The COVID-19 pandemic placed unprecedented pressure on the American government, particularly financial systems charged with disseminating aid and relief to our most vulnerable citizens. As unemployment rates exploded, small businesses shuttered and Americans battened down the hatches for the unknown future, our collective financial vulnerability skyrocketed at the speed of light. And despite Congress passing relief legislation at a historically fast rate, there was no clear pathway to get financial resources to the general public in a fair and efficient manner (Wilson, 2021).
The realization that our financial and government infrastructures are not capable of servicing a national systemic crisis has created an urgent desire to solve this problem. This, combined with an increasing appetite for remedies to economic injustice, has ignited a nationwide interest in public banks.
THE BELL OF THE BALL
There is, and has only been, one public bank in the United States: The Bank of North Dakota (BND) (HR&A Associates, 2018). This bank is backed by the “full faith and trust” of the state of North Dakota. It was started in 1919 as an effort to give support to farmers who were in desperate need of financial relief operating at the mercy of out-of-state grain dealers. After the state’s legislature approved the formation of the bank, which required it come to fruition in 90 days, BND opened her doors on July 28, 1919 with $2 million dollars (over $31 million in today’s dollars) in starting capital (Peterson).
During the great depression, North Dakota Governor William Langer drastically expanded the bank’s service offerings to support his constituents during the catastrophic era, which grew the bank. This happened again in the 1960’s when the governor expanded the bank’s operations to encourage economic development and again in the 1980’s to diversify the state’s economy (Peterson).
In its latest annual report, BND declared a profit of $141.2 million in 2020, a return on investment of 15%, and $7.7 billion in assets (BND, 2021). It’s truly the Cinderella story of American socialism.
But creating a statewide public bank with taxpayer dollars was something you could just do in 1919. Today, if Cinderella wants to raid her evil stepmother’s closet, sneak out of the house and hit the club to meet prince charming, she’ll have to get past the in-house monitoring system sending video feed directly to mommy dearest’s iphone, bypass the ADT alarm, bribe Alexa to keep her big mouth shut, and steal the car without anyone hearing the automatic garage door open as she starts up her Jetta. In 2021, the chances of Cinderella pulling all that off and successfully making it to her prince, get very slim. But the question is “How slim?”
OBSTACLE #1: IT’S ALL ABOUT THE DRESS
Feasibility studies are how policy wonks wardrobe. And when the policy you’re wonking on has virtually no precedent in the 21st century economy, it’s all about the dress. The Cities of Philadelphia and Seattle commissioned feasibility studies for the creation of municipal level public banks. Both studies were performed by the same consultant: Andrea Batista Schlesinger of HR&A Consultants, making them very easy to compare and contrast, because any significant variations in the studies can be assumed as the result of the Cities’ goals and individual state and local barriers to entry, not a variance in the consultant. Each study was incredibly informative and overwhelmingly robust with details, nuance and logistical integrity. After reviewing both, the element that surprised me most was how stunningly different the studies were. The finding that did not surprise at all was, what a gargantuan undertaking this effort is in the modern legislative and financial environment.
Now, when you’re engaging an effort of significant disruption in a complex adaptive system as large as banking, with almost zero historical precedent, there’s an immeasurable level of subjective bias. But here’s a short summary of my experience reviewing the studies. The Philadelphia study reads like a maze, in which you keep hitting regulatory and legislative walls. With each page, I felt the possibility of a public bank slip further away, always seeming to end up back where I started. The Seattle study provided a much more linear and procedural presentation of the logistical hurdles, making the prospects of a public bank seem slightly less daunting, but not by much.
This significant variation appeared to be due to how each city defined the problems they were trying to remedy with a public bank. Seattle had two very specific problems they wanted to solve, making the feasibility of creating a public bank to solve them, more streamlined and targeted. Philadelphia’s study opens with a lengthy letter from Mayor Kenney in which he suggests the bank could resolve various amounts and types of social injustice. He provides no data or evidence for his claims to guide the course of the study toward specific solutions or proposed outcomes which I imagine was more challenging to navigate when determining feasibility. Kenney also cited under-banking and un-banking in disenfranchised populations as a problem to solve, which the consultant addressed as cultural, market and geographic trends not easily remedied simply by establishing a public bank.
