The recent collapse of Silicon Valley Bank (SVB) and Signature Bank — the second and third largest bank failures in U.S. history respectively — has laid bare the vulnerability of the private banking sector.
With over 563 federally insured banks toppling between 2001 and 2023, it’s impossible to ignore: The status quo is unsustainable. Amid this financial turbulence, the need for public banking has never been more pressing. It’s high time we seriously consider public banking as a stable, transparent, and accountable alternative that would firmly anchor public interest at the heart of the financial system. After all, banking should be a public utility that benefits everyone, not a high-risk game played by bankers trying to score big profits.
The failures of SVB, Signature and Silvergate banks can be traced back to poor management decisions and high-risk strategies. SVB invested in long-term government securities amid concerns about rising interest rates as well as the volatile venture capital industry, while Signature and Silvergate banks ventured into speculative cryptocurrencies. All three banks shared one common problem: massive uninsured deposits from a handful of ultra-wealthy customers.
When the banks teetered on the edge of collapse, the Biden administration, FDIC, and Treasury swooped in with a bold bailout. They created a “systemic risk exception” to protect all deposits, even those beyond the $250,000 threshold. Ironically, all depositors were “made whole” from the Deposit Insurance Fund — the very fund that Silicon Valley Bank had previously lobbied against, arguing that increased contributions would hurt their bottom line.
This intervention raises a crucial question: If the government is ultimately responsible for ensuring the banking system’s stability, why not opt for public banks designed to serve the public interest from the outset?
The Federal Reserve’s recent launch of the Bank Term Funding Program reveals just how deeply our financial system relies on government backing. By offering loans to banks in exchange for premium collateral — valuable assets like property or high-rated bonds — the government is effectively throwing a lifeline to the private banking sector. This safety net would be put to much better use if it were aimed at public banks instead.
No sooner had the SVB downfall hit the headlines before its ripple effects spread across international financial markets, leaving Credit Suisse, one of the 33 global systemically important banks, on shaky ground. The Swiss Central Bank stepped in and announced a $54 billion backstop for Credit Suisse, further reinforcing the reality that even the mightiest banks can’t stand on their own without substantial government intervention.
Now, imagine a world where public banks, overseen by states and local governments, prioritize stability and public service over astronomical profits. Public banks break away from profit-maximizing motives, focusing instead on a commitment to the public good and sound financial management principles. As a case in point, California’s recent approval of city and region-owned banks means that public banks will hold public funds rather than private deposits, keeping their focus on creating a positive impact for the entire community.
In sharp contrast to private banks, public banks aren’t driven by a relentless pursuit of profits for private shareholders, which often leads to risky practices. As a result, these banks adopt more sensible and responsible strategies, guaranteeing a secure financial system. Take the Bank of North Dakota, for example, a state-run public bank that generated a profit of $144.2 million in 2021, yielding an impressive 15% return on investment for the state. California’s state laws require public banks to maintain 100% collateralization. This means, public banks must promise to give something valuable to the government if they cannot pay back the money they are holding, which helps to keep public funds safe.
On top of this, democratically-governed public banks face tougher regulatory oversight and are held to higher accountability standards with three levels of oversight: federal regulators, state regulators and local governing boards. Considering that Wall Street and global banks have paid over $36 billion in fines since the 2008 financial crash while continuing to engage in high risk practices, it’s clear that existing regulations and enforcement have fallen short — our current system isn’t cutting it.
Beyond offering stability and transparency, public banks are also uniquely positioned to channel public revenue toward meaningful societal progress. With an emphasis on local economic revitalization, public banks have the potential to drive affordable housing projects, extend essential small business loans to underrepresented communities, fuel the growth of sustainable energy infrastructure, and play a central role in infrastructure such as roads, schools and public transportation. Through public banks, the power of finance can be harnessed to uplift communities and tackle the most urgent issues our cities face.
While public banks hold immense potential for pushing forward public-good projects, they are not immune to the challenges of navigating the boom-and-bust cycles inherent in the capitalist system. These institutions must strike a delicate balance between managing investment risks and staying true to their mission of helping the public. Ensuring strong regulations and oversight is crucial in maintaining this equilibrium. Public banks can weather economic fluctuations by implementing regulations such as setting aside funds for local projects, regularly reviewing investments, having independent audits, and keeping a stash of cash on hand for future use or emergencies. Stakeholder collaboration through community meetings and transparent decision-making also help with accountability and alignment with the public’s needs.
Currently, municipalities from coast to coast are exploring public banking legislation, including the nation’s two largest economic hubs. New York’s Public Banking Act was recently reintroduced in the State Senate, while Los Angeles issued a Request for Proposal to bring consultants on board to craft the viability study and business plan for their own bank. It’s worth mentioning that New York City held $60 million in Signature Bank accounts when the bank went under and was subsequently seized by the FDIC.
California is at the forefront of this movement, having already passed the 2019 California Public Banking Act, with regulations solidly in place under the state’s regulatory agency, the Department of Financial Protection and Innovation (DFPI), since January 2022. San Francisco and the East Bay region are also actively developing business plans for their future public banks. The dream of public banking is taking root, one region at a time.
As states and local governments weigh their options, we have a pivotal opportunity to reshape our financial system for the benefit of all. Choosing public banking means prioritizing stability, transparency and public welfare over fleeting profits. The case for public banks has never been stronger, and the moment for action is upon us to usher in a transformative era for banking — one that uplifts communities, fortifies economic resilience and forges a just and inclusive financial future for everyone. With a groundswell of support growing nationwide, now is the time to embrace public banking and revolutionize the American financial landscape for generations to come.
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