February 9, 2021
Recently, Michael van Norstrand, president of Independent Bankers of Colorado (IBC), wrote an Op-Ed for Colorado Politics: “Public Banks Would Pose Risks, Play Politics.” The Op-Ed makes numerous incorrect assumptions and assertions.
- Public banks, as advocated by Colorado Public Banking Coalition and Rocky Mountain Public Banking Institute, will be modeled on the 102-year-old public bank of North Dakota (BND).
- The BND has greatly reduced the risk of banking and has never failed or been bailed out.
- North Dakota has many more community banks per capita than any other state.
- Contrary to IBC’s assertion, like BND, a Colorado public bank will not compete with community banks for depositors or in making loans, but lend in partnership with community banks, sharing 50-50 in making the loan and guaranteeing it. This arrangement will greatly benefit community banks and the community they serve.
- Public banks would meet many underserved needs for loans in Colorado—for infrastructure, affordable housing, home loans without redlining, small businesses, education and lower-cost student loans, conversion to clean energy, broadband, transportation, and paid family medical leave. The lending in these areas presently provided by the private banks of Colorado falls far short of the real needs.
- In the Great Recession, the BND, in partnership with community banks in North Dakota, increased lending enough to offset the decline, making North Dakota the only state that suffered no recession in 2008 or after. Private banks in all other states cut lending, causing and deepening the recession.
- Thanks to BND, North Dakota perennially has the lowest unemployment rate, one of the lowest home foreclosure rates, and the lowest credit card and student loan default rates. North Dakota’s community banks strongly support the BND.
Thus, public banks reduce risk, while the major banks, some of which are IBC members, increase risk by inflating real estate values and engaging in risky lending and investments. They don’t invest much in small businesses or cooperate much with community banks in Colorado but compete with them. In contrast, public banks would be very beneficial for community banks and credit unions in Colorado, just the opposite of IBC’s assertions.
BND has averaged a 20% return on equity over the last 19 years, far outperforming Chase and Wells Fargo where Colorado governments place most of their deposits. The major banks received massive bailouts from taxpayers in 2008, even though they created the bubbles and risks that caused the crash.
The IBC implies that public banks will be unduly influenced by politicians. Wrong. Like the BND, public banks in Colorado will be run by experienced professional bankers and will be strictly insulated from political and corporate influence and from conflicts of interest, in contrast to private banks whose goal is to maximize shareholder profit, which often conflicts with the public interest.
IBC asserts that public banks won’t work in Colorado because conditions here are different from North Dakota, a rural state with a small population. Wrong again.
- Alberta, Canada’s 83-year-old public bank, ATB Financial, has helped make Alberta the strongest economy in Canada, like the BND for North Dakota. Alberta’s population is 4.4 million. It has a mixed industrial and rural economy, like Colorado.
- Germany has 1,500 city-owned savings banks (Sparkassen), which have been the backbone of Germany’s economy and have made it the strongest economy in Europe.
The ability of public banks to create a strong, stable economy is unrelated to size or type of economy. They succeed because tax revenue is deposited in the public’s own bank and loaned locally. Public banks operate with very low overhead and make low-risk loans. The major banks prefer risky investments elsewhere to maximize profits for their shareholders, believing they’re “too big to fail.”
Public banks create a major new source of income (interest) and new loans for a state, county, or city, without raising taxes, and as a TABOR enterprise would not be subject to TABOR limits on revenue.
The IBC article makes additional false claims but limited space requires us to answer them in the Addendum of this complete version of our response.
Add: By contrast, it is clear from the financial history of Colorado that State debt has skyrocketed to over $24 billion, and all other subdivisions of the state have increased their collective debt to nearly $50 billion. These debts are largely owed to the same private banks and other private investors. With public banks, this increase of public debt to private interests would cease, and debt reduction could begin.
Add: Mr. van Norstrand asserts that a handful of public banks failed 200 years ago because of “gross mismanagement,” citing a 2015 CATO Institute article. The CATO article provides no support for that claim. A handful of states did have public banks in the early 1800s, but no systematic analysis was ever published. Some did very well. We don’t know why these banks failed. It could have been due to speculation by “public” banks that had majority private ownership, opposition from big banks, or recurrent recessions that caused many private banks to fail.
Also, Public banks would comply with federal (Fed) regulations to protect banks but for stated reasons should not be required to join the FDIC or to provide 102% collateral for its own deposits.
What is the difference between Green Banking, Postal Banking, and Public Banking?
Answer: All three types of banking are public alternatives to the Wall St. style, for-profit, large commercial banks which we are used to providing both retail (taking deposits from individuals and providing personal banking services) as well as commercial services (lending to and working with institutions, governments, and businesses). However, each type of bank is designed for a unique purpose: green banking is meant to drive private capital into “green” market gaps; postal banking is well suited to fill the specific need of reaching people with little or no access to retail banking; public banking is meant to create a cyclical cash flow by leveraging a community’s money specifically to serve the needs of that community.
Each offers unique benefits and styles that set it apart. Green banking corners a niche market: it’s specialized financial know-how opens doors to allow capital to move directly towards developing green technology markets, meeting ambitious emissions targets, and lowering energy costs. Postal banking leverages the fact that USPS, with locations already built in banking deserts, is legally required to serve all Americans, regardless of geography, at uniform price and quality, eliminating many barriers for those who are underserved by the current system. A public bank, automatically funded by existing (not new) government revenue, is able to stabilize local economies by increasing the availability of productive capital in a community, eliminating losses due to high interest loans, and offsetting recessions by providing lending when it’s most needed, usually through collaboration with community banks.
More info in the chart below:
Designed to reach people with little or no access to retail bankingPrimarily retail, providing ATMs, money transfers, check cashing, bill pay, and in more comprehensive proposals, savings accounts and small loansStart up funding is not an issue, as adding banking services would actually make the post office moneyInherently a public non profit entityPerks: USPS is legally required to serve all Americans, regardless of geography, at uniform price and quality. Locations already exist in many banking desertsGoals include: expanding access to affordable financial servicesSources: Campaign for Postal Banking, Take on Wall St., Forbes.com
Designed to make and leverage money to serve the needs of the people of the community it serves and to make low cost loans to finance civic needs.Usually commercial (lending to businesses and governments)Principally funded by a government body (national, state, county, or city government) through deposits of revenue, taxes, fees, etc.Fully public entityPerks: low overhead, conservative lending (no speculative lending), new income to a community without raising taxes, offset recessions by lending more, not lessGoals include: increasing the availability of productive, equitable capital in a community: increasing lending to local projects (e.g. social housing, community enterprises, green projects), empowering small businesses and historically underserved communities.Sources: RMPBI, Public Banking Coalition, Democracy Policy
Designed to drive private capital into market gapsUsually commercial, does not take depositsFunded by governments or charitable contributions or bothPublic, quasi-public or non-profit entity Perks: specialized market and financing know-how leads to bridged market gaps that allow capital to flow at scaleGoals include meeting ambitious emissions targets, mobilizing private capital, lowering the cost of capital, lowering energy costs, developing green technology markets, supporting local community development and creating jobsSources: Green Bank Network, CO Green Energy Fund