Therefore, my first conclusion is: If you’re going to try for a public bank, know exactly what problem you are trying to solve, specific indicators for performance and the quantifiable outcomes you want to achieve then base your work on data and evidence-based practices and employ the scientific method. This conclusion is supported by the fact that BND was started as a remedy to one socioeconomic problem. It was targeted to help one vulnerable group at a time of crisis, and its evolution maintained that pattern successfully, for over a century. On the other hand, if you try to clone BND in its current form as a $7.7 billion panacea for socioeconomic injustice, like an omnipotent instrument of economic equity, then the feasibility study is going to be a non-linear, logistical headache that fails to alchemize into anything more than a progressive pipedream. Again, it’s all about the dress. For this reason, the bulk of this article is being taken from the Seattle feasibility study.
The Philadelphia study stresses the point that regulations are often designed to control big banks, but they still apply to small and public banks. And while the big banks are lawyered up to the teeth and flush with cash to navigate regulation, small and start-up banks may lack that money and manpower. In this case, the Philadelphia public bank would theoretically start with about $250 million, making it a very small bank.
Both studies list a number of legislative remedies that would need to be passed before each bank could even be attempted. These include constitutional amendments in both states, contingent upon each bank’s structure and functionality. Such amendments are a slow and painstaking process, requiring a ballot initiative and significant bi-partisan support. There are also strict rules on how government entities can manage taxpayer dollars that do not apply to private banks, restricting portfolio options and available liquidity for a public bank. Therefore, establishing a viable portfolio for a public bank that will meet regulatory approval could be even more challenging than for her private counterparts.
Now, back to that dress. Let’s say you have sewn together that perfect little green dress. It’s been tailored to the nines with regulatory reform and a sparkly state constitutional amendment and you even have the money to fund it thanks to the taxpayers refilling the City’s coffers, assuming the taxpayers are actually going to support this. Now you’ve got to get your ass to the ball.
OBSTACLE #2: CAN’T I JUST UBER?
Nope. You’re going to have to drive this ride and the twists and turns are sharp and steeped in extremely rigorous approval processes. First, you have to get your bank a charter. That means writing a very detailed business plan and having all your ducks in a row, lots of ducks. Then, if you’re going to take deposits of any kind, which you probably will if you want to build the capital needed to be sustainable, you either have to get approval from the FDIC or self-insure the bank. BND, for example, is not FDIC approved. But their only retail services are predominantly basic checking and saving accounts, and CDs and they have $7.7 billion in assets which goes a long way when you’re backing a bank with nothing but the “full faith and trust” of the state. A small, municipal start-up on the other hand, is again going to struggle with this part. Consider that, due to rules prohibiting the political control of a bank, if the bank is self-insured, Seattle City Council must assume full financial responsibility of a bank that they are absolutely prohibited to influence. I’m sure the City Council members will love that. But it doesn’t stop there. The City’s charter would also have to establish the extent of their capital commitment to the bank that includes a plan for its failure. I can just see portions of the “too small to succeed plan for failure” quoted all over FOX NEWS in memes with that big scary n-word plastered everywhere in all caps: NATIONALIZATION. Meanwhile, execs at Goddamn Sachs and Moron Stanley are licking their chops like Lady Tremaine as they utter, “Well I see no reason why you can’t go if you get all your work done. And if you can find something suitable to wear. Of course . . . I said IF.” (Cinderella, 1950).
Assuming you get your bank charter and the FDIC approval (which has never happened for a public bank) or the municipal mandate to self-insure deposits from City Council, then you’re ready to apply for access to the Federal Reserve Payment System. This is necessary if you are going to receive a routing number and financially transact with other banks. Again, this will be a very rigorous application process, through which Seattle is automatically denied, because they intend to have their bank service the cannabis industry (HR & A Associates, 2018).
