EPISODE 25: The First City To Launch Its Own Bank

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Show Notes

What becomes possible when the public owns the bank? A city-owned bank could decide, for example, that it wants to support Black-owned businesses and others that have historically lacked access to credit. Now an American city is pioneering a future that prioritizes the public’s interest.

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Transcript


Straw media. This is Lucas grinly
from next city, a show about change

makers and their stories. Truth is, there are solutions to the problems of

pressing people in cities. If you're
listening, I hope it's because you want

to spread good ideas from one city
to the next city. Everyone talks about

needing systemic change. Today we have
an example. We're going to hear about

cities starting public banks. This idea
has so much potential that this is how

representative Alexandria Acazio Cortez began a Congressional
hearing last year on the federal version of

this solution. Thank you so much, chair Parl Mutter, and you know,

I think one of things that's important
to acknowledge is that this is one

of our first congressional hearing from public, and today's a historic day, I

think the day we're celebrating, and
I think the chair for his courage,

his political courage and willing to convene
this in front of the Financial Services Committee.

Why is a Congressional hearing and act
of political courage what is so historic?

I have to warn you. Today's
episode is next city podcast level one

hundred and two. This is not
a one one class to help us understand.

We turn to next city senior economics
correspondent, Oscar Periabello, who has

covered this idea for years, because
actually it's more than an idea. It

already exists in North Dakota. All
right, so you and I get to

talk about public banks a lot.
This is one of the things we talked

about a lot because apparently we're big
nerds. But I think most people don't

know what public banking is. So
what is a public bank? It's not

like there are ATM's right. Describe
it for people who've never heard of this

before. Yes, so a public
bank is a bank owned by a unit

of government. It might be a
state, might be a city or a

county, it could be also the
federal government. It is owned by the

government and it holds government deposits.
The Bank of North Dakota, which has

been around since nineteen nineteen. It
takes all of the state's government's deposits,

like every every every tax dollar and
fee that you pay to the state of

North Dakota. It goes into the
Bank of North Dakota, into the bank

accounts that the state has, and
state agencies have also had bank accounts at

the Bank of North Dakota, all
of it. There's about five million dollars

in there. Everything. Right now
five million dollars in deposits from the state

in the Bank of North Dakota.
Why is it that public banking is extremely

rare, but in North Dakota we
have a public bank. What is it

they wanted? Yeah, so in
Nineteen nineteen the farmers in North Dakota,

the farmers banded together. I think
there were probably some pitchforks involved. So

the farmers in North Kada were mad
that the bankers in Minneapolis and Chicago and

New York, we're charging the societ
interests. They're like, screw it,

we're going to create our own bank. To compare to today, public banking

is also response to shortcomings in the
banking system. Now that people are saying,

well, we'll start our own bank
then. Yeah, yeah, it's

really it's been really weird to talk
with Bunch of folks in San Francisco and

Oakland and New York and Chicago,
places that could not be more different than

North Dakota. Big Cities, so
many people of Color, block owned businesses

like temo business owners and Businesss,
and they're all looking at North Dakota and

saying hey, if they can do
this in North Dakota, we can do

this here in San Francisco or Los
Angeles or New York, because they feel

the same way that the banks have
let them down there. They either get

charged too high interest or they don't
get any loans at all from the banks,

from the from the private banks as
they exist. And so they believe

that, just as the farmers in
north the courda believe that that creating a

state own bank, or a city
owned bank, in the cases of the

cities are doing this can be a
way to create access to capital where it

doesn't currently exist or create more affordable
access to capital where it's currently cost too

much, and where that is is
usually communities of color, right right,

because of historic redlining and segregation.
There's plenty of maps and data that show

that bank branches are more likely to
close in communities of color. There are

fewer bank branches in those neighborhoods well
did to white and wealthier neighborhoods and cities.

Yeah, these are places, you
know, even though it's in it

might be in the middle of a
giant metropolitan area, it's very much a

banking desert the way lots of places
in rural areas are banking deserts. In

North Dakota there are places that are
you might consider geographically far from a bank,

but banking deserts are rarer in North
Dakota than in other big states.

That will give you an example.
There are about seventy five banks headquartered in

North Dakota. There are only fifty
towns in the Dakota with more than twozero.

