‘Public Bank’ Bill Blocked From State Senate Vote After Industry Pushback

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Yves here. Notice that this public bank proposal is pretty modest. It sets parameters that would allow cities in New York to apply to establish a public bank. Yet even that is being stymied.

The big dirty secret is that during ZIRP, plain vanilla checking accounts were particularly unattractive to banks because they made no money on the float. Now that short term interest rates are higher, that equation might have changed a bit, but that would also favor the economics of a not-profit-driven public bank.

But another big issue is that banks can profit nicely from the unbanked, although the even bigger beneficiaries are bottom-feeders like check cashing services. Low income people often have to use products like stored value cards to work around their lack of a bank account, imposing high costs when they are already having trouble getting by.

However, before romanticizing public banks, remember that the US once had at least one in most states, and the only survivor is the North Dakota public bank. The others all failed and/or were shuttered due to corruption. If you think CalPERS has issues, just imagine the fact that public banks give loans…..and cronies are often first in line. Strong oversight is critical, and that includes an independent state auditor with teeth.

By George Joseph. Originally published at THE CITY on May 18, 2022

For the last four years, Queens State Senator James Sanders Jr. has pushed his colleagues in the New York legislature to greenlight public banks: local government-run financial institutions intended to extend credit and generate economic activity in low-income neighborhoods.

The public banks would support loans and deposit accounts through nonprofit financial institutions that have a mission of helping people access banking services who might not otherwise have access.

But each year, his bill haslanguishedin committee. And this session, it appears to be headed for the same fate.

Sanders chairs the senate’s banking committee and has won 30cosponsors for the bill, nearly half of the chamber. Still, the state senator has failed to try and pass his bill within his own committee, the next step needed to get it closer to a floor vote.

He cites a lack of support from his colleagues, including Andrea Stewart-Cousins, the powerful Senate majority leader whose lead fellow Democrats tendto follow.

“We have yet to win her over on this issue,” Sanders said in a phone call with THE CITY last week.

So far, Sanders said, the majority leader has only agreed to support a less ambitious billthat will study whether public banking is a good idea.

In a statement, Sarah Ludwig, co-director of the New Economy Project, one of several organizations pushing for Sanders’ bill, also blamed Democratic leadership for the lack of progress.

“With 31 members already sponsoring the bill and another handful on record saying they’ll vote for it if it comes to the floor, the Senate majority is showing a real appetite for the kinds of bold solutions we need in these challenging times,” said Ludwig. “We are confident that if Senate leadership gets behind the bill, it will pass by a healthy margin.”

Mike Murphy, a spokesman for Stewart-Cousins, affirmed that the majority leader supports the bill for a study on the “feasibility” of public banking, but disputed that she has already made a decision on the more expansive bill.

“I’d say we’ve no comment on that bill. As we do with everything, we’re still talking through it as a conference,” he said.

Assemblymember Carl Heastie, who leads the Democratic majority in his chamber, did not respond to repeated requests for comment about his stance on the Assembly version of the bill. He is not listedas a co-sponsor.

In April, 82elected officials across the state, including mayors, City Council members and city finance leaders, signed on to a letter calling on Gov. Kathy Hochul, Stewart-Cousins and Heastie to back the legislation.

Sanders’ Plan

Sanders’ bill wouldn’t automatically create public banks. Instead, it would authorize cities to apply for public banking charters with the state’s Department of Financial Services.

Those cities must demonstrate to DFS that they could launch a bank with sufficient reserves and safeguards against political influence. After receiving charter approval, they could then pool together capital funds by issuing bonds, appropriating taxpayer dollars, or using federal stimulus funds to give the bank a financial foundation.

The public bank would then leverage pre-existing municipal revenue streams, like sales taxes and municipal fines, to enlarge the loan capacity of pre-existing credit unions, community banks and community development financial institutions.

As of now, North Dakota is the only state that uses public banks, an initiative won by early 20th century populists who used the bank to give farmers low-interest loans. Today, the institution has expanded its loan portfolio to address modern financial necessities, providing student and business loans to residents who might otherwise not qualify.

Sanders contends that public banking in New York could play a similar role helping Black and Latino residents in communities that have been left behind or harmed by private banks.

The issue is personal for the state senator, whose predominantly Black district in  Southeast Queens was devastated by subprime mortgage loans in the run up to the 2008 financial crisis.

