What is a Public Bank?

A Bank for Public Funds Owned by the City of Santa Fe

A public bank is owned by the people through their representative government: a Tribe, City, County, State or Federal Government. It can receive deposits of public funds (taxes, fees fines and interest earned) from, and make loans to, the representative government that owns it.

A Public Bank for Santa Fe can be founded and owned by the City of Santa Fe which holds it in trust for the people of Santa Fe. Banking On New Mexico has received a definitive legal opinion from David Buchholtz of the Rodey Law Firm, among New Mexico’s oldest and most respected firms, that New Mexico Constitutional and Civil Law and financial regulations do not prohibit the establishment of a public bank.

A public bank is operated in the public’s interest, and profits are returned to its representative government to be used for public purposes. It is not like an incorporated bank owned by stockholders who reap the profits as dividends from their stocks.

A public bank might pay the City higher interest on its deposits than is paid by national/global banks currently, because a public bank doesn’t return profits to individual stockholders or pay exorbitant salaries to high level employees.

A public bank can lend money to the City of Santa Fe at lower interest rates than the City presently pays to national/global banks and bonding agencies for the money it borrows. This occurs because global banks and bonding agencies pay profits to their owners and stockholders, and this will not be true of a public bank.

A Public Bank for Santa Fe CAN and WILL make a profit as a result of its lower operating costs and smaller management team. And a public bank can return that profit to its owner, the City of Santa Fe, or use some of the profit to increase the bank’s size and lending ability.

The Public Bank for Santa Fe will be chartered by the State of New Mexico, like other local community banks, but the public bank’s mission will be to receive, hold and invest substantial deposits from the City of Santa Fe. Deposits will include city income from taxes, fees and fines and any interest earned. The public bank will likely open with only one depositor, the City of Santa Fe.

Because the proposed public bank will not be set up for private bank accounts, it will not incur the expense of providing retail banking services and products. This will make the public bank more efficient to manage, with less paperwork, fewer expenses and a very small professional banking staff.

A public bank will keep our community’s money right here at home in Santa Fe. Interest paid here and profits earned here stay here, circulating in our economy.

At first our public bank would primarily invest in needed public services and projects in Santa Fe, because those investments are low risk and clearly benefit the public as a whole.

When our public bank has more experience, it could partner with local community banks, credit unions, and community development fund institutions (CDFIs) to guarantee or share in local lending. This would make it easier for those institutions to make loans that expand our economy, create jobs and invest in projects that enhance our community.

Under the right circumstance, a chartered depository bank can put its financial resources to work for Santa Fe twice. First, it can issue bank credit (loans) for up to 90% of qualifying deposits. Second, those same financial resources are held safely in a bank account earning a little interest for the City. A public bank has many of the same privileges as stockholder-owned incorporated, chartered banks. For example a public bank can use the fractional reserve system to multiply the value of its deposits through the credit it creates with the loans it makes.

When all the legal steps to establish a public bank have been completed, a Public Bank for Santa Fe could be created with an original deposit by the City. Sufficient City funds to establish a public bank are presently on deposit in two banks that are not locally-owned, Wells Fargo and First National Bank of Santa Fe.

As a part of the bank charter application, the bank would state the amount of capital to be invested by the City to establish the bank.

Santa Fe (unlike some other NM towns, cities and counties) is only allowed to deposit public funds in banks that will guarantee the safety of those funds by locking up an equal amount, plus 2% of the bank’s own money. That means that, for every $1000 deposited in a bank, the bank must lock up $1020 of its own dollars. This City requirement for 102% collateralization of its deposits can be changed by City Council and that change will not only make a public bank possible, but will also make it possible to deposit more public money in local community banks.

As a part of the bank charter application, the bank would discuss the kinds of investments /loans that the bank anticipates making. It is probable that at first, loans will mostly be made to the City for public infrastructure or services, because that is something the City already borrows for. They are low risk loans and clearly something that benefits the public as a whole. And the interest paid on those loans would increase the available funds to loan.

As a part of the bank charter application, the bank would demonstrate its anticipated profits and losses. Most new banks expect to take a few years before they turn a profit. This might not be the case for a Public Bank for Santa Fe because sufficient initial deposits from the City will make it possible to make substantial loans to the City.

Policies that Serve the Public Good

Banking on New Mexico believes that if our bank is to serve the public interest (instead of private investors) the public must be involved in establishing the governance steps that will ensure transparency and accountability in how the bank manages and invests the public’s money.

A Public Bank for Santa Fe will require governance that ensures that the mission or purpose of our public bank is carried out faithfully. The governance of the bank must include a way for the public to periodically review and revise the public bank’s mission.

A Public Bank for Santa Fe would operate under the same regulations that apply to all New Mexico chartered banks. State chartered banks are regularly inspected, reviewed, audited and governed by New Mexico Statutes and the New Mexico Administrative Code.

Bank policies and quarterly public reporting requirements assure compliance and transparency for how public funds are managed.

An oversight board would ensure that the investment practices remain true to the public mission of the public bank, and that financial management of the bank is sound. To begin, those appointed to the board must be residents of Santa Fe, have clearly demonstrated personal and professional integrity and impartiality, have sound financial experience and be very familiar with the needs of our community as a whole.

The Public Bank for Santa Fe regulations would prohibit the bank from lending outside of Santa Fe or investing in the kind of investments that have destabilized the global banking system.

Management that Protects the Public’s Funds

The public bank would be staffed by banking professionals who are public servants, eliminating the excessive salaries and bonuses paid in the national and global banking system.

The management of the public bank would be independent from City elected officials and appointed staff, with a firewall that prevents political involvement or tampering by non-bank officials.

There are several highly successful bank governance models that we think might be helpful for the public to review as part of the public input process to establish governance structure, such as the Bank of North Dakota, the little Sparkassen Banks all over Germany and our own local credit unions and CDFI’s.

There are also a number of extra-governmental or super-governmental agencies or corporations, in and beyond New Mexico, that can provide models for how a public bank can be responsive to the citizens’ priorities and wishes while remaining protected from political involvement or tampering.

A Public Bank for Santa Fe can keep more of our public funds working here in our community rather than being invested elsewhere in the country and the world, as is now the case.

A public bank chartered by the State of New Mexico can reduce the City’s expenses and debt burden by making loans to the City for local, public works projects at lower rates than the City is presently paying to global banks or bonding agencies.

Its profits can be paid to the City annually to increase City non-taxed base revenues and eventually make it possible for the City to reduce or hold-the-line on taxes. Profits can also be reinvested back into the public bank so that its capacity for investing back into Santa Fe increases.

By reducing City expenses and increasing City revenue a public bank could also help Santa Fe fund public services for families and children, the elderly, public transportation and social services programming.

A public bank can also be a Partnership Bank by guaranteeing or financially backing portions of loans made by community banks, credit unions and community development fund institutions that support efforts that benefit Santa Fe and its economy — like affordable housing, local business development and job creation.

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Public Banking — Funding Local, Sustainable Economies