People like tiny towns in North Dakota
still have a local bank and that's

because of the Bank of North Dakota. Right. The way the Bank of

North Dakota works is through local lenders. It really partners with local community banks

credit unions to support them. So
you've been explaining this to me for a

long time and let me see if
I've got it at all, which is

that a public bank can lower their
risk. For the all those local banks

that want to give a loan out
to someone who is in low income underserved

neighborhood, they can essentially split the
loan share the risk. Right. So

let's say your small business in West
Oakwood and you need a loan of Fortyzero.

There's probably no bank you can find
that can make you a loan for

Fortyzero. It's number one is too
small maybe for them. The number two

it might seem to a risky because
of the neighborhood where your business is,

because if you might lack a collateral, you might not own your own home,

you can't put it up for collateral. In North Dakota they can say,

okay, we're going to lowly Fortyzero, but we're actually to get twentyzero

from the bank in North Dakota to
cover part of that loan so that we're

sharing the risk with the state owned
bank. So the combination of a big

bank and a little bank making a
loan it helps to share the risk and

encourage those lenders to make more of
those loans. So the back of R

code is able to support a lot
of these loans. And it does it

again. It does it always in
partnership with a local lender, which I

think is probably one of the most
misunderstood parts of the begging with the code

is that it partners with local lenders
on the vast majority of its lending.

It doesn't compete with them and actually
works with them. That leads us to

Philadelphia, where the city council has
approved the first ever municipal public bank entity.

The state admission of this new bank
is to make small business loans a

specially to black entrepreneurs and neighborhoods that
have historically lacked access to credit. After

the break will hear from city council
member Derek Green, who champion this first

ever city owned public bank. Welcome
back to next city. Before the break,

we heard how North Dakota pioneered public
banking. That is just the beginning.

American Samoa created a public bank in
two thousand and sixteen when other banks

wouldn't serve the territory, and that
public bank actually accepts deposits from people like

you and me. California approved a
public banking act in two thousand and nineteen

for the first time, allowing the
creation of public banks to spread throughout the

state. Now activists in the East
Bay are working on a regional public bank

that would jointly be owned by Alameda
County in the cities of Oakland, Berkeley

and Richmond. New Jersey's governor created
a public bank implementation board in two thousand

and nineteen, and legislation has popped
up in New York Oregon, Washington State,

New Mexico, Massachusetts and others,
and this year, after six years

of hearings and public meetings, Philadelphia
City Council voted fifteen to one to create

a public banking entity. That is
where we are headed next. Our senior

economics correspondent, Oscar peria bellow,
spoke with the Philadelphia Bills Champion city council

member, Derek Green. Each public
bank can have its own specialty. In

the Philly Bank will have its own
way of doing business. Can you talk

a little about what is the envision, the end results, I feel?

What is the public bank supposed to
be? Ideally, what I would like

to see is the city of Philadelphia
having a I'll call it a public banking

ecosystem that I can that includes a
municipal bank here in the city of Phildelphia,

but also, connected and affiliate with
that, a put up a public

Finance Authority, which is a legislation
that we've already passed, that working cooperatively

together to really help the dress some
of the systemic issues we've seen in the

city of Phildelphia, looking at ways, in more creative ways, providing financing

both for the city of Phildelphia and
other entities, but also providing banking products,

especially for those hard to lend to
entities like some of our black and

Brown businesses, like cooperatives, like
a form of housing developers and other new

industries that are come out of this
dual track initiative of the Philip and public

banking until up with public financial authority
and then also a future public bank.

You know what kinds of means I've
come up for you in terms of how

the bank will operate. Now there's
a real depth set and access to credit

for black and Brown businesses. We've
seen studies from both the census from organizations

here in the city of Padelphia that
showed how many black and grab this is

what really impacted by the pandemic who
were not able to reopen. And even

before the pandemic there's been historical issues, systemic issues that really impact the ability

of those businesses to grow. And
when you think about the issues were seeing

in the city of Phildelphia, Republic
Safety and, a lot of the public

saype issues tied to people not being
able to have jobs and resources and the

greatest creator of jobs or small businesses. And when you have some people want

to start a business not having the
resources to open up their own business.

That has caused some of the deficit
of jobs in the city of Phildelphia.