“This is a silent killer,” he said, referring to the economic fallout from private banks’ mortgage loan practices, which included ballooning, high-interest loans. “You go to bed with a neighbor, and you wake up with trucks moving that neighbor away. They’re too embarrassed to say their homes were stolen from them.”

Sonya Ferguson, a62-year-old from Hunts Point in The Bronx, hopes that a public bank in New York City could help finance a credit union that she and fellow activists are tryingto help launch in their neighborhood.

Ferguson has been unbanked for almost two decades because she says she can’t afford most banks’ account fees.

“I tried Chase one time,” she said. “Their marketing bill was like $7 a month, even if you didn’t do anything.”

Because of this reality, Ferguson has to turn to the current bank alternatives in her neighborhood.

A few weeks ago, she recalls, she got a $325 check for cleaning and painting an apartment that was being remodeled. Lacking a bank account, she went to a check cashing store next to the Longwood Avenue No. 6 train station. There, she says, they took a 2% cut.

“I’m working and I’m losing,” she said. “I’m getting a check, and I’m losing, you know?”

Previous New York City estimates have found that majority Black and Latino neighborhoods in the South Bronx and eastern Brooklyn have the highest rates of unbanked residents and the least access to brick and mortar bank branches.

Pushback From Banks

John Witkowski, president and CEO of the Independent Bankers Association of New York, told THE CITY in an email that he has met with Sanders a “few times” as he and other private banking advocates have sought to inject the industry’s position into the debate.

This year, Witkowski’s community bank group sent an opposition memo on the public banking legislation to the entire legislature, state lobbying records show.

The memo argues that a public bank reliant on public revenues would be a burden on taxpayers, who would have to fork over even more if too many loans go belly up.

“A critical consideration is not only taxpayer cost but also the inherent risk and liability of banking operations, which would be backstopped by taxpayers,” the memo states. “Unlike private banks which are required to collateralize the deposit of state funds to protect the state in the event of loss or bank failure, the state guarantees all deposits of public funds.”

The industry group also argues that a public bank could hurt local community banks by draining them of talent.

“Community banks would be unable to compete with the salary, healthcare and pension benefits which would be available to employees of a state bank, who are covered by the Civil Service Law as state employees,” the group noted in the memo.

State records also list several big banks, including JP Morgan, Capital One, and HSBC, as having hired firms to do “direct lobbying” on bills in Albany, including the public banking measures, over the last three years.

One 2021 disclosure, for example, refers to a lobbying firm engaging a staff member from Stewart-Cousins’ office on the bill in addition to other aides and lawmakers on behalf of Capital One.

Capital One did not respond to a request for comment, while HSBC declined comment.

In an email, a spokesperson for JP Morgan said the bank had not taken a position on the bill and “was not aware of any active lobbying on this issue either by us or by our contract lobbyists.”

Sanders and activists pushing for public banking assert that bank lobbying has discouraged fellow Democrats from backing the legislation. (Public records show that unions, housing rights groups, and several other pro-public banking groups have also themselves retainedlobbying firms and deployed paid staff to push for the bill in Albany.)

“They have managed to control the narrative,” Sanders said of banking industry lobbying. Still, he insists he’s not giving up yet.

“Yogi Berra once said, ‘It ain’t over till it’s over.’ And that’s our position, that we are going to fight into the last possible moment,” he said.

Murphy, Stewart-Cousins’ spokesperson, rebuffed claims from pro-public banking activists that she is refusing to get behind the bill because of industry pressure.

“For the advocates to imply that simply because we want to support a further study of this crucial issue is offensive and nonsensical,” he said.

Albany’s legislative session ends in early June.

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  1. James E Keenan

    This article unfortunately provides no definition of community bank and no specific examples thereof. So it fails to give me a clear idea as to why such institutions are not doing a good job and why a public bank is therefore needed.

  2. Itabet

    Yves’ comment in her foreword to the article states authoritatively that there have been public banks in every US state and all have failed or been shuttered, (with the exception of North Dakota’s), due to corruption. Please provide sources for this claim. I have been working in the public bank advocacy movement for over a decade and have never seen or heard this shocking assertion anywhere. This sort of blanket statement leaves a false and very poor impression of public banking in the minds of the uninformed. For those wishing more complete information, The Public Banking Institute is a good starting point.

    1. Yves Smith Post author

      My statement is correct, and I must add you straw manned it, which is not a good look. You have not done your homework.

