Could business owners and others in DC soon benefit from a new bank owned and operated by the DC government? With $200,000 put in the city’s 2018 budget by the DC Council, officials at the Department of Insurance, Securities and Banking are studying the feasibility of a publicly chartered bank.
What’s a public bank?
A public bank is a deposit-holding and loan-making institution created and run by a government — a city, county or state. Leaders of public banks are held to more direct accountability standards than private banks. Important decisions on lending and other bank operations must serve a public mission. Private banks have broadly defined regulatory requirements, such as lending to local communities, as mandated by the federal Community Reinvestment Act. Public banks have been set up to serve more specific, locally determined goals. In DC, this might take the form of loans to small businesses owned by people of color in wards 7 and 8. In California, officials say public banking can support marijuana businesses that have been denied private banking services because of the complex legal environment around the substance.
Financial assistance is already a part of economic development programs in DC, but a public bank would increase the number and complexity of services offered to stakeholders, according to a Department of Insurance, Securities and Banking overview of the feasibility study. A public bank in DC would manage all of the city’s financial accounts. This wholesale banking requires the capacity to manage the multi-billion-dollar accounts of corporations and other, smaller banks. Also, a public bank in DC could provide retail products to residents such as checking accounts and auto loans. So, a public bank in DC may be deposit-taking and loan-making.
At a July 25 public meeting hosted by the agency, panelists discussed how a public bank could support collaboration across the patchwork of financial institutions that frequently partner to fund projects like affordable housing and below-market-rate small-business loans.
“A public bank could help consolidate resources,” said Steve Seuser, manager of the DC Public Banking Center, a group advocating for a DC public bank. “One of the things we’ve looked at, and I know the Department of Local Small Business Development has been looking at, is some type of a secondary market for the small-business lending programs that exist throughout either Community Development Financial Institutions or revolving loan funds around the city.”
In general, public banking could support economic development and banking activities that are some combination of too risky, too small or too infrequent for private banks to participate in. A public bank could support projects or businesses that are just starting out in a distressed area without much other business activity, are asking for too little money to make a private bank’s time worth it, or are offering too little in the way of return to merit the hassle of regulatory compliance and due diligence.
High-social-impact projects like affordable housing rely on specialized loans and financing, underwritten and administered by nonprofit or community financial institutions. The business plans of a social housing project or small-business incubator stack as many as a few dozen funding sources, including threatened tax credits, on top of one another to meet their needed capitalization.
Where are the other public banks?
Right now, two public banks are chartered in the United States. The Bank of North Dakota was formed in 1919 to serve that state’s agricultural community and local businesses facing limited credit availability from the private sector. Earlier in 2018, American Samoa opened a public bank to serve the territory’s 50,000 residents and its local businesses. For five years before the Samoan bank opened, there was no commercial lending. With recurring storm damage, the islands needed credit to rebuild when the private sector wouldn’t deliver it.
Other U.S. governments are considering chartering public banks. Alaska may establish the Alaska State Bank in 2019 if the proposal passes through its state legislature. Los Angeles will soon develop a thorough cost-benefit analysis for a Bank of Los Angeles, following preliminary study results released in February. San Francisco, both a city and a county, may create a municipal bank following a feasibility task force that reported findings in April. State legislators in Michigan, New Jersey and New York have introduced legislation to establish public banks, and those efforts are under committee consideration.
How would DC set up a public bank?
A 2016 Roosevelt Institute paper suggests two major paths for cities to establish public banks. The first option is to “create a full-fledged, state-chartered depository institution outright, through either a City Council ordinance or a voter-approved Charter Amendment.” The North Dakota legislature followed this approach in 1919, but DC law imposes stringent limits on matters eligible for voter initiatives, ruling out any measures that would appropriate government funds.
The second option proposed by the Roosevelt Institute follows two stages. First, DC could “establish a non-depository Municipal Financial Corporation that could make long-term housing and infrastructure investments, together with a smaller-scale, limited-purpose depository institution.” Puerto Rico operates a finance corporation that issues bonds to support debt service and capital investments of its cities.
Under the second option, the sister organization accepting deposits would eventually “expand its operations to establish a locally controlled depository institution that would take over all depository and cash management services currently contracted out by the city to private commercial banking institutions.” With that step, DC would be able to bring in-house all the operations it currently contracts out to Wells Fargo — a relationship that has sparked a backlash from some local activists.
Roosevelt scholars argue the multi-stage process is superior, enabling the growing pains of bringing banking in-house to be worked out before the operation is at full scale. “Many of the technical competencies that would be developed in the course of the formation and operation of the Municipal Financial Corporation would carry over into the subsequent establishment of the depository institution,” they write.
