Will Los Angeles create a city-owned bank? Voters to decide

Last Updated Nov 5, 2018 5:05 PM EST

Ten years after Wall Street banks sparked a financial crisis that nearly wiped out the U.S. economy, the idea of nationalizing banks briefly came into vogue. Now, one city is on the verge of making a public bank a reality. 

Los Angeles on Tuesday will vote on whether to amend the city charter to allow it to own a financial institution. The ballot initiative, called Proposition B, marks the first time the issue of a public bank will come up for a popular vote. 

But the concept has been gaining some ground. Washington state passed a bill this summer to create a public bank. New Jersey Democratic Governor Phil Murphy made the issue part of his campaign. San Francisco and Oakland are doing feasibility studies. And the Territorial Bank of American Samoa, which is backed by the government, began functioning this past April when it was approved to access the U.S. payments system.

"The purpose of all this is to bring democracy to finance, in a way that respects the public trust. No longer, at least in Los Angeles, do we think city borrowing should be the basis for the investment industry," said David Jette, legislative director for Public Bank LA, a volunteer effort backing Proposition B. PBLA was among the activist groups that succeeded in making Los Angeles pull city money out of Wells Fargo after its bogus-accounts scandal and subsequent public shaming.

There's even hope that a state-chartered bank could service the state's burgeoning cannabis industry. While a bill specifically aimed at boosting banking options for recreational marijuana industries failed to pass in the current legislative session, any such legislation would require the existence of an institution like the Los Angeles public bank in order to work.

Money-saver or unfair competition?

The idea is simple: Instead of paying for a private institution to hold the city's money, the city would own the institution -- saving on fees and reinvesting the profits into public works. While activists support the plan as a money-saver, the banking industry opposes the measure, saying it would create unfair competition.

Los Angeles currently spends upward of $1 billion a year on finance fees, a figure that could be reduced substantially, advocates said. Proponents also said a public bank could underwrite city bonds at a cheaper rate than Wall Street institutions offer.

"You improve the efficiencies, because you don't have Wall Street holding on to billions of dollars in customer deposits, taxpayer deposits, and then lending it back to you when you need to put out municipal bonds," said Marc Armstrong, a co-founder of the Public Banking Institute, which studies the issue.

Proponents also hope a state-owned bank will make loans that a private institution might find insufficiently profitable, such as funding public projects and investing in housing and clean energy efforts. It could create access to banks for the 20 percent of Los Angeles households whose neighborhoods offer no traditional consumer-banking services, according to an analysis from the city's legislative analyst.

Another potential benefit: Because such a bank engages in the conservative business of holding deposits and lending out money, it will be less likely to overextend itself, collapse and tank the economy in the manner of Wall Street around 2008.

"Because it doesn't engage in speculative ventures that generate short-term fee income — think derivatives — a public bank is a return to more conservative banking," said Armstrong. "This creates an incentive for good behavior, a return to the community-banking model that used to be so prevalent."

The North Dakota model

That local lending model still exists in places like Germany, which has a network of small banks mandated to work in the public interest, as well as in North Dakota, which owns the Bank of North Dakota — the nation's only state-owned bank and one of its most profitable. North Dakota's bank is what inspired Ellen Brown, the other co-founder of the Public Banking Institute, to look into the issue back in 2008. North Dakota had "the lowest unemployment rate in the country, the lowest default rate and the most banks per capita," she said.

The Bank of North Dakota, whose mission is "promot[ing] agriculture, commerce and industry in North Dakota," does not take retail deposits but acts as a partner to the state's commercial banks, essentially using its money to allow smaller banks to make loans in larger amounts than they would otherwise.

Amending Los Angeles' city charter would be the first of many steps needed to make the bank a reality. And there's no agreement on what it will cost. A study conducted in 2011 for the state of Massachusetts estimated the cost of establishing a public bank there at $3.6 billion, extrapolating from the original cost of starting the Bank of North Dakota back in 1911.

The PBI disputes that number, which in any case would depend on the bank's capitalization, or how much cash it could tap to meet both its short-term and long-term obligations. The true figure could be as low as $100 million, said PBI's Brown. The city could raise that amount through bonds or by using some of the money it has stashed in "rainy day" funds. The PBI pointed out that American Samoa — an island with a population of 58,000 — was able to launch a public bank in April. It did so after the last commercial bank left the island two years prior.

Low awareness

For the time being, though, uncertainty over cost isn't the main hurdle for the effort. It's that relatively few people know it exists.

"Within my circles, everyone's excited about it. I think beyond that, most people don't know about it," said Mike Dennis, a nonprofit worker who described himself as progressive. Dennis filled out his absentee ballot last week and was surprised to find Proposition B all the way at the back — after a series of county judicial candidates he wasn't familiar with. Still, he said, "If it doesn't pass, I don't think it's a total loss. It moves the needle."

He added: "I hope other cities are watching."