The city of Los Angeles is thinking about starting up a public bank:
The City Council voted in October 2021 to study the viability of forming a city-owned bank and to create a business plan for doing so. With new political leadership and support from a number of community organizations, the city is now preparing to devote $460,000 toward the study’s first phase.
A public bank’s decisions would be driven by the needs of Los Angeles communities rather than private shareholders, advocates say, leading to investments in projects and people normally disregarded by Wall Street.
This is not like postal banking, where ordinary people can keep small savings accounts and make small loans. This is a commercial bank that would fund worthy projects that big corporate banks won't touch.
And it sure sounds like a bad idea to me. If the City Council wants to hand out money based on politics instead of creditworthiness, well, they already do that. It's their whole job. Who needs a bank for that?
The only thing that comes to mind is that they think it will stretch their spending capacity. Instead of giving $1 million to an affordable housing project, they can capitalize a bank for $1 million and then loan out $10 million. Hooray! In addition, of course, the city-owned bank can, if it wishes, make riskier construction loans than private banks; perform faster underwriting; aid in faster land acquisition; and just generally charge everyone less than a Wall Street Bank would.
But is that wise? Are commercial banks really ripping off Los Angeles? Or are they being normally prudent in their decisions? If they are, LA would be ill-advised to be less prudent.
There are limited occasions when markets are distorted enough that government funding is a better bet. Health care is an example. So is highway building. But I'm not so sure about banks. At most we might want to increase lending by providing loan guarantees, and even that's questionable unless the city is awfully sure their credit judgment is better than JP Morgan's. Beyond that, there are lots of banks and lots of competition in the private sector. We should probably leave the banking to them.
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One the one hand I'm sympathetic to the idea that whatever the profit margin of the lending departments is a measure of how much more risk a non-profit bank could take on in terms of more "deserving" projects.
On the other hand, I think it's hard to imagine that the political incentives will align with a bank that operates as efficiently or effectively as a for-profit bank, swallowing up at least as much as the targeted profit margin.
I've never worked in banking, but I have worked in government. So many subtle, pervasive influences from political and CYA behavior affect operations at every level. And honestly, that's basically fine, but it's important to be realistic about it.
As I recall, commercial loans were primarily based on your pro forma, specifically your projected profit margin and your leverage. Those things made it harder to get a loan with tiny margins, eg a low-income housing project or a corner grocery store looking to buy its own building.
Ding ding ding! Exactly.
This kind of institution is necessary to lend the money to small developers, small businesses, and marginalized communities. Because of the tiny profit margins involved (or zero, or possibly even negative if something doesn't work out), backstopping or filling gaps with public funds makes it better for the community. This one could focus just on lending to small housing developers that traditional large institutions won't lend to (or that traditional small banks would charge too much interest on to make the project viable) and it would have more business than it could handle.
Whether the LA City Council intends to or will use it for this purpose, I don't know. But (public) banks that will lend to necessary social good projects are not a bad thing. They are a GOOD thing.
This is a bad idea. The first bad loan will get the Solyndra treatment and be used, more broadly, to discredit government interventions. Further, the risk of political influence peddling is enhanced. Even the perception of political influence will make headlines....
https://fortune.com/2015/08/27/remember-solyndra-mistake/
Huh, when arent private banks ripping people off? What a weird idea.
Have you checked out the Bank of North Dakota? This is a public bank that has existed for a century. I don't know whether LA's plan is beneficial or not, but there is a prima facie case for serious consideration. I wonder if a public bank could provide financial services to cannabis operations while we wait for the feds to get their act in order.
If it did, it wouldn’t be federally chartered I suspect and perhaps not eligible for FDIC.
In the last 100+ years, there have been multiple attempts to launch a "public bank." BND is the only one that has lasted and the people who run it are very cautionary to those who believe a public bank is a solution.
Meanwhile, if the public bank wants to comply with federal law and all of the benefits that affords, no, they will not be able to bank cannabis companies.