If you somehow manage to pass through all that bureaucracy and make it to the ball, you’ve got to dance eloquently with the prince. But that’s not all waltzes and waistcoats either. Seattle’s study shows they will actually have some iatrogenesis to mitigate after the transition from private to public banking. First off, only the City’s largest banks have the service capacity to fulfill all its banking needs which means, when Seattle becomes its own banker, the services it provides itself will lose a lot of functionality. That requires a second business plan and RFP’s to establish outsourcing, thus incurring more costs. With this consequence, the Seattle study states that the City is “venturing into uncharted regulatory territory.” Suddenly, Cinderella is trying to meander her way back home wearing one glass slipper like the anti-heroine of an Amy Schumer movie; And it only gets worse.
Second, the public bank will likely cause Seattle to be removed from the state’s negotiated master contract for municipalities offered through their Local Government Investment Pool (LGIP). In 2017, that contract yielded Seattle $32.9 million through a portfolio of overnight repurchase agreements and long-term government bonds. This investment windfall costs the City just $6,000 per year for the service.
Third, a portfolio structured to ensure sustainability of the bank is going to be nothing short of a tight-rope walk. To fully capture the dynamic and less-than-sparkling disposition of this negotiation, I’ll quote directly the chilly illustration from the Seattle study:
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“The public bank may need to invest in an above-average share of securities to collateralize the City’s deposits, which could reduce net interest income. In addition, the infrastructure to support the City’s account needs may drive up overhead costs, while the avoidance of retail deposits may reduce these expenses, adding uncertainty to any financial projections. Furthermore, the Washington data reflects established institutions with stabilized operations. By contrast, regulators expect newly-chartered banks to incur losses in the initial years; BND did not earn a profit for nearly 30 years. Even if the model bank does generate the average pre-tax ROA of 1.31%, the City would forego its expected 2.0% return on its investment account to fund both the public bank’s deposit and capital. Regardless of bank size, the City faces the same trade-off between funding a sustainable public bank and earning higher returns on investments (HR & A Advisors, 2018).”
So let’s play this out, even if we get this regulatory and administrative behemoth out of the gate and operating, City Council will likely be obligated to financially feed an entity that is more expensive to operate than their current structure, will possibly lose money for 3 decades, requires a written pro-forma plan for failure, removes them from the profitable state municipal master contract, and is predominantly, if not completely, funded by the taxpayers. The voters are absolutely going to love this!
“I regret to inform you, sire, that the young lady has disappeared,
leaving behind only this glass, slipper.”
– The Grand Duke
For those of you who are finding your hopes that public banking will be the antidote to a corporatized, oligarchical sickness, now completely obliterated and your soul crushed; I so didn’t mean it. So let’s get the Fairy Godmother to make it better.
OBSTACLE #3: TIME FOR TWO-SIDED TAPE AND SOME DRY SHAMPOO
The cutting room floor for this article is cluttered with crates of clippings that didn’t make it to copy. And the absence of any modern precedent on this process leaves so much unknown. However, a detailed presentation of the known barriers to entry for this type of entity is a necessary start in our public discourse. And, as an insatiable, hopelessly romantic policy wonk, I do believe there can be a kiss at the end of the night and a happily ever after.
BND is undeniably, a century’s-old Cinderella story and could become the 21st century’s “New Colossus.” She has aged like fine wine and slowly evolved into an incredibly valuable and fiercely effective tool in times of crisis for the people of North Dakota. Her capacity to heal seems limited only by the imaginations of those she serves. And her subtle but storied history has proven that a public bank can be a remarkably non-partisan effort in even the most turbulent political times. Those characteristics make the work and effort to self-actualize and replicate her, a worthwhile vision in our nation’s future. That work will require patience, precision and a great deal of time. Washington state has been trying to achieve the feat since 2009 and they’re not there yet (Wilson, 2021).
“Even miracles take a little time.”