      If your “Institute” believes otherwise, it’s due to omitting many failed and corrupt banks from its review.

      I must further note that the Bank of North Dakota operates in a limited manner. It is the bank for the state and so handles deposits of funds made to the state. It uses those to make development-type loans, and as least according to other articles, these are commercial loans, usually done in concert with other banks. It does not offer retail services, like individual accounts. The only retail product it offers is student loans. Its main function is to be a banker’s bank. So even though it does provide some very valuable services, it is not a model for a consumer-oriented bank.

    2. JohnnySacks

      Call me naïve, but I question why a public bank should provide loans to begin with. Seems like a hard no for many reasons, number one being the clientele it would provide with much needed non usurious stored value, checking, and ATM card services would be high risk for default.

  3. Questa Nota

    State and postal banks are very appealing to people, which is why they are fought tooth and nail by entrenched institutions. The North Dakota experience proves that state banks are viable, and that those early populists had reason to pursue them.

    The danger in the current climate is that legislators, via their lobbyists, would gum up any new state or postal bank with loads of extra unwanted features, enforced by layers of overseers, and ill-advised social engineering attempts.

    How about simple savings, checking, ATM, basic lending and electronic services, all delivered through transparent processes? Oh, yeah, I know, dream on. :/

  4. Michael

    State owned banks are commonplace in Europe. In my opinion the major advantage is that the existence of two entirely differnet systems creates some healthy competition that constraints abusive behavior by both types of banks.

  5. Jokerstein

    I only had a US bank account for a couple of years with the now long-gone Midlantic Bank when I was living in NJ.

    Since then I’ve been with a credit union. I don’t know enough to tell how similar to banks they actually are, but I’ve been very happy with mine. Then again I am a high net worth person, so the inequities if the banking system don’t touch me directly.

  6. kirk seidenbecker

    What constitutes sound banking in the first place? According to Bill Black, the best way to rob a bank is to own one…

    Michael Hudson has written > 80% of today’s loans are on real estate… most of the Fed chartered banks’ portfolios that did not go under in 1929 were ones that used the ‘real bills’ doctrine, which allocate < 30% to real estate. So all of banking should basically just be called Shelter(ed) Lending Centers? Could just do away with it all – socialize the rent and attempt to standardize a land value assessment practice like Lawson Purdy did in New York in the 1920’s….but shit, that would be reasonable….

  7. Anthony G Stegman

    In California, with its endemic levels of public corruption, public banking would be a disaster. The Democrats running the state would screw things up royally as they most often do.

    1. Yves Smith Post author

      I think the best shot is a revival of the old Post Office bank, plus a variant of the North Dakota bank, which is mainly a wholesale bank. You are leveraging an existing real estate network. But yes, it would be scary in CA.

  8. Arizona Slim

    A few years ago, I had the opportunity to do some business with one of the advocacy organizations that is promoting public banking.

    I couldn’t help noticing that the public banking people were not willing to go to the mat and fight. Instead, they acted like others would be persuaded by their superior logic and public banking would rule the day.

    Long story short, I didn’t do any business with them. Probably just as well. I would rather have feisty clients.

  9. Watt4Bob

    IIRC, the ND populists won a state bank and a state flour mill despite the organized efforts of big banks in Chicago and Minneapolis and St. Paul, and the big mills in Minneapolis.
    However, they were not experienced in banking, and their mistakes resulted in scandals particularly when party officers granted themselves loans to build nice houses.
    The opposition took advantage and drove them from power.
    It seems possible to me that these inexperienced individuals thought “everyone “ was going to get loans so “why not me?”
    They were naive.
    Although the opposition fought against the state bank, they knew what do with it once they took control, issuing thousands of loans in the next year.
    The proof of the state-owned bank is proved by the fact that it still exists.

  10. ian

    When I was younger and lived in Europe, I had a bank account at the post office. I have wondered why we don’t do the same thing here: just have them offer simple savings and checking accounts.

  11. rick shapiro

    Government provision of very basic bank services can not only help the poor, but can also be a solution to the credit card oligopoly that imposes outrageous costs on all retail businesses. The service would supply an account to each well verified human resident, and would allow deposits and (via a credit card) withdrawals up to a modest negative balance. The inevitable number of permanent negative balances can easily be handled by the treasury; and absolute transparency will discourage them among all who desire to participate in the economy.
    Like roads and highways, the evolution of society has uncovered a common need that we the people (govt) need to address.

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