The fact that we have such a
high pop the rate, the highest poper

rate for any large city in the
nation. So when I think about the

type of facts that can come from
the filled up a public financial authority,

if those type of products like letters
of credit, credit enhancements that are helped

black and brown businesses to grow,
the fact that for the city of Phildelphia,

only six percent of the businesses with
employees are owned by African Americans and

from the Latin disport, only four
percent of the businesses with employees come from

that and Diasporat. To me that's
directly true attributable to the fact that of

the high property we have in our
city and the fact that we need into

the like fill up a public the
final authority that can provide those type of

credit enhancements to help those businesses be
able to grow get access to more lending

products so that way they can help
provide more jobs. How was our public

state issues in our city? Yeah, can you say a little more and

about the letters of credits and the
other kinds of structures that have. How

does it? How does that sort
of work when you're providing a letter credit

or other type of credit hance?
But they're still a level of underwriting.

But because this is a public entity, we don't have the same type of

risk, I mean profit motive that
traditional bank would have, and so the

risk issue is not the same level
that you have in a traditional for private

or even a nonprofit lender, because
those entities still have to bring in some

income to offset their expenses. We
don't have that same level of motivation for

this type of entity and so there's
a willness take a little bit more risk,

and so we're trying to provide a
product that's really missing from the ecosystem.

I mean there are intities that do
provide letters of credit or more often

that's in the important export that's you're
not really what you see for a small

business product, and so we're trying
to really provide a nitch that's not really

available down that will help these businesses
that traditionally had not been able to give

access to more land to allow them
to grow, to help their cash flow,

and that's why we've seen the numbers
like the six percent and the four

percent of businesses being owned by people
color but only being entrepreneurships. To not

being entrepreneurs is socro prietorships and not
being larger businesses, and I think that's

something that really has been a challenge
from a historical systemic perspective, because many

of our black and Brown entrepreneurs don't
have another friends and family what they can

ask for. Hey, can you
provide xbount dollars that I can use this

collateral to them help get more financing. That's where this new enter will come

in to provide those type of opportunities
and for the city it provides ability to

grow businesses and when you're growing businesses, you're going to bring in more taxtiles

to the city and I think it's
going to help us address some of the

poverty issues that we have as a
city. It's almost like the the financial

authority can kind of serve as a
like a cosigner on a loan. You

know, if you have an uncle
or your parents or your grandparents, maybe

peuple co sign alone for your house. This would be an authority would cosine

Alan for a small business. That's
actually very good analogy when you think of

some of the cosigner your basis saying
I'm putting my credit up to support this

business, and when you think of
the stocking equities, and it's go back

to my own career having started at
a small business lending from ready and bank

and I work in North Philadelphia and
I saw the impact of redlining in the

city of Phidelphia from a historical respect
and when you don't see the building for

black and Brown business owners or homeowners
to build up the equity in their home.

But ask the money and the resource
of many use to start a business

is either home equity or tapping to
the home equity of family, friends and

others. So if you don't have
those resources when you do start a business,

often those businesses are under capitalized.
And if you have some type of

issue, like a major event like
a pandemic or a recession or some other

type of national global event, so
quickly those businesses that get started that may

have a great customer base or have
a great pride of service that people want

to buy. But if you don't
have those fundamental supports to make sure those

businesses are capitalized at the way they
should, they're not able to make it

through some of those down turns and
what happens? A lot of business don't

last but so long or there I
able to grow because they can't get additional

financing to bring in more employees or
take advantage of opportunities. Let's talk about

next steps in terms of funding for
this entity and then eventually also pursuing a

bank charter is. It will be
another question down the line, but what

can you tell us so far about
getting the start up funding for the finishahip?

So one of the other benefits of
doing this initial at this time.

There are two other new entities within
the city of Phildelphia to fill up how

the developed incorporation created the Accelerator Fund, which is a fund that's providing loans

to emerging developers of color in the
city Phildelphia. Also to fill up an

energy authority, which is also in
Munici Authority. How to create an affiliate

call it filled up at Green Capital
Corporation as a new entity. So although

those two entities are different than the
filled up a public FINANCI authority, there

are similarities. So both with the
accelerated fund and the Green Capital Corporation that

it put together initial budget of what
they thought they would need for start up

dollars, for operating dollars. Looking
at their operations, we came up with

a number of about three million dollars
that will be requested through this current fiscal

year twenty three budget process that we're
currently going through and addition, looking at

some of the initial products that accelerate
a fund and the Green Capital Corporation doing.

