Philadelphia has been making little progress on promoting Black businesses despite many efforts. A public bank, an idea that got some traction in the 2019 City Council election, might be a way to get to the heart of the problem: access to capital.
Unlike a private bank, which is owned by shareholders, a public bank is owned by a government entity and focuses exclusively on business and civic development. In Councilmember Derek Green’s proposal, Philly’s public bank could secure initial funds from the city’s General Fund, among other resources. A public bank would have the power to provide loans, issue tax-exempt bonds, and finance city construction projects for business owners who currently do not meet the underwriting criteria at most private banks.
It is well-documented that banks discriminate based on race when deciding who qualifies for loans and what terms are required. Additionally, interest rates could be a barrier to capital. A public bank, driven by the city’s mission and not shareholder profit, could be more strategic when giving loans to promote equity and offer more favorable terms.
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While other cities and states have explored public banks, including a proposal in New Jersey, only three public banks currently exist in the United States: in North Dakota, Puerto Rico, and American Samoa.
Critics, some of them bankers, say that the public bank is unnecessary and a potential liability. Between city-affiliated organizations like the Philadelphia Industrial Development Corp. and private groups like the Enterprise Center, the city has existing routes to fund businesses. And in a city that recently lost $33 million from its main bank account (though they were later found to be an accounting error), and saw a city treasurer arrested for fraud, it’s not unreasonable to wonder if enough safeguards exist to ensure that this doesn’t wind up wasting taxpayer dollars.
Fortunately, as a community development financial institution (CDFI), the bank would be legally required to maintain some distance between itself and the city. A majority of its board members would have to come from outside institutions, rather than through appointments by the mayor or City Council. This would help insulate the bank from concerns about malfeasance.
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A public bank also could be an appealing investment for existing financial institutions by helping them meet their obligations under the Community Reinvestment Act, which calls for banks to meet the needs of low- and moderate-income communities. The bank’s role is intended to be complementary to existing organizations, rather than a competitor. As a public bank, it would be able to fill in the gaps of financing that traditional CDFIs aren’t always able to fulfill, like providing initial lines of credit to difficult-to-lend-to businesses, or helping to seed the growth of minority developers.
Councilmember Green, who has been thorough in his efforts toward a public bank, is awaiting an external report from law firm Holland and Knight to further explore its feasibility.
Overcoming the racial wealth gap, providing the capital Black entrepreneurs need to succeed, and increasing the business density and economic health of the city are all essential public policy goals. It’s up to stakeholders — including Green and his colleagues on City Council — to make it a reality.