As populism has surged in U.S. politics, it might extend to an unexpected profession: banking. Public banks — financial institutions owned and operated by the government — are gaining steam across the country, promising a banking system that puts community economic development over profit. In 2018, American Samoa created the second currently operating public bank in the U.S., following North Dakota’s. New Jersey Gov. Phil Murphy signed an executive order last November aiming to create a state-run public bank, not long after California passed a law to allow its city and county governments to create or sponsor public banks.
Philadelphia has held public hearings around public banks, with longtime advocate City Councilmember Derek S. Green introducing a resolution last January to hold another. The city has hired outside consultants, HR&A Advisors, to investigate the feasibility of a public bank here.
Proponents say public banks will offer fairer loans, and invest in community growth in ways private banks do not. But opponents counter that public banks are expensive to start. They also note that government control may open the door to political manipulation of bank funds, and needlessly compete with private banks that already do the job.
The Inquirer turned to Green and the president of the American Bankers Association to answer: Should Philadelphia start a public bank?
By Derek S. Green
Concentrated poverty, inadequate paychecks, and too few jobs have limited Philadelphians’ economic security for too long. By promoting local economic growth, a public bank is a way to address these issues by providing access to capital for businesses and individuals who have not been able to obtain loans from traditional lenders.
Although our population is growing, Philadelphia’s economic growth lags behind that of our peer cities. According to the Bureau of Labor Statistics, the rate of private-sector job growth among big cities is 2.3%. For Philadelphia, it is only 1.5%. Consequently, this low job growth explains why Philadelphia, among the 25 biggest U.S. cities, has a poverty rate of 25%, which is second only to Detroit (and ranks first among the top 10 cities).
I believe that poverty is the No. 1 issue that plagues Philadelphia. This issue has a profound impact on many of the problems that confront our citizens and our city. From crime to health care, from education to housing, Philadelphia’s high poverty rate limits our ability to address all of these problems. Due to poverty, people don’t have the income to fight these problems in their own homes, and we, as a city, don’t have the resources to attack these problems throughout Philadelphia.
In order to address poverty, we need to grow more jobs in our city. Many people would agree that the best long-term solution to poverty is a job. Further, as we’ve seen throughout our country’s history, I am confident that the best creators of lasting jobs are small businesses.
Starting and growing a business is difficult, with many failing within three years. As a former small-business lender in North Philadelphia, entrepreneur, and attorney, I’ve seen that most businesses start small. For entrepreneurs of color, and for women, limited resources and networks make the path to success even more challenging. These complications make it difficult for these business owners to obtain credit based on the underwriting criteria of most banks. While those rules are set by regulators and market conditions, the result is the same for too many Philadelphians: limited access to capital to start or grow businesses.
We can do better for our city by passing legislation to create a public bank. By strategically investing in locally owned businesses through banking staff removed from political control, the city can lower a main barrier to entry for our entrepreneurs. Building wealth and creating jobs are core factors in providing the economic security and justice that every resident, family, and community deserves.
A successful public bank doesn’t need to solve every financial need of each citizen and business from its inception to thrive. As I envision it, Philadelphia’s public bank would start by filling this dire need for capital to build locally owned businesses.
Redeploying the same stale growth strategies, like tax credits that end up underutilized by the city, will yield the same disappointing results. It’s time to be bold and creative with a real focus on jobs to reduce poverty and address the problems that impact our residents. To be the city of economic inclusion that all Philadelphians deserve, we can and should create a public bank.
Derek S. Green is a city councilmember at-large in Philadelphia.
By Rob Nichols
In the honorable quest to find solutions to some of Philadelphia’s major issues, some in the community have latched onto an idea that sounds appealing on paper. They want the city to create its own bank to handle city municipal finances and perform banking services for city residents and businesses.
Once you move from an idea on paper, however, to reality, you quickly realize that this is an idea that could do serious harm to the city and the taxpayers who call it home. Before considering such a move, Philadelphia would be well advised to learn the lessons of the past.
The concept of public banking is not new. There have been dozens of public banks across the country over the years, but the vast majority ended in costly failure, mostly in the 19th century. There are currently only two operating public banks in the U.S.: the Bank of North Dakota, and a bank in American Samoa just getting off the ground.
Proponents point to those banks as examples to follow, but the comparisons miss the mark. American Samoa created a public bank because the island territory — located 2,500 miles from its nearest U.S. neighbor — was at risk of being completely unbanked.
The city of Philadelphia, on the other hand, is served by 38 banks with 291 branches, according to an American Bankers Association analysis of Federal Deposit Insurance Corp. data. Twelve of those banks are headquartered in Philadelphia.
The Bank of North Dakota started in 1919 and continues to this day, but public banking advocates often lose sight of the fact that the bank was chartered to partner with local, privately owned banks and credit unions, not to compete with them as a direct lender. That is a very different mission from competing directly with existing banks as some in California, New Jersey, and Philadelphia have proposed.
There are several reasons other public banks have failed. Vermont’s state bank tanked six years after starting in 1806 and cost the state $3 billion in today’s dollars, while Farmers’ Bank of Delaware failed in 1981. The problems with public banking start with costs to taxpayers. Launching a public bank in Philadelphia would cost millions of dollars, tying up resources that could be better used to fund projects such as infrastructure enhancements and community development instead of offering financial services already provided efficiently by private-sector banks operating in a highly competitive marketplace.
San Francisco recently conducted a study of public banking in that city, which is roughly half the size of Philadelphia. The study estimated that an investment between $184 million and $3.9 billion would be needed to operate a public bank, depending on its mission, and it would take anywhere between 10 and 56 years before it would breakeven.
Beyond the expense to the city and taxpayers, there is the critical question of who would make financial decisions. Placing political leaders, no matter how well-intentioned, in charge of a public bank raises serious questions about whether the bank could operate independently from the political process. A government bank, for example, could be incentivized to make questionable loans to politically connected borrowers, putting public funds at risk.
Simply put, expanding access to financial services is a laudable goal we support, but there are better and safer options for the good people of Philadelphia than a risky public bank.
Rob Nichols is the president and CEO of the American Bankers Association.