We looked at we know what's the
capitalization needs for this entity itself.

Base on that research and looking at
other jurisdictions that are looking to do public

banks, we're looking at an initial
campelation amount of seventy five million dollar collars

to those that are requests are we're
making to deministration for this budget process,

both three million dollars and offering dollars
and seventy five million dollars in tional capital

dollars and get started that we could
then do through some type of offering,

and the belief is at base on
those two numbers, as well as having

the support from the administration for the
appointment process, either to the city website

to receive requests of interest for people
who want to be on the corporate board

of Policing Board or through the City
Council website. You know, those are

the kind of the three steps need
to go through. We need to get

the board members appointed, we need
to get funding through the budget process for

the initial operating dollars for the new
entity and then also the capitalization. So

those are the three steps that will
work on. Now we are communicating that

information to administration and hopefully we'll get
the support we need, and I believe

those who have been supportive of this
initiative will also by notes of public support

for those requests, so that where
we can move forward and then hopefully we'll

be able to have those things in
place, hopefully by the end of the

year. So who is opposed to
creating public banks? After the break will

hear some of the typical arguments made
against this new solution. Welcome back to

next city. In today's show,
public banks are being used to fill in

gaps and better serve black small business
entrepreneurs, but not everyone likes the idea

and there are actually lots of myths
about public banking. Here again is our

senior economics correspondent, Oscar Periabella.
All right, let's see if we can

go through a few of these popular
misconceptions about what is and is not true

about a public bank. Some have
said that public banks are risky because they're

not FDIC ensured like other banks.
What is the truth about that? So

the back and read the CODA is
not FDIC. In short, when it

was created in one thousand nine hundred
and nineteen, the FDIIC did not exist

right the fice. They now ust
the one thousand nine hundred thirty three,

so you're sort of grandfathered into the
banking system. That said, the purpose

of FDIC insurance is to give depositors
the peace of mind that if their bank

fails, the FDIC will be there
to cover their deposits and get their deposits

back for them through the FDI SS
insurance spots. And the reason that event

depositors would would all go at once
to a bank to get their deposits.

It's because it's failing and it's called
the bank run. Right. Used to

happen to lots in this country and
that's the FDIC was cree to prevent back

runs because the state and North Dadoda
is required by law to deposit its funds

in the bank and North Dakota there
cannot be a bank run on the bank.

And Gorth Dakota, right in California
and Philadelphia, the cities that are

pursuing public banks, they are requiring
their banks to obtain at the Ice Insurance.

The reason for that is primarily for
the oversight, because one way to

keep politicians away from messing with the
bank is by having federal regulators oversee that

bank and we the ones who monitor
on an ongoing basis. But the insurance

would actually only cover a small amount. Yeah, after I see insurance only

covers up two hundred and fifty thousand
dollars per depositor. And you know,

even the small city is going to
keep half a million dollars getting the bank,

and so a lot of that's going
to be uninsured. A state,

you know, in Massachusetts are proposing
the state deposit one point four billion dollars

into the state owned banks. Most
of that's not going to be harvered by

deposit insurance anyway. Right. So
there have to be other ways to protect

the public deposits in that in that
instance, and there are established ways to

do that. Let me ask you
another one. So some say if the

public bank is designed to serve people
who don't qualify for everyday commercial bank phones,

then there's going to be more loan
defaults. Is that true or false?

If we're really talking about these public
banks doing what they want, a

lot of the folks say they want
to do. Yes, it's going to

have more defaults, but not so
much that runs the bank out of business.

The bank will still have to be
financially self sustainable. Otherwise they have

DII. See, wouldn't let it
told deposits. What the Bank can do

is, because it doesn't have shareholders
who want dividends, is it can set

aside more money every quarter or every
month. It can set aside more money

and keep a bigger buffer there to
support, you know, a slightly higher

default rate. That's the mindset you
want to have established when you when you're

establishing a bank that wants to reach
more folks like this, like you,

do want to do that. That
said, do we know that there's going

to be a the higher default rate? I'm not sure, because there are

cdfis across the country who are providing
some loans to these folks who haven't been

able to access conventional, mainstream financing, and the all of these cdfis have

lower default rates than many mainstream banks. They are below average default rates,

even though they're lending to some of
these borrowers who banks considered too risky.

