Other Progressive Governments Have Rejected Public Banks Citing Excessive Costs and Financial RisksAs Berkeley’s infrastructure continues to crumble and financial liabilities escalate, one would hope the Mayor and Council would focus on closing this gap. Perhaps they would consider scaling back the record growth in spending, so resources could be redeployed to address our maintenance deficit. But apparently the fundamental functions of municipal government are too mundane for this Mayor and Council as their latest push is to adopt a resolution to draft a plan to risk millions of public dollars to create a “public bank.” The startup cost of this endeavor is projected to be $40 million.
Mayor Arreguin and Councilmember Robinson are leading this effort, and they have recommended adoption of a resolution of intention to form the Public Bank East Bay with approval of up to $50K to develop a business plan. Arreguin and Robinson also present a “viability study” authored by advocates for the Public Bank. The viability study suggests funds should address the climate and housing crisis while it assigns blame for “structural [financing] problems” on Wall Street banks.
Small banks have been driven out of the market by Wall Street banks, or have been bought out or merged into larger banks. This has left banking deserts around the state, including in the East Bay. In 1994, the state had 500 community banks, but by 2017 it had only 124. While this corporate concentration may have brought convenience for some customers, it has caused pain to many others.
Public Bank East Bay Viability Study
Issue appropriation aside, the reduction in the number of community banks appears to have little to do with Wall Street. Rather, the FDIC attributes these reductions to voluntary mergers between community banks to improve the financial position of the acquired bank because it is typically underperforming.
In the wake of the 2008 financial crisis, banks have been required to strengthen their asset positions. Therefore, this consolidation among community banks is generally good for customers and society because it increases assets and reduces risks of failure (requiring public bailouts) while preserving services. It is important to note that fewer banks does not necessarily mean less services. In fact, similar service levels are now supported by larger, more stable community banking organizations.
Community banks also make up the vast majority of merger participants on both sides of the deal. Most community banks that are acquired merge with other community banks, which results in a community banking sector composed of somewhat larger institutions that continue to provide essential financial services within a limited geographic market.
FDIC Quarterly 2017 • Volume 11 • Number 4
The FDIC also concluded that community banks were profitable and could successfully compete against their typically larger noncommunity bank competitors. Further, the viability study implies that a public bank is a way to remove our city’s government deposits from large Wall Street banks. But 53 percent of state and local deposits are already held by community banks, meaning a public bank could displace locally based community banks. In other words, Arreguin and Robinson’s “solution” appears to exacerbate the problem the viability study claims needs solving.
Beside this dubious rationale, the City would also be assuming enormous financial costs and risks. For example, the only existing public bank in the US is not FDIC insured. Berkeley would have to provide financial guarantees in the event of defaults on a bank’s loans. The feasibility study also cites Germany as an example, but fails to mention that the bulk of losses related to the 2008 subprime mortgage crisis were from loans provided by public banks. Massachusetts rejected a public bank proposal citing the high costs, risks, and unclear benefits including a significant initial investment of capital. Chicago, echoed similar concerns. The viability study presented by Arreguin and Robinson does not mention these risks, historical losses, or the Massacchusetts study. Therefore, a city-funded study apparently omitted evidence of downside risk associated with the policy proposal it was charged with analyzing.
The Commission recommends that the Legislature not pursue establishing a bank owned by the Commonwealth or by a public authority constituted by the Commonwealth. The primary reasons for the Commission’s recommendation are that a state-owned bank would require significant initial capital investment … the public funds of the Commonwealth would be exposed to unacceptably high risk if deposited in a state-owned bank.
Report of the Commission to Study the Feasibility of Establishing a Bank Owned by the Commonwealth
To date, multiple jurisdictions have rejected creating public banks because of unacceptably high risk and cost. The Arreguin and Robinson proposal calls for forming the Public Bank East Bay alongside Oakland & Richmond to be governed by city council members. This language suggests a joint powers authority model with capital investment from three or more jurisdictions. Such complexity appears unprecedented. What jurisdiction’s taxpayers would underwrite a default on a Berkeley-based business with operations in Richmond and Oakland?
The Arreguin and Robinson plan also calls for the bank’s board of directors to be composed of city council members setting the stage for potentially significant conflict of interest scenarios. City council members could be authorizing “in their district or city” projects and programs financed with bank funds.
The Public Bank East Bay's proposed governance plan requires that each member city designate one councilmember to sit on the Public Bank East Bay's Board of Directors
Berkeley City Council Resolution of Intent
In summary, a preponderance of evidence suggests that the Arreguin and Robinson banking proposal is an expensive and risky endeavor that would serve to undermine our existing community banking infrastructure.
There is no need to spend another $50K to assess the financial benefits and risks of forming the Public Bank East Bay. We have done the research for you here, just follow the links and save our tax dollars. Please don't squander limited public resources to champion expansive programs that lack evidence of need or effectiveness. Our City has pressing needs that demand immediate attention. Will you come to your senses? We are not banking on it!
Revision: the original post indicated the City of Berkeley had spend $25K on the Feasibility Study. The City Council resolution states: "WHEREAS, the City of Berkeley began formally assessing the feasibility of establishing a public bank with a $25,000 allocation made in 2017 to support the development of a feasibility study for the Public Bank of the East Bay.”
According to a commenter (see below) “Berkeley did not put any money into the viability study.” The post has been revised based on this comment.