California Public Banking Act
| Company type | Public sector bank |
|---|---|
| Industry | Banking, Financial services |
Area served | Various countries worldwide |
| Products | Deposits, loans, personal savings accounts, savings bonds, remittance services |
A public bank refers to a bank owned and operated by a state, local government, or other public entities, functioning under governmental oversight. Prominent instances include the Bank of North Dakota, Germany’s Sparkassen-Finanzgruppe, and numerous national postal banking institutions.
During the late 19th and early 20th centuries, public or state-owned banks saw significant growth worldwide, playing a crucial role in fostering industrialisation across both capitalist and socialist nations. By 2012, these institutions managed up to one-quarter of the global banking assets.
Supporters contend that public banks contribute to lowering expenses for government services and infrastructure, bolster community banks, extend financial services to underserved populations, and drive economic progress aligned with societal objectives. The 2015 Addis Ababa Financing for Development Action Agenda recognized their contribution toward fulfilling the Sustainable Development Goals. Furthermore, leading international financial organizations are increasingly acknowledging the influential role of public banks in facilitating the transition to low-carbon and climate-resilient economies. In addition, academics and NGOs highlight their significance in funding a fair and inclusive energy transition.
Definitions of public banking
According to the Public Banking Institute, a public bank is defined as "a chartered depository bank where public funds are held," owned by governmental entities such as states, counties, municipalities, or tribal authorities, with a mission to serve the public interest reflecting community priorities.[1] Ellen Brown differentiates public banking from state socialism, emphasizing that public banking entails government regulation of the credit system that supports economic transactions within free markets.[2]
Public banks compared to credit unions
While public banks are owned and managed by government bodies, credit unions operate as private, member-controlled organizations. In the United States, federal regulations restrict credit unions from issuing commercial loans exceeding 12.25% of their total asset base, limiting their capacity as credit providers.
How public banks work
Although organizational models differ, public banks are generally funded through government capital contributions alongside tax or fee-generated income. Similar to private banks, they accept deposits from government entities, generate bank credit, and offer loans at competitive interest rates. Unlike private sector banks, public banks do not have shareholders, allowing them to provide lower borrowing costs to governmental agencies, local enterprises, citizens, and students. Nevertheless, since these institutions depend on state deposits that could yield higher returns if placed in private banks, this arrangement effectively constitutes a concealed subsidy transferring resources from taxpayers to borrowers.
Public banks frequently collaborate with local banking institutions by underwriting or guaranteeing loans for projects that might otherwise struggle to secure financing. This cooperative approach positions public banks as allies rather than rivals to private financial firms, as highlighted by Bank of North Dakota President Eric Hardmeyer.
Public savings banks—including postal banking services—offer products such as personal savings accounts, savings bonds, remittance services, and more. Around 75% of postal systems worldwide provide these financial services; notably, the United States operated a postal banking system from 1911 until 1967.
Ancient history
In ancient times, prior to the development of price-adjusted markets, temples played a central role in regulating weights and measures critical for trade. Mesopotamian legal codes incorporated price regulations and established fixed interest rates, such as one shekel per mina, a rate that remained consistent for approximately a thousand years.
Medieval, renaissance and modern Europe
During the 14th century, Mons Pietatis (Mount of Piety) institutions emerged as charitable lenders offering credit at minimal or zero interest in exchange for pawned goods, aiming to shield borrowers from usurious practices. Their revenues supported operational costs and allowed expansion of their philanthropic activities. These organizations operated independently or as municipal entities, reinvesting surplus earnings into capital reserves or reducing future interest charges.
Early public banking functions were also fulfilled by church-affiliated banks; abbeys, convents, and parish wards extended credit facilities and maintained financial records.
Prominent early public banks in Catalonia included the Taula de Canvi (established 1401), which accepted deposits from private banking institutions to fund short-term public debt; the Banco di San Giorgio (founded 1408, revitalized 1530), which aimed to lower public debt and advance public banking objectives; Venice’s Banco della Piazza di Rialto (1587), which managed payments on public debt; and the Banch de la Ciutat (1609), which permitted limited circulation of inferior coinage among the populace.
In other parts of Europe, the Bank of Amsterdam (1609) introduced standardized currency exchange mechanisms, influencing the creation of similar Dutch exchange banks that persisted into the 19th century. Between the 15th and 17th centuries, German and Swiss cities established banks, with Basel’s municipal bank explicitly created to serve public interests. The Bank of Hamburg (1619) expanded upon Amsterdam’s framework by incorporating credit services and operating a grain reserve.