Right. So that's this brings up
another thing that people say, which is

that there are already be all these
cdfis that you're mentioning. So why do

you even eat a public bank?
It's not necessary. What's the response to

that? Yeah, so there are
the cdfis that are doing these loans,

but if you ask any of them, they'll all tell you that most of

them are nonprofits and they're all,
just like other nonprofits, constantly short on

Gash. They have to raise the
money first in order to make the loans.

So these cdfis are stretched to the
limit and public bank, by doing

loan participations or even by offering it
to buy some of these loans, the

same way fan you may or Freddie
Mac buy home loans from all kinds of

home lenders, public bank could buy
certain kinds of loans. That's only cdfis

currently make. I could buy those
loans, it could buy part of those

loans. That's what the loan participation
is, if buying part of the loane,

and by doing that it could allow
those cdfis to do more, like

a lot more, because basically,
if you think about if your CDFI has

nine million dollars in loans and you
sell participations on let's say half of that

amount, you suddenly have four million
dollars more you can re loan back out

into the communities that you're serving.
You know, I just I randomly walk

into an immigrant own grocery store in
Fargo and I asked them where they where

do they get their startup capital?
And they got from a local bank.

And then I went to the bank
and they said Hey, these guys said

they got a loan from me and
they said yeah, there are great tients

and I said Yeah, did you
work with the bank in North to go

to all that loan? And they
said yeah, we got. We got

half of the half of the bar
with the mat looking from the bank in

North Dakota. And that's that's just
typical in a place like North Dakota and

these other places want that to be
typical in their cities and states. So

last one, sort of the typical
argument against anything that is publicly run is

that private banks couldn't possibly compete with
a government run bank. They might think

you're opening some sort of Pandora's box
in which private banks will go away.

What do you say to that?
The answer to that is everywhere there is

there are public banks, and I'm
going outside the US now to include like

places like Germany and you know,
some like thirty to forty percent of the

world has government owned banks in operation. And be all these other places private

banks will exist. And if you
just look at the bank in North Dakoda,

there's seventy five banks headquartered in North
Dakota for a state of only about

eight Hundredzero. That's more banks headquartered
per capita than any other state. Right.

We're talking one bank for every tenzero
ish people in North Dakota. In

New York I think it's one bank
for every hundred and forty thousand people.

Across the whole country it's one bank
for every sixty three thousand people. You

know there are more banks in North
Dakota where there is a state owned bank.

There are more banks headquartered capital in
North Dkoda than any other state and

if you go to the North Dakota
Bankers Association you can ask them about it.

They love this thing. Their membership
can't envision operating the way they operate

in North Dakota without the state owned
bank as a lending partner to them.

Now we're a lot of folks are
worried is on the deposit side. Yes,

there are local banks and some tiny
you, depending on the state,

that do hold local deposits. There
are about five hundred billion dollars in state

and local governments that are deposited in
banks. Most of it is in big

banks, some of it is in
small banks and yes, to some extent

a state owned or locally owned bank
would be competing for those deposits. We

hope you enjoyed this episode of next
city, a show about change makers and

their stories. Together we can spread
good ideas from one city to the next

city. Thank you for listening this
week. Thank you to Oscar perio bellow,

our senior economics correspondent, who knows
more about public banks than I could

possibly fit into one episode of this
podcast. If you'd like to learn even

more, download next cities public banks
Ebook by visiting next city dot Org ebooks.

Thank you to our guests, Philadelphia
City Council member Derek Green. If

you would like to hear more from
that interview, visit our Webinar Library at

next city dot Org. weapinars.
Our audio producer is Silvana Alcala. Our

executive producers are Tyler Nielsen and Ryan
Tillison. By the way, next city

is a news organization with a nonprofit
model. If you like what we're doing

here, please consider pitching in to
support our work. visit next city dot

org slash membership to make a donation. We'd love to hear any feedback from

our listeners. Please feel free to
email us at Info at next city dot

Org and, if you haven't already, subscribe to the show on Apple,

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Next City
Join Lucas Grindley, executive director at Next City, where we believe journalists have the power to amplify solutions and spread workable ideas. Each week Lucas will... View More

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