Our Position

Postal or State-Owned Public Banks

Position

  • ICBA opposes the formation of new public banks or other types of public retail financial service providers, whether they are owned by states, municipalities, the United States Postal Service (USPS), or any other federal or quasi-federal instrumentality.

  • Such banks would directly compete with community banks, diverting deposits from local communities and create undue taxpayer risk.

  • ICBA adamantly opposes allowing the USPS to offer financial products and services.

  • Financial services are best provided in a competitive, private, and free marketplace that openly and efficiently benefits customers.

  • Community banks and other financial institutions continue to offer low-cost financial services to underserved communities to help them break from the debt cycle of payday lenders.


Background

In recent years, several states and localities around the country have considered proposals to create public banks to operate in competition with the thousands of existing private, for-profit, taxpaying banks that serve our communities. In 2019, the California State Legislature approved the Public Banking Act, which will allow city and county governments to create, or sponsor, public banks. This law was in response to the failure of a 2018 ballot measure that would have allowed for the creation of a Los Angeles city-owned bank. That approach was rejected by voters.

There has also been a resurgence in interest among certain lawmakers in allowing the United States Postal Service (USPS) to offer retail banking services at their locations. This proposal was included in President-elect Biden’s “Unity Task Force Recommendations” document written with Senator Bernie Sanders.

The reported purpose of postal banking is to provide a “consumer-friendly” alternative to payday lending and check-cashing services for those without a bank account and to turn a profit to support the moribund finances of the USPS. The argument for the proposal relies on the supposed omnipresence postal facilities. USPS’s “universal service obligation” requires it to maintain postal facilities and personnel in every ZIP code in the country.

However, postal banking proponents fail to recognize that commercial bank branch locations outnumber post office locations 3 to 1. There are 31,322 postal locations, but 627,409 branches and ATMs offered by private institutions including community banks. Moreover, under 10 percent of unbanked individuals have cited “inconvenient locations” as a reason for being unbanked, while 34 percent said that they simply didn’t have enough money to keep an account open. An ICBA study projected the postal service would lose nearly $500 million per year as a competitor against private institutions in the financial services sector.

Postal Bank
ICBA adamantly opposes allowing the U.S. Postal Service (USPS) to offer financial products and services, as advocated by the Office of the Inspector General for the U.S. Postal Service. These activities would include loan making, deposit taking, and other services that are fundamental to community banks.

The encroachment into these activities by a major federal agency would represent a significant, government-sponsored, competitive threat to the ongoing viability of the nation’s thousands of private-sector, tax-paying community banks that do an excellent job of serving consumers, small businesses, and farmers and ranchers across America. Financial services are best provided in a competitive, private and free marketplace so they can openly and efficiently benefit customers.

Community banks and other financial institutions already offer low-cost financial services to underserved communities to help them break away from the debt cycle of payday lenders. According to the FDIC, 88% of banks offer small-dollar loans and 81% offer free counseling to underserved consumers.

No Public Need to Establish a State-Owned Bank
Today’s financial services industry meets the banking needs of both consumers and businesses. In particular, community banks provide 60 percent of all small business loans under $1 million, as well as customized mortgage and consumer loans suited to the unique characteristics and needs of their customers and local communities.

Community banks play a vital role in ensuring economic growth is robust and broad-based, reaching urban, suburban, and rural communities of all sizes and in every region of the country. Community banks compete with large and regional banks, credit unions, farm credit entities and nonbank lenders.

In this financial services ecosystem, there is no public policy need for a state or publicly owned bank that would directly or indirectly compete with community banks, leveraging a tax exemption and virtually unlimited access to capital. Public banks would most likely compete with community banks for public deposits as well as for business loans and loan participations.

Taxpayer Risk Associated with Publicly Owned Banks
Public banks create undue risk and exposure for taxpayers. Their deposits, if they choose to forgo or are not provided access to FDIC deposit insurance, would be backed by the full faith and credit of the state or municipality that chartered them, posing substantial risks to taxpayers, a risk heightened by lack of federal supervision.

In contrast, any costs associated with handling community bank failures are paid out of the FDIC’s Deposit Insurance Fund, which is fully funded by the banking industry. Notably, a 2019 report by the San Francisco Office of the Treasurer and Tax Collector on the feasibility of three different models of public banking concluded that the bank would break even anywhere between 10 and 56 years with a total capital investment between $184 million and $3.9 billion of public funds.

Political Risk
A state-owned bank would be subject to the political whims of a state or local government which would dictate the type of products, services, and loans it would offer or even mandate certain loans through political pressure. This would violate the principle of impartial allocation of credit and sound lending.

It would create undue risk ultimately borne by the taxpayer. Moreover, history clearly indicates that even public banks founded for narrow, specialized purposes inevitably expand beyond their original scope. Credit unions, the Farm Credit System, and industrial loan companies have expended well beyond their original limitations and now compete directly with community banks. Once established, a state or public bank would advocate relentlessly for additional powers to assure its longevity and survival.

Cannabis Industry Does Not Justify Creation of Public Banks
Some groups have argued that a state-owned bank is needed to service the growing cannabis industry. However, once community banks are legally allowed to service that industry, there will be no need for a state-owned bank for this purpose. A 2018 study of the feasibility of establishing a state bank in California to serve the cannabis industry found that such a bank would not be viable because it would be too costly to capitalize and would not return a profit for at least 30 years.[1]

[1] Laura Alix. “Public Bank Isn’t the Answer for California’s Pot Industry: Report.” American Banker. December 28, 2018. https://www.americanbanker.com/news/public-bank-isnt-the-answer-for-californias-marijuana-industry-report.

Staff Contacts

Aaron Stetter

Executive Vice President, Policy and Political Operations

Washington, D.C.

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Christopher Cole

Executive Vice President, Senior Regulatory Counsel

Washington, D.C.

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