|Public bank benefits the people.|
Thursday, April 21, 2016
A Public Bank would benefit Santa Fe
After an earlier submission to the New Mexican failed, I submitted this shorter, punchier version.
The question is not, “Why should we have a public bank?” but, “What is taking us so long?”
Private banks provide investment capital for productive enterprises that generate profits to repay loans. Also, banks provide capital for public projects for the common good, and taxes repay the loans. A public bank returns profits to the public instead of private investors. So, public banks offer a way for banks to serve the people rather than make people serve the banks.
Public banks are not new. The Bank of North Dakota is a century-old, public bank that is an essential element of that state’s economy. In Germany public banks garner 40% of all bank assets. In other parts of the world public banks are common.
My own skepticism toward a public bank turned to enthusiasm upon working with the Brass Tacks Team of Banking on New Mexico. We modeled the first five years of a hypothetical public bank. Also, we calculated the savings to the city of refinancing existing bonds and loans through a public bank. We showed that a public bank can reduce City borrowing costs significantly.
Generally, this is how a public bank could work. The public bank would be the City’s bank chartered by the State. The City would own the bank as it would provide the capital to be leveraged for loans. The City would deposit its income in the bank and pay its bills from the deposits. We assumed $100 million in city deposits, $10 million in capital, and a $50 million loan portfolio. These amounts are consistent with City assets and liabilities reported for FY 2014.
Over the five years our model yielded $10.5 million in profits and reduced City debt by $4.85 million.
The bank would minimize its own expenses. It would not handle individual citizen deposits. And, it would use neither tellers nor ATMs. The bank staff would be few and other overhead would be austere.
The City would only use the bank not manage it. Banking professionals would manage the bank day to day with an appropriate oversight board. Employees would be hired and paid by the bank not by the City.
A bank depositor is an unsecured creditor of a bank. To be a safe haven for City deposits the bank must make conservative investments of its assets. Founded not to satisfy private investors, the bank would not take risks to chase high profits.
A public bank would offer the City an alternative to expensive, omnibus bonds and provide transparency to funding. Instead of large bonds, the city could take out loans for individual projects as needed.
In the future, the bank could participate with community banks and other lenders for local development efforts. Currently the City is in a budget crunch and looks for ways to save money. A public bank would have helped.
A public bank would return to the City interest on loans that would otherwise go to private investors and Wall Street. It would provide a safe haven for City funds against the turbulent environment of private banking. And, it would provide better transparency of City spending. This would be good stewardship of public funds.