Would You Bank On Los Angeles?

On Monday, California Assemblymembers Miguel Santiago and David Chiu announced that they intend to author a bill that would allow local governments to form their own local or regional public banks.  The announcement refers to AB 857, but that bill currently makes technical, nonsubstantive changes to a statute governing handgun safety.  Evidently, the plan will be to gut and amend this bill.  Separately, Senator Bradford has introduced a bill, SB 203, that simply states the legislature's intent to create a public bank.

If this bill becomes law, local banks will have at least one obvious category of customers - the local entities themselves.  They may also compete with existing financial institutions in their community.  The bill's authors, however, assert "Those [local and regional public] entities would be able to engage in both banking and retail activities that are not already provided by existing local financial institutions, barring the public banking system from competing with existing community banks or credit unions."  According to the authors, a raison d'être for public banks is investment/disinvestment in projects based on social concerns:

"It is time that banks start working on behalf of people, not Wall Street investors. Time and time again, we have seen big banks invest our money in institutions most Californians are opposed to--oil pipelines, gun manufacturers, private prisons, and companies with unfair labor practices.  This legislation allows us to take a first step towards ensuring the public’s money is used for public good."

The concern with this type of investing is that the public bank becomes a tool for politicians to reward and punish with the public's money.  For example, will public banks be used to advance the anti-Israel boycott, divestment, sanctions (BDS) movement?

As with all banks, the most fundamental question will be the safety of depositors' money.  The track record of public banks should be cause for concern.  According to a report issued by the State Treasurer last year: 

"All public banks have ceased to exist either by regulatory order, financial failure, or the state or municipality closing the public bank, with the sole exceptions of the Bank of North Dakota and the recently approved American Samoa Bank."

The authors plan to require insurance which may be provided through the FDIC, private share insurance, or self-insurance.  California is one of a minority of states that permits credit unions to operate with private share insurance.  Twelve California credit unions currently do so.  It is unknown whether any private insurer would be willing and able to insure a public bank.