Establishing a state-chartered deposit institution is difficult because of the regulatory hurdles. The more products and services offered by a DC public bank, the harder it would be to create all at once. However, it’s not clear how a public bank in DC would be affected by the District’s unique governance. It may be easier for DC to set up a public bank because of its city-state structure. San Francisco, on the other hand, must meet all of California’s bank charter requirements. On the other hand, congressional oversight could end up blocking local efforts to establish a public bank.
Anti-Wells Fargo energy fuels DC public-bank campaign
Supporters of a public bank in DC have a surely disliked foil in Wells Fargo & Co. The company is DC’s “bank of record,” holding all of the city’s accounts and providing the system for municipal transactions. However, DC does not use Wells Fargo to store money the way a consumer might use a savings account or money-market account. The bank provides a spot for short-term funds to sit so the District can process accounts payable and receivable. DC regularly shuttles the positive balances over to numerous deposit accounts at other banks and in other investment portfolios.
In March 2017, at-large DC Council member David Grosso and four colleagues introduced a non-binding resolution saying DC should consider ditching the corporate bank, which had falling consumer ratings and known to have misled customers. Two months later, Grosso pushed the ball forward by winning a $200,000 line item in DC’s 2018 budget. That money paid for a contract to study the feasibility of chartering a public bank for DC.
The divestment idea made its way into community meetings, and this summer the DC Department of Insurance, Securities and Banking has presented information about public banking to residents, business owners and other community members at a series of public meetings. Proponents argue, based on recent events, that Wells Fargo fails to serve the communities from which it takes deposits. These critics say DC tacitly supports the megabank by awarding it $12 million every five years to manage the city’s finances and host its high volume of transactions. An anti-Wall Street, anti-discrimination, community-focused coalition has found plenty to criticize in Wells Fargo’s recent record.
DC has only five banking options — and they’re “all the devils”
Skeptics of public banking in DC argue divestment from Wells Fargo may be pleasing the conscience, but ultimately harmful to the health of city finances. DC’s capacity to serve residents and local businesses will only be greater than the present situation if the transition to a public bank is handled properly. Wells Fargo may be cartoonish in its recent misdeeds, but it is the biggest bank in the Washington area, holding $52 billion in local deposits and backing that up with $1.7 trillion in total assets. That heft is necessary to successfully handle the transaction load of a city like DC. It’s not clear whether a DC public bank would be able to match Wells Fargo’s capacity.
The private-sector alternatives aren’t likely to make consumer-protection advocates happy, either. “I know all the 25 largest city CFOs personally,” Jeffrey DeWitt, DC’s chief financial officer, said at the July 23 meeting of Advisory Neighborhood Commission 3/4G (Chevy Chase). “And all of them use one of five banks because to have this infrastructure to do transaction banking is very expensive. … The banks are Bank of America, Wells Fargo, JP Morgan Chase, U.S. Bank and Citibank.”
DeWitt did offer criticism of Wells Fargo. “I am just as disgusted as every other citizen is at some of the things that Wells Fargo has done. … I don’t like doing business with people who are misbehaving, either.” However, he asked community members to consider the relatively small size of the banking agreement. “To do all the [government transaction] services, we pay from $3 [million] to $4 million dollars a year. So it’s not a big contract.”
Looking to recent history, DeWitt noted how this banking contract has been controversial before. “If I look at who [among the five big banks] has misbehaved in the last decade,” there may not be great alternatives. “We used to have Bank of America,” but then about a dozen DC officials used the banking relationship to embezzle tens of millions of dollars. DC dumped Bank of America, and Wells Fargo won a new bid.
DeWitt has noted in public meetings that DC’s options for banking services are limited to the least objectionable among five firms who have all been penalized by regulators. “Bank of America’s fines over the last decade are over $70 billion,” Dewitt said at the July 23 meeting in Chevy Chase. “J.P. Morgan over $40 billion in fines. Wells Fargo over $10 billion in fines. I call them all the devils. Which devil do I want?”
DC’s Old Building and Loan
An old saying about the banking industry goes “3-6-3: You offer deposits paying 3 percent, you loan that money out at 6 percent, and you’re out on the golf course by 3 in the afternoon.” Many stakeholders in DC see a public bank as a way for the District to serve its neighborhood better with these basic services. That community mission may be overlooked by a giant corporation interested in banking products that maximize shareholder return, offer loans only on slam-dunk business plans and provide only fractional percentages on deposits.
The Department of Insurance, Securities and Banking has created focus groups to encourage community input as part of the public-banking feasibility study. Focus group topics include affordable housing, student loan financing, support of small banks and credit unions, and public infrastructure financing. Residents can contact PublicBank.FeasibilityStudy@dc.gov to get involved.
DC officials will receive the public-banking feasibility study by Sept. 30.