Update 518 — Route to Recovery:
Any Bandwidth for Public Banking?
Later this afternoon, President Biden will outline his multi-trillion dollar infrastructure investment plan, his framework for the Recovery Act. The centerpiece of the pie is infrastructure investment and modernization, including broadband access, a vital concern for the 24 percent of rural Americans and millions of others who lack it.
Biden’s plan provides an opportunity to bring basic banking services to the 40 million people outside the formal financial system. Below, we examine proposals for public banking, some of which have been around for years, but which may now have a viable vehicle in the infrastructure bill.
Last week, the Congressional Black Caucus joined progressive groups in supporting the nomination of University of California Irvine Law Professor Mehrsa Baradaran for Comptroller of the Currency. While President Biden has not yet announced his choice to lead the OCC, Baradaran is known for her advocacy of financially-inclusive and innovative policies like public banking.
America’s Unbanked and Underbanked
According to a 2019 report from the Federal Reserve, around 22 percent of Americans are either unbanked or underbanked, relying on costly financial services provided by non-banks. More than 11,000 bank branches have shuttered since 2013 — mostly in low-income and minority communities, leaving many Americans without mainstream financial services. The pandemic has accelerated this trend; up to 20,000 branches could close in the aftermath of COVID.
An FDIC survey finds that most financially-underserved do not believe they make enough money to have a bank account, citing concerns of high and unpredictable fees. Low-income Americans face low-balance fees, fees for checks and ATMs, and delays accessing their deposits. In 2019, banks collected nearly $12 billion in overdraft fees, with 84 percent of these fees being paid by the poorest nine percent of consumers.
For many, non-bank financial institutions which trap their customers in a cycle of poverty are the only option. A 2014 Post Office White Paper found that a typical unbanked or underbanked family spent 10 percent of their income on fees and interest paid to access credit or other financial services. As big banks cut back on free basic services, a growing number of Americans rely on predatory financial institutions for access to credit. Public banks would step in as a public utility to enable saving and reduce poverty.
Public Banking Services
Scaling up public banking with federal policy (either by supporting local banks or standing up a national system such as one through the Postal Service) would provide the following:
- Traditional Retail Services: Public banks worldwide offer their customers individual savings accounts, savings bonds, remittances, and other services. A 21st Century U.S. banking system would enable customers to cash paychecks, access low-cost ATMs, and pay bills. Many in Congress tried unsuccessfully to secure in the CARES Act FedAccounts — free bank accounts at the Federal Reserve. FedAccounts would allocate transfer payments, avoiding past issues with the garnishment of stimulus checks by debt collectors and private banks.
- Lending: Like commercial banks, a public bank may take in tax revenues and other government income as deposits, and create money by lending. But unlike private banks, a public bank need not take advantage of borrowers and lend at higher interest rates to maximize profits, thus passing on low rates. Public banks could advance industrial policy by underwriting and/or guaranteeing loans of local banks to fund projects with longer time horizons or ambitious end goals. Public banking can facilitate much of the financing and partnerships with states and localities mentioned in Biden’s infrastructure plan.
Traditional private banks often do not offer small personal loans because they are not cost-effective to underwrite. For individuals with an insufficient credit history or a low credit rating, credit cards are not an option to finance small purchases or cover bills. Absent an inclusive public banking system, low-income individuals and families are forced to seek credit from payday lenders.
- Social Programs & Relief Delivery: Both federally-backed and state/local public banks provide a pathway to administer certain social programs or deliver relief during crises. Baby bonds could be facilitated through a public banking system, avoiding fees charged by private banks. If the American Opportunity Accounts Act passes, every child in America would receive a “Baby Bond” savings account of $1,000 at birth, with additional deposits of up to $2,000 each year, depending on household income.
Crisis relief including emergency lending and stimulus payments could also be facilitated more immediately and effectively through public banks. North Dakota’s public bank, the Bank of North Dakota (BND), delivered Paycheck Protection Program (PPP) loans more efficiently than any other state during the pandemic. Small businesses in North Dakota secured more PPP funds relative to the state’s workforce than any other state.
The breadth of public banking services depends on the form policy would take at the federal level. Postal banking, administered by USPS in D.C., would connect every American to basic retail services. State and/or locally-run public banks, like the widely-praised Bank of North Dakota, could take on greater roles in their communities and finance infrastructure projects. Coming out of the COVID-19 pandemic, structural flaws in our economy could be corrected with common sense public banking practices.
Public Banking Proposals
Lawmakers are taking steps to make public banking a reality in the United States. The following proposals have been recently introduced:
- Postal Banking Act (Sens. Gillibrand and Sanders) would re-establish the postal banking system as a nonprofit and accessible alternative to private banking or payday lending. Under this proposal, individuals could deposit up to $20,000 at their post office, which would be given the same basic retail services as any bank. It would also be authorized to provide small-dollar loans. Senator Gillibrand estimates that such a program could generate up to $9 billion in new revenue annually. Postal banking was formally endorsed by a range of progressive scholars and organizations, including the Democratic Party’s Unity Task Force in 2020.
- Banking for All Act (Sen. Brown) would require Federal Reserve member banks to provide digital pass-through “FedAccounts” to individuals and businesses, without fees or balance requirements. Banks would partner with postal facilities to provide services accessible to all. This bill was initially introduced to ease the distribution of COVID-19 aid payments, and as Chairman of the Banking Committee, Senator Brown is likely to reintroduce it for consideration.
- Public Banking Act (Reps. Tlaib and Ocasio-Cortez) would create a federal framework to encourage the development of state and local public banks. This includes providing grants as start-up capital, allowing the federal reserve to provide easy lines of credit, and establishing an “incubator program” to give public banks technical assistance. This bill provides states and localities financial flexibility in funding public infrastructure projects and would provide FDIC insurance to public banks — a major barrier to entry for new banks.
- National Investment Authority (NIA) proposals include the National Climate Bank Act (Sen. Markey), the National Infrastructure Bank Act of 2020 (Rep. Davis), and the National Infrastructure Development Bank Act of 2019 (Rep. DeLauro). The NIA (also known as a National Investment Bank or a National Infrastructure Bank) would provide a public option to the financial sector, acting as a federal financing body responsible for coordinating US industrial policy.
The Future of Public Banking
During the pandemic, the majority of federal relief funds targeted financial markets and corporations, while state and local governments on the frontlines suffered budget crises. Public banks offer a way to respond to future crises as well as addressing financial exclusion and worsening economic inequality.
While progressive federal legislation for a national public banking system faces an uphill battle in the Senate, an increasing number of states and localities refuse to stand by and wait for federal guidance. Back in 2019, California passed AB 857, The Public Banking Act, allowing municipalities across California to set up public banks in their communities. Also in 2019, New Jersey Governor Phil Murphy issued an executive order to set up a public bank in New Jersey. One thing is certain: more state and local public banks are on the way.