- The Fairy Godmother
Currently, the Public Banking Act sponsored by Reps AOC and Rashida Tlaib (HR 8721, 2020) is in the Financial Services Committee of the US House. Without dissecting the current draft of the bill in painstaking detail (yawn), I can say it has a few very good ideas but needs a lot of work. Considering that one of the biggest obstacles public banks face is mounds of regulation not only for banks, but government entities and how they use taxpayer dollars, the bill’s increased regulations on interest payments, and required and restricted portfolio products, are likely to increase administrative burden, and prohibit the creation process instead of alleviate it’s barriers. The relaxed Federal approval processes are too vague to be enforceable and the severe over-allocation of power to the US Federal Reserve Chair is alarming. (Why would anyone supporting a public bank risk the next Alan Greenspan using his “Ayn Rand Approved” rubber stamp to decide if a public bank can be a thing, especially when that process is already being performed by the Comptroller of the United States (Stewart, 2020)?) The bill’s biggest faux pas is its failure to remedy the Federal Reserve System’s ban on banking, in any form, with the cannabis industry; a tragic oversight.
The structure of smaller municipal banks appears to be extremely unfeasible. A statewide public bank, on the other hand, conceptualized in the likes of BND’s nascence, seems the most capable of establishing the capital requirements and effecting the extensive, necessary legislative remedies to be successful. Furthermore, a statewide bank could house existing state banking programs, like the LGIP master agreement, SBA programs, and infrastructure lending, allowing municipalities to receive the benefits of a public bank without sacrificing participation in current value-added programs. Furthermore, its potential as a supportive entity for numerous public sector finances is boundless; affordable housing, public sector pensions, government trust funds . . . etc. Finally, a statewide bank would have the brain-power and political pull necessary to survive this steep climb over the very long haul.
While I don’t see public banks as the panacea they are, at times, painted to be, if thoughtfully and pragmatically designed and objectively run, they could be a powerful state-wide weapon to wield against economic inefficiencies and financial service gaps. I love the idea of recreating an old-world, romantic love story fit for 21st century inspiration. If we just take our time and meticulously adapt the tale to our very complicated modern world, we’ll ensure it remains a cherished classic for the next American century. See you at the ball!
“No matter how your heart is grieving,
if you keep on believing,
the dream that you wish will come true.”
- Cinderella
. . . AND AS ALWAYS, THE PAST IS PROLOGUE.
For more information here’s a great resource. https://www.publicbankinginstitute.org/why-public-banks/
CITATIONS
Bank of North Dakota (2021). Bank of North Dakota Releases 2020 Annual Report. June 9, 2021. https://bnd.nd.gov/bank-of-north-dakota-releases-2020-annual-report/
The Financial Brand. (2021). Public Bank growth will draw key consumer groups from private sector. The Financial Brand. July 20, 2021. https://thefinancialbrand.com/118760/public-bank-growth-will-draw-key-consumer-groups-from-private-sector-unbanked-minorities/
Goalcast. 31 Cinderella Quotes to Make You Believe in You Dreams Again. https://www.goalcast.com/2018/09/12/cinderella-quotes/
HR&A Advisors. (2018). Public Bank Feasibility Study for the City of Seattle. October, 2018. https://sftreasurer.org/sites/default/files/2019-09/Seattle%20HR-A-Advisors-Public-Bank-Feasibility-Study.pdf
HR&A Advisors. (2020). Public Bank Feasibility Study for the City of Philadelphia. September 30, 2020. https://www.phila.gov/2020-09-30-philadelphia-public-bank-feasibility-study-released/
Peterson, C. (Undated). The Bank of North Dakota: A Bold Social Experiment. North Dakota Living. https://www.ndliving.com/content/bank-north-dakota-bold-social-experiment
The Public Banking Act of 2020. HR 8721. 116th Congress. October 30, 2020. https://www.congress.gov/bill/116th-congress/house-bill/8721?s=1&r=1
Stewart, E. (2020). Exclusive: Rashida Tlaib and AOC have a proposal for a fairer, greener financial system — public banking. October 30, 2020. Vox. https://www.vox.com/policy-and-politics/21541113/rashida-tlaib-aoc-public-banking-act
Wilson, K. (2021). Is this the year that Washington state starts a public bank? https://crosscut.com/opinion/2021/03/year-washington-state-starts-public-bank