Editorial: A public bank would be risky, expensive and a potential waste of tax dollars

Proponents of public banks are certainly persistent. Study after study has thrown cold water on the idea of establishing a government-owned banking system that, in theory, would let public agencies lend out taxpayer dollars at lower interest rates than commercial banks and yield greater benefit for their communities.

But in practice, no state or local government has established a public bank in 100 years, despite the recent surge of interest and dissatisfaction with commercial banks after the financial crisis a decade ago. Feasibility studies have repeatedly found that a public bank would be too expensive for government agencies and too risky for taxpayers, while also delivering questionable value to the community. Around the country, they’ve been tried — and in almost every case, they’ve failed or shut down.

Despite the pessimistic projections, advocates have only gotten more supporters on the bandwagon. They’ve also found a pair of champions in state Assemblymen David Chiu (D-San Francisco) and Miguel Santiago (D-Los Angeles), who have introduced a bill (Assembly Bill 857) that would authorize thousands of public agencies to form their own public banks.

The bill would set the stage for a massive waste of time and money as government agencies commissioned more studies and hired more consultants to analyze the feasibility of starting a public bank — only to find out what we already know, which is that it probably wouldn’t work.

In fact, there are real questions as to whether the state’s Department of Business Oversight would even allow a public bank to open. Backers of the bank would have to convince regulators that they had insulated the operation from political interference, ensuring that elected leaders couldn’t pressure the bank to make investments in or risky loans to favored individuals, causes and communities. The California Assn. of County Treasurers and Tax Collectors — the men and women responsible for managing deposits and investments for government agencies — have opposed the bill, saying it creates a “false sense of hope.” The association wrote that its members “cannot possibly deposit county funds into a public bank” because of their fiduciary responsibilities.

One of the challenges of assessing the public bank concept is the diverging views among proponents about what a government-owned bank would or should do. The potential missions for a public bank include financing infrastructure improvements or affordable housing projects, funding small business loans or offering banking services to people without bank accounts. A government-owned bank, they argue, could provide services more cheaply because it doesn’t have a profit motive like commercial banks do.

The problem with that rosy assessment is that there’s only one public bank operating in the U.S.: the Bank of North Dakota, which was formed a century ago and partners with local banks and credit unions to make loans to businesses. It’s the only one for a reason: Two dozen other public banks have closed or failed over the last century.

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Countless public bank proposals have been abandoned over the years because banking is a really expensive, complicated and risky business. San Francisco recently studied three models for a public bank. The version that would have provided the most services would have required $119 million in start-up funding and $2.2 billion in public subsidies until the bank could break even — in 56 years. Few public agencies have the budget for such huge upfront costs or the ability to wait decades for a bank to become self-sustaining. And public banks that have a mission of serving people who cannot qualify for commercial bank financing face greater risk of defaults, making it harder for them to sustain themselves.

Some city leaders have eyed public banking as a solution to a real problem: Cannabis businesses have to operate and pay their taxes in cash because they can’t get accounts or credit from commercial banks as long as marijuana is illegal under federal law. Former Treasurer John Chiang commissioned a study to see whether California could create a public bank to serve the marijuana industry. The answer was an overwhelming “no.” Such a venture carried “unacceptable degrees of legal, schedule, mission and financial risks,” the study found.

If there is a future for public banking in California — and again, that’s a very big “if” — then lawmakers would do better to authorize a pilot project that tests a specific mission and model for a single public bank. But AB 857 is too big and too broad a foray into a banking concept that is, so far, unproven.

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