Public banks are making a splash in the world of U.S. financial institutions. But how exactly do they work?
Despite public opinion of big banks reaching a record low in 2012 (a level that didn’t rise much in 2014), not all banking systems are quite so nefarious.
Public banking, though far from ubiquitous in the U.S. (the only large scale public bank is currently located in North Dakota), has caught the eyes and ears of those disillusioned with private sector banking.
What are public banks?
Public banks are pretty much exactly what they sound like: banks which are run by the local or state government.
A recent surge of attention, however, doesn’t mean that public banks are a new thing, in fact, public banking has existed in the U.S. since 1919, and globally speaking, over 40 percent of banks worldwide are in the public sector.
There are a few distinct ways in which a public bank operates differently from a private one:
- The state deposits revenue – public banks are funded by an initial public investment, and the state then deposits all of its revenue in the bank as well as periodically borrowing from the ban
- The chief officer has no executives – instead of reporting to executives like a private chief officer would do, the head of a public bank reports to a the state governor and other government officials
- Not profit driven – according to the Chief Officer of The Bank of North Dakota, public banking institutions exist solely to help support “agriculture, commerce, and industry…” as opposed to the standard for-profit model
- No direct lending – public banks don’t directly lend money, but rather, they help local banks finance small business loans and other ventures
Why do people like them?
Since 2008, when the actions of big banks helped bring down the global economy, public banking has become even more appealing to many–20 states are now petitioning for a public banks in their municipalities.
What exactly makes public banks so appealing?
- They can be managed – since public banks operate under government control, they can be much more easily managed. This means they can be made to lend locally as opposed to internationally, a change which would help stimulate local communities.
- Low risk – public banks don’t engage in high risk activities like derivatives trading or other speculative trading that isn’t adequately regulated, making them a much lower risk to financial system
- Amplify public money – each dollar a state keeps in a public bank equals two dollars of money that a state can invest locally (business loans, infrastructure, other special projects), according to fractional reserve banking.
- Supplement state revenue – earnings beyond what a public bank needs to support growth can then be directed back to the state to support other projects
Challenges for public banking
Public banks are, of course, not without their critics.
Those who oppose public banking contend that they could fall victim to political motivations since they are operated by state and local government. Additionally, some fear that a public bank may open up state governments to more risk if not managed properly.
Regardless of your opinion on public banking, their success in amending a private banking system still depends on a number of different factors.
Some of the biggest challenges that public banking faces are:
- Opposition from private banks – large banking institutions may see public banking as competition, which may create a backlash given a widespread movement
- Finding the right home –
- Finding the right rules – will hinge on whether or not public banking will compete in the same arenas as private banks