
Many commercial bank customers are stung by fees if their account falls below a minimum balance or has an overdraft, said state Assembly Member Miguel Santiago, a Democrat who sponsored the California law aimed at implementing state-run banks or accounts. The program, called “CalAccounts,” is specifically designed to serve the unbanked.
“We thought there should be a different model for people who don’t have $1,000 in a bank account,” said Santiago, who represents a district including downtown Los Angeles that is more than 60% Latino.
“We are trying to eliminate overdraft fees, and fees for accounts with less than $100 dollars—nickel and diming the banking account,” Santiago said in a phone interview. “If you are a millionaire you probably are not feeling a dollar here, a dollar there. If you are poor, like the neighborhoods I represent, pulling a dollar away here and a dollar away there—it makes a difference.”
Former Assembly Member David Chiu, a Democrat who is now the city attorney for San Francisco, sponsored the law aimed at setting up municipality-run banks. He said the impetus for public banks came from his constituents and was backed by a coalition of liberal and labor organizations—from “Santa Cruz for Bernie [Sanders]” to the International Brotherhood of Teamsters.
“For the vast majority of our constituents who are trying to run and grow small businesses, the largest Wall Street banks have been all but useless to them,” Chiu said. “They can’t access capital unless they already have capital. My colleagues heard from thousands of constituents who wanted other options.”
The California Bankers Association has been opposed throughout the legislative process, according to Beth Mills, spokesperson for the group that represents most commercial banks in the state.
In an interview, Mills said she expects the California study will “confirm what we believe: It will be incredibly expensive, and it will put taxpayer dollars at risk.
“The proponents have explained it as [adding] new accounts,” she added. “We would like them to come into the banking system that’s already established.”
Serving the Public
Compared with commercial banks, public banks would have a broad mandate that might allow them to do a better job of “representing and reflecting the needs and interests of the public they are serving,” said Michael Pagano, dean emeritus of the College of Urban Planning and Public Affairs at the University of Illinois, Chicago, who has studied the issue.
Pagano said states could require the public banks to invest in certain community priorities, such as low-income housing. That requirement is included in the state-run bank bill now moving through the Washington state legislature.
But Girard Miller, a retired investment banker and financial author, in a column for Governing argued that the financial technology revolution is lessening the need for state banks.
Internet banking, he wrote, “is bringing capital to previously underserved communities and businesses. It turns out that the capital markets, big data, artificial intelligence and techno-wizardry are filling in many of the niches that supposedly cry out for public banks.”
There are studies to support both points of view.
An analysis by the Washington State Treasurer in 2018, which reviewed a number of studies conducted by other states on public banks, found that setting up a state bank in Washington could cost $100 million to $300 million and put taxpayer money at risk. It also said there was a “high likelihood” of political favoritism.
But another study, this one by the University of Washington in 2018, found that “such a bank could be structured in a way that presents minimal risk to the state’s credit rating and overall financial health.”
Washington state Sen. Patty Kuderer, a Democrat who is sponsoring a public bank bill, estimated it would take a $10 million loan from the state to cover start-up costs.
The Washington legislation only involves the lending side of the public bank concept. It would allow local governments to get a loan from the bank to fund infrastructure projects, such as filling potholes or building public housing, which the cities would then pay back.
Commercial banks, however, were still opposed, she said. The bill passed the Washington Senate last session, on a mostly party-line vote, with Republicans against it, but it ran out of time in the House. It’s back on the agenda for the 2022 session.
State Sen. Mark Schoesler, a Republican who voted against the bill, said he opposed it on principle. “Why should the state be in competition with the private sector, credit unions and banks?”
He also said in a phone interview that he opposed the bill because the state “can’t capitalize it without costing us a lot of money and banking shouldn’t be based on political trends.”
Kurderer said she has been trying to reassure commercial banks. “From the beginning I’ve explained to them this is not competition for them. This isn’t going to make a dent in their bottom line. This is another tool in the toolbox for local governments to make an investment in their community.”