Private Banks Are In Crisis. What If They Were Public Banks?

What if we had public banks that prioritized the greater good, rather than private banks prone to taking profit-chasing risks?
Private Banks Are In Crisis. What If They Were Public Banks?
Image: Whitemay via Getty Images

The failure of Silicon Valley Bank and Signature Bank, both known for making risky investments and concentrating on banking speculative sectors, is invigorating the nationwide movement to get cities and states to put their deposits in public banks, which are designed to reinvest in communities and which do not have to reap profits for shareholders.


Public banks are typically operated by government or tribal authorities and, in theory, would be chartered to achieve social good and invest in communities. Only two public banks currently operate in the United States: the Bank of North Dakota, founded in 1919, and the Territorial Bank of American Samoa, founded in 2018. Organizations pushing for a public banking option exist in 37 states, according to the Public Banking Institute. 

In contrast to private banks, which are responsible to their shareholders, , public banks are responsible to their boards and are chartered to invest in public needs. The Bank of North Dakota, for instance, is chartered to offer a “revolving loan fund” to farmers, and profits from loans are directed back into the fund to keep interest rates low.

Legislators in New York renewed calls for a vote on statewide public banking legislation after SVB and Signature were taken over by the FDIC last weekend amid bank runs that triggered a crisis of liquidity. Public advocate Jumaane Williams tweeted on Tuesday that “NYC deserves a public bank that serves the public good.” Williams joined with community groups to “condemn banks like Signature—designated the ‘Worst Funder of Bad Landlords’—that endanger public interest.”


The same day, State Senator James Sanders, who chairs the state’s banking committee, released a statement decrying Silicon Valley Bank and Signature Bank’s investment decisions and saying, “this crisis speaks volumes to the soundness of public banks.”

They’ve both championed a statewide bill called the Public Banking Act that has failed to get a vote in the past few legislative sessions but which was reintroduced in February. The bill would allow local governments across New York to form and control public banks and invest public money in them.  

“It's just made clear how unstable and risky and often predatory our banking system is,” said Andy Morrison, a member of the Public Bank NYC coalition.

Morrison said that the New York state officials will have more time to focus on the bill once the state’s budget is passed in early April. “I think it's going to take center stage come April and May,” he said.

On Thursday, the Public Bank NYC coalition sent a letter to Carl Heastie and Andrea Stewart-Cousins, the heads of New York’s state legislature, criticizing local governments for continuing to place deposits in Signature. “We write to express our alarm over recent reports that hundreds of millions of dollars in public deposits belonging to New York local governments are held at failed Signature Bank,” the letter states.


The letter criticizes the practices of Signature Bank, which banked the crypto industry but also had a history of lending to predatory landlords looking to cash in on rising rents. “The sudden meltdown of Signature Bank–a New York State-chartered financial institution—should serve as a wake-up call for the state. Across New York, billions of public dollars are deposited in banks that engage in risky and abusive activities that run counter to the state’s public policy objectives,” it states.

According to the coalition, 30 of New York’s 63  state senators and 60 of the state’s 150 assembly members support a bill that would pave the way for public banks. 

The modern movement to invest in public banks grew out of the 2008 financial crisis and was galvanized during the pandemic, fueled by a populist distrust of the banking and finance sectors.

In October 2020, Representatives Alexandria Ocasio-Cortez and Rashida Tlaib introduced the federal Public Banking Act, which would allow state and local governments across the country to create public banks.

In the first two months of 2021 there were sixteen bills across the country designed to pave the way for public banks, according to Yes Magazine. 


The largest recent success for the public banking movement came when California passed AB857 in 2019, approving a legal framework for regional public banks to be established across the state. The law allows jurisdictions with 250,000 people to form their own regional banks, and lets counties and cities to partner up to form such banks if they have under 250,000 people. No public banks have been established in the state yet, but organizers are pushing for them in Los Angeles, San Francisco and in the Central Coast (Monterey, Santa Cruz, Santa Barbera)  A group called Public Bank East Bay says its bank will be up and running by 2024, and the cities of Oakland and Richmond have taken the first steps to establish it.

Supporters of public banks are hoping that any deposits from state and local governments can be used to fund community-based projects that have trouble getting funded by private banks. Private banks like the ones that made loans to chronically unprofitable startups, speculative financial products, and over-leveraged landlords are hesitant to make investments in more stable forms of innovation that stress democratic ownership, like community land trusts and worker cooperatives. 


And private banks are oddly costly for states to do business with. Cities often finance projects by selling municipal bonds to private banks, which requires them to pay out interest to those banks. But governments are limited in their ability to set the terms of those bonds. As Ellen Brown, Chair of the Public Banking Institute wrote in 2021, “Local governments are extremely good credit risks; yet private, bank-affiliated rating agencies give them a lower credit score (raising their rates) than private corporations, which are 63 times more likely to default.” 

The result of this lopsided arrangement is that $160 billion in interest is paid out each year by local governments. Public banks could potentially reduce some of these costs with lower interest rates.

But the idea that public banks will disinvest from harmful industries is not a foregone conclusion.  The Bank of North Dakota provides mixed lessons; it has excelled financially and weathered the Great Depression, the 2008 financial crisis and the pandemic uniquely well, but some of its investments have raised eye-brows. The bank outperformed Goldman Sachs and J.P. Morgan in 2014, but this was largely due to investments in fracking. In 2016, the Bank of North Dakota lent $10 million to law enforcement to fund the response to protestors opposed to the Dakota Access Pipeline in Standing Rock.


Public bank proponents have suggested this is because Bank of North Dakota’s board has all-white leadership. The New York Public Banking Act requires that any board of a public bank in the state be set up so that “the composition of the board reflects the composition of the population in terms of people of color and women.” It also requires each bank to have an advisory board chartered to “ensure that the public bank's operations are consistent with social equity principles, including racial, gender, and environmental  justice and indigenous rights.” But how each public bank interprets those principles and decides to invest its money will largely depend on each bank’s charter.

The push for public banks comes as the Federal reserve’s actions in insuring deposits far above the $250,000 available to average citizens for both SVB and Signature potentially threatens smaller community banks, whose customers have no such guarantee. The problem was laid bare in a recent exchange with Treasury Secretary Janet Yellen.

Asked by Oklahoma Senator James Lankford whether every community bank in Oklahoma would be covered regardless of the size of its deposits, Yellen responded that banks would only receive such coverage if the Fed and FDIC determined that the bank’s failure would “create systemic risk,” effectively leaving customers at smaller banks without any lifelines and incentivizing them to invest at larger, “too big to fail” banks.

Members of the Public Bank NYC coalition are hoping that regional public banks could increase investments in affordable housing and projects that stress community control, particularly by partnering with local credit unions. One of the reasons that developers have historically been hesitant to build housing with a higher ratio of affordable units is because private banks judge such projects riskier due to the lower return on investment.

Melissa Marquez is the CEO of Genesee Co-Op Federal Credit Union in Rochester, New York, and a member of Public Bank NYC. She says the 40-year old credit union, which has about 4,000 members and holds about $40 million, is too small to provide large loans like those that might be required to affordably set up a local community land trust. She wants to invest in a local land trust with commercial space and co-op residential units. “That's not a project that we could do ourselves,” she said.

She says private banks are unlikely to lend to land trusts because they’re not familiar with the model or because they find the model, in which a nonprofit owns land and restricts the resale value of homes to keep them affordable, to be too risky. 

But it’s clear from the past week that risk is not the problem—private banks are eager to take many large risks if even a few of them pay off. They are less likely to invest when risks are lower but profits aren't a guiding principle.