Public banks are financial institutions owned by government entities, such as cities, states, and nations. The initial capital for a public bank often comes from a government appropriation or the proceeds of a loan arranged for the purpose of making the initial investment, but there are also other ways this money could be acquired. They include (a) reinvesting money from idle state and local funds – funds that must currently be maintained as “rainy day” funds because state and local governments do not have the sorts of instant credit lines available to banks; and (b) setting the bank up as a DBA of the state, making all of the assets of the state assets of the bank.
Both public and private banks do two fundamental things: (1) Keep account of our money, and (2) issue credit (i.e., loans). Money and credit can create, slow, or accelerate economic activity. A bank matches borrowers and depositors, and profits from the spread difference between the interest paid to get funds (supplied by depositors or other lenders) and the interest collected on loans and investments made by the bank. Transaction fees add to profits. If private shareholders own the bank, the profits go into private hands and investment accounts. If government owns the bank, the profits go into public hands and offset the costs of government operations. Most states dispense their investment funds through revolving loan programs, in which the funds are lent, repaid, and lent again. A “bank” has several significant advantages over this current loan arrangement – advantages that states give away by depositing and/or investing their assets in out-of-state banks.
First, a “bank” can leverage its capital assets. At an 8% capital requirement, $8 in capital can be leveraged into $100 in loans. That assumes the bank can come up with the deposits to back the loans; but if it doesn’t have the deposits, it can borrow them. And that is a second major advantage of a “bank”: it can borrow deposits from other banks at the Fed funds rate, currently set at a very low 0.2%. Rather than borrowing from Wall Street banks at 5% and having to worry about such things as credit ratings, interest rate swaps, and late fees, the state can fund its projects through its own bank, by backing the loans with its own revenues deposited in the bank with no interest having to be paid to itself; and until it can acquire the necessary deposits, it can borrow short-term from other banks at an extremely reasonable 0.2%.
Other advantages of public banks are that they serve the public interest and can take a long-term view of public investment strategies. Private banks operate in their own private interest and are concerned with maintaining the positions of management and satisfying their shareholders’ requirements for quarterly profits and a healthy stock price.
Publicly-owned banks hold their elected officials accountable for the banks’ lending, investment and other operations. A by-product of public banking is to offer local counter-cyclical relief from credit contractions in the private banking system.