The proposal to create a public bank owned by the city of Philadelphia is a bold and far-reaching policy initiative. City Councilmember Derek S. Green has made this a priority for the current Council session, a study on the bank’s feasibility is underway, and critics have spoken up about the liabilities of such a bank. It is important to get it right.
More than two dozen localities are now embracing one public bank model: the over 100-year-old public Bank of North Dakota (BND). Its success provides a blueprint that can be adapted to Philadelphia.
The BND is not a commercial bank and does not compete with community banks and credit unions. It partners with them in lending to lower the cost of credit to their customers — small and large businesses, home buyers, and students among them — and by providing those partner banks with cost-saving services.
By lowering the cost of credit and monthly payments, more borrowers can qualify. This means jobs. Studies, such as one done by nearby Stockton University in New Jersey, project that every $1 million loan can create — both directly and indirectly by prompting more growth — at least six new jobs.
The conservative loan-to-deposit ratio of U.S. banks is 8 to 10: $8 loaned for every $10 on deposit. In its first year, a Philadelphia public bank holding only $200 million of the city’s far larger deposits could be expected to loan $160 million and create 960 new jobs.
Under the partnership model, community banks and credit unions are better able to grow and compete with the big, mega-banks. North Dakota has one of the strongest community bank systems in the nation. In interviews conducted by the Public Banking Institute, numerous North Dakota bankers praised the public bank as an ally and partner central to their success.
A public bank would also have a positive impact on city finances. Because it is not a retail bank, it has no branches, tellers, ATMs, advertising, and the attendant costs. These savings fall to the bottom line as profit the public bank can share with the city as nontax revenue, helping to balance budgets and avoid tax hikes. The bank could additionally eliminate the need for the large, unproductive city “rainy day” funds.
Further, the public bank can make low-interest loans to the city for infrastructure needs, in place of more expensive bond issues. This reduces the debt service in annual budgets passed on to taxpayers. In 2015, the BND began loaning to school districts for new construction and renovation at 1.75%. The principal and interest paid are retained and reinvested locally, rather than exported to out-of-state banks and bondholders.
There are challenges. As with commercial banks, a public bank needs a charter from the commonwealth, sufficient deposits to operate, capital to cover any losses, and a business plan to avoid failure.
Ample deposits are available: Consider some or all of the city’s hundreds of millions of daily deposits now held by one or more of the Wall Street mega-banks. A public system keeps those deposits safe from the “too big to fail” banks that failed in 2009, and from the risk that in another crisis mega-banks will seize deposits, as post-Dodd-Frank regulations allow.
Capital is available. The most recent commercial bank to receive a charter in Pennsylvania after 2010′s Dodd-Frank consumer protection reforms were approved had start-up capital of only $17 million. A review of the last Consolidated Annual Financial Report of the city lists hundreds of millions of liquid or quickly liquid assets, some portion of which can be invested in the public bank.
A Philadelphia public bank can start small, with a limited mission, and grow.
The big challenge is to ensure the bank is both accountable to elected officials for its performance, but also free of political involvement in its daily management, hiring, and credit decisions. Numerous models, including that of the BND, demonstrate how these twin requirements can be met.
Properly organized and managed, a Philadelphia public bank will be a legacy institution providing ever greater benefits for generations of Philadelphians.