If a state bank is good for North Dakota why not LA?
The $10M loans on $1M capitalization misconstrues fractional reserve banking. The $10M on loans better be backed by solid assets, namely the high probability that the loans will be paid back, or the bank will fail.
There are limited occasions when markets are distorted enough that government funding is a better bet.
Yeah. And perhaps that's the case in some poor communities. I mean, the existence today of gentrification in neighborhoods that were poor from the 1960s-2010s suggests that sometimes the Big Banks really do miss out on investing in declining neighborhoods and their assets for long periods of time. There are still lots of neighborhoods in almost every pre WWII city with good housing stock, walkable-but-struggling commercial districts and lots of natural or manmade amenities nearby that everyone just fled because The Blacks (or The Mexicans, or whomever) were moving in, ergo The Whole Neighborhood Must Be Shit Now. Perhaps a government-owned bank would be less likely to write off a neighborhood simply because Too Many Minority People Live There.
Also, as someone else pointed out, ND has a government-owned bank called the Bank of North Dakota. And North Dakota's population is 1/5 that of LA. Not sure why it's OK or generally unremarkable for 774K almost-all-white people to collectively own a bank, but inherently "too political" or "too risky" for a very diverse city of 3.89M to do so... except of course a racist presumption that "only white people know how to run complicated organizations well"?
What sort of business does the Bank of North Dakota do? Does it engage in the same sorts of things this presumed Bank of LA (BOLA?) would be doing? If so then it provides a fine precedent. If not, the relative demographics are irrelevant.
Take a look at what the BND does and compare it to what the "public bank" advocates want such a bank to do. There are a lot of differences. Also, while the BND has survived for decades, numerous other attempts at public banks have been unsuccessful. BND is the only one that has survived.
"There are limited occasions when markets are distorted enough that government funding is a better bet. Health care is an example. So is highway building."
Well first of all, highway building isn't a market. Not sure what you're trying to say there, other than "there are some things where it's a public good and not a market, and the government should fund that." OK? So? Nobody was arguing about that.
But there are plenty of other occasions when markets are distorted enough that government funding is the better bet. It happens all the time with marginal projects that are nevertheless necessary for the health of the community. They're your small developers, community-based retail, and everything else that big capital doesn't like to lend to. There's literally a term in planning and development called "national credit" - it means "business that has a national presence and established credit lines with national lending institutions." Why is that a term? Well, because commercial real estate owners and developers sometimes will only rent out or sell a space to a lessee/buyer with national credit. It freezes out locally-owned businesses and homogenizes the landscape. This is a bad thing for neighborhoods and cities, and it helps calcify corporate consolidation as well.
Small lenders are likewise unable to offer low enough interest rates on loans (or high enough principal/capital) for some projects that would otherwise be viable because they don't have the economy of scale that the national lenders do.
There is a place in every American city and state for a publicly owned bank to lend to these projects to get them off the ground. To argue otherwise or to argue that the need is limited is a very narrow (and IMO incorrect) point of view.
When it comes to public funds, which are essentially what would capitalize a public bank, do you really want those funds investing in riskier projects that will all too frequently result not just in no investment gain, but loss of principle?
To suggest that this is a risk worth taking is ... an uninformed point of view.
Love this classic message board comments response.
If you assume the risk is too high and ignore the proposed benefits, how could anyone support an idea with high risks and no benefits?
That you dont start with these assumptions, means you are obviously UNINFORMED!
Given the actual reality we live in, we know that the existing financial market doesnt place much value on climate, affordable housing and serving a diverse set of clients. You only have to look around to acknowledge this reality. So the question is, are these valuable results that the city should be trying to address and is this the best way to address them. Your argument that the financial results might not be great and it might cost something is not really an argument against this project. Almost all public services fall into this bucket...they cost money snd they dont result in direct economic gain to the funders/owners.
