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.
ICBA opposition extends to the creation of special purpose banks to service the cannabis industry or a National Infrastructure Bank.
Such banks would directly compete with community banks, diverting deposits from local communities and create undue taxpayer risk.
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.
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.
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. Further, community banks played an outsized role in implementing the SBA’s Paycheck Protection Program where they were counted on to generate over 60 percent of the loans to struggling small businesses due to the pandemic.
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 expanded 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 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.
National Infrastructure Bank. Certain policymakers are supporting a proposal to create a $5 trillion national infrastructure bank. Such a proposal would create distortions in the municipal bond market used by the community banking sector to fund localized lending activities. Further, the municipal bond market, from both a supply and demand perspective, is working appropriately. There is no demonstrable need for a taxpayer-backed $5 trillion national infrastructure bank. The Congress recently passed a $1.2 trillion bipartisan infrastructure package without inclusion or mention of a National Infrastructure Bank.
 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 and Chris Cole