by Matt Stannard | February 18, 2015
American Banker, founded in 1836, is America’s oldest and most important banking journal. Over half a million people read its five day-a-week news site every month, and over 35,000 people subscribe to the print version. Independent of any portion of the banking industry, American Banker has won accolades for its coverage of legislation, banking scandals, financial crises, and significant issues in banking and finance.
So when Kristin Broughton authored an article on public banks, we were immediately interested. Would the nation’s leading banking journal give fair treatment to our alternative to Wall Street banks?
We have mixed reviews of the article. Although at one point Broughton refers to the public banking movement as an “industry fringe group,” the article is objective and acknowledges that the Bank of North Dakota has been a success. But it also cites to a flawed 2011 study commissioned by the State of Massachusetts, concluding that establishing a public bank would be costly. And Broughton quotes a University of New Mexico business professor who asserts, without evidence, that it’s “not correct to think” that profits earned by big banks for financing local projects are going outside of the state. Broughton could have explored both sides of that argument–and this underscores the need to support PBI’s ongoing media efforts in order to combat the often shallow and warrant-free assertions made by glib business interests to dismiss the concerns of public banking activists.
As Ellen Brown wrote back when the Federal Reserve Bank of Boston released that flawed report on public banks in 2011:
The FRBB’s method of calculating these costs is dubious at best. The report takes the BND’s $2 million capitalization in 1919, multiplies by 12.5 “adjusting for inflation,” then multiplies by another 13 adjusting for “growth,” to come up with a figure of $325 million. Then it scales up again for the size of the Massachusetts economy to arrive at $3.6 billion as the amount of capital needed to start a bank. This looks like serious double-counting. Moreover, there are much more accurate ways of determining capitalization requirements for a modern bank than looking at banking requirements in 1919.
Capitalization needs vary, depending on how large the legislature wants the bank to be. A bank today could be started with as little as $20 million. The bank can start small and grow. Moreover, its capital base needn’t come from the budget or from tax revenues. “Capital” is an equity investment, not an expenditure. It can come from existing rainy day funds and other investment funds sitting idle, or from a bond issue.
Here are some good excerpts from the article, which is subscription-protected at the American Banker site.
One of public banking’s most vocal supporters is Santa Fe Mayor Javier Gonzales. A former commercial lending executive and state Democratic Party chairman, he was elected mayor early last year on a platform that included establishing a public bank.
“Cities are the places where innovation is taking place,” Gonzales said.
So far, he’s pushed the issue with the Santa Fe City Council, and he generated buzz around the issue by hosting an all-day public forum. Public banking in Santa Fe is still in the “discovery stage,” Gonzales said, adding that formal legislation has not yet been introduced.
The Santa Fe City Council last month approved money for a feasibility study to look into the costs and benefits of a municipal bank. The city is also exploring whether it has a legal pathway to do so.
The primary goal is to form partnerships with local banks to expand lending to residents who are “on the marginal side” of being creditworthy, Gonzales said. “Community banks and lending institutions … need to be allowed to make loans to small businesses without the threat of a federal regulator saying, ‘That’s too risky,’” he said.
A municipal bank could also hold city’s deposits — a service that, based on city documents, is primarily handled by Wells Fargo. A representative for the San Francisco company declined a request for comment.
But Gonzales insists that big banks aren’t his target.
“More so than a message to the big banks, it’s a message to the banking regulators: You have created a regulatory environment that has locked out people who need access to grow after the recession,” Gonzales said.
Gonzales, who expects to move forward with legislation this year, has some support from councilmembers.