Ummm ... I was responding to somebody who said anybody who stated anybody who disagreed with them had a narrow and uninformed view. How about you go after the original commenter?
You don't need a public bank to expend public funds on the projecs you discuss.
You're missing the entire point. Sure, we don't need a public bank to do these projects - we could always just gift them public money.
But the point of the public bank is that you can do more with your money by making them into loans instead of grants, or you can give loans to projects that otherwise wouldn't get them when your community needs the products of those projects.
Like the other person said: just look around.
Government doesn’t need to form a public bank to loan instead of grant money.
Marginal does not mean not profitable, and even if there are some projects that wouldn't be profitable that doesn't mean that they aren't worth doing with public funds. Marginal in this particular context means projects that are crowded out of traditional funding but which are otherwise fiscally viable, or projects that are on the fringe of fiscal viability.
Another way of thinking about it is as something between a loan and a grant. Instead of funding things that society needs but that the market won't provide because the markets are fucked (i.e., less-unaffordable housing) with grants, why not fund them with loans? Even if you have to write off some portion of the balance, it's still "cheaper" to the public coffers than a grant - which you don't get anything back from.
Obviously there are some projects that simply should be funded by grants. But there are others, and housing and locally owned small businesses are the great examples, that make sense as loans even if a large portion of them default or have to be written off.
I’m not arguing over whether loans or grants are the appropriate tool. I’m arguing that a public bank isn’t necessary for what you describe and what many advocates of such a bank really want would be too much of a risk for public funds.
It depends what the city owned bank would be doing. If the goal is to facilitate financing of city-projects I believe this would backfire in fairly short order. However if the goal is to include everybody, no matter how poor, in the financial system, letting them have checking or savings accounts on affordable terms and offering payday loans at reasonable rates (with proper underwriting) would be a very good thing to do indeed.
There are already multiple ways in which government can finance its own projects. No need for a public bank to do that.
I dunno, it depends on the details. I'm a big fan of credit unions, inasmuch as they tend to work in the interests of their members and their local community, rather than solely for shareholder or corporate interests like private banks.
So really it depends on what the charter of this city bank would be and what their purpose would be.
Im not sure that there is much evidence that private banks operate very effectively in the US. Lest we forget about all of them going bankrupt 12+ years ago and the seemingly constant stories about major banks paying massive fines for ripping off or outright stealing from their customers.
I dont have a good perspective to judge how private banks deal with minority customers and affordable housing projects. But i bet it aint great.
This posting took, what, five minutes to write? Quote from the LA Times article, speculate on what it might do, point out that the banking sector is generally seen as very competitive, and then conclude that they idea is without merit, all without looking at the Bank of North Dakota, a very successful public bank.
Anyone following the prominent link in the LA Times article would have found this:
"As a wholesale bank, the Municipal Bank of Los Angeles wouldn’t raise deposits from people or private businesses or make loans directly to them. Instead, it would hold deposits from the city government or maybe also local anchor institutions like hospitals, universities, transit agencies and port authorities. Its lending would flow through other financial institutions — like Inclusive Action for the City — to support more loans on more favorable terms for borrowers or projects that typically can’t get access to responsible, non-predatory loans."
An analysis of whether MBLA is more or less likely to be successful like the BND would be very useful. An off-the-cuff conclusion that banks have no herd-like behavior (redlining, anyone?), and so there is nothing to be gained from a MBLA, isn't useful at all.
An off-the-cuff conclusion that BND is a good example, without considering whether it does the same thing the MBLA is contemplated to do; an off-the-cuff conclusion that BND is a good example, without recognizing that numerous public banks have been attempted and BND is the only one that has lasted; and an off-the-cuff conclusion without considering the risk to public funds and what that would mean for the provision of other services is ... well just kind of off-the-cuff and meaningless.
This is the problem with one party governance. There's no countervailing force against Crazy. And no, it's obviously not the fault of Democrats. The problem is the other party is already thoroughly crazy.