Subsequently, additional public banks authorized to issue currency appeared in Sweden, England, France, Vienna, and Prussia.
Contemporary Germany
Based on OECD research, Germany’s public banking sector manages around 40% of the nation’s total banking assets. The Association of German Public Banks (VOB) reported that by the end of 2016, public banks held assets totaling approximately 2.9 trillion euros and employed roughly 75,000 individuals.
The Landesbanken are government-owned institutions primarily engaged in wholesale banking operations. The Sparkassen-Finanzgruppe comprises public savings banks committed to serving community interests and fostering local economic growth. These institutions provide personal banking services and extend loans to small enterprises and homebuyers.
Wolfram Morales, executive vice president of Sparkasse, emphasized that public banks played a vital role in Germany’s transition away from centralized fossil fuel energy sources toward a diversified renewable energy portfolio, with Sparkassen banks significantly contributing financing for this shift.
Financial analyst Frances Coppola criticizes Landesbanken for inefficiencies and weak profitability following the 2008 financial crisis while also noting that Sparkassen face challenges such as low returns for depositors, declining profits, and increased competition from digital lenders. Similarly, Craig Johnson from the Public Policy Institute for Wales highlights Sparkassen’s difficulties in achieving strong profit margins. Conversely, Ellen Brown stresses that Landesbanken and Sparkassen provided essential liquidity to regional economies during periods when private banks reduced lending amid risky practices that contributed to the global financial crisis of 2008.
Australia
Established under the Commonwealth Bank Act, the Commonwealth Bank of Australia commenced operations in 1911. Prior to its complete privatization in 1996, the institution provided credit to Australian residents through loan programs, thereby playing a significant role in fostering the nation's economic growth.
Canada
The Bank of Canada began as a private entity in 1934 before being nationalized in 1938. Its primary purpose was to extend loans to both federal and provincial governments, effectively eliminating interest charges on public debt. Throughout World War II, the bank financed extensive military efforts, aiding in the development of what became the third largest navy globally. In the post-war era, it supported sectors such as agriculture, veteran education, infrastructure projects, airports, technological advancements, pension schemes, and healthcare services. From the 1960s onward, the bank implemented monetary supply restrictions to control inflation and discontinued lending to government bodies by 1974.
United States in the 17th, 18th, and 19th centuries
During colonial times in America, legislative assemblies established "land banks" that issued paper money and provided loans aimed at agricultural and developmental financing. This approach enabled rapid economic expansion while maintaining low taxation levels. The Bank of Pennsylvania, chartered in 1793, managed to fund state expenditures through dividends without resorting to direct taxation for four decades.
In the early 1800s, numerous states founded public or semi-public banks tasked with supplying currency and overseeing banking regulations. By 1831, state legislatures had authorized over 400 banks, often imposing specific restrictions on loan types and credit issuance. Certain state banks successfully funded government operations; for instance, from 1828 to 1842, the Georgia Central Bank fully covered state expenses.
According to Susan Hoffmann, these banks exhibited diverse ownership and governance models—ranging from minimal public involvement to majority government control—with capital assets including specie, land mortgages, slave mortgages, and bonds. Their lending activities varied between commercial enterprises and real estate or agricultural sectors.
Among these institutions were two entirely public state banks: the Vermont State Bank and the Bank of Kentucky (which was eventually succeeded by the Bank of the Commonwealth of Kentucky). Similar to what would later be seen with the Bank of North Dakota, these banks were wholly owned by their respective states, managed by officials appointed by legislatures, and operated utilizing state credit.
The Bank of North Dakota
The Bank of North Dakota (BND) is a financial entity owned by the state and headquartered in Bismarck, North Dakota. Legislation requires that state agencies deposit their funds exclusively with BND.
Originating from populist movements within the Non-Partisan League that championed "public ownership of economic infrastructure," BND was established to address restricted credit availability that exacerbated farmers' hardships during the late 19th century. The NPL advocated for state control over mills, grain elevators, banks, and other agricultural industries as a countermeasure against price manipulation by Minneapolis and Chicago markets.
At its inception, BND encountered challenges regarding its legitimacy and faced opposition from banking institutions based in Minnesota and along the East Coast. During 1931-32, loan defaults soared to 66%.
Currently, BND serves as a vital driver of North Dakota's economic progress with a mission centered on advancing agriculture, commerce, and industry. Approximately half of its loan portfolio comprises business and farm loans originated through community banks, thereby enhancing local lending capabilities and reducing reliance on out-of-state financial institutions. Additionally, BND provides funding for disaster recovery efforts, public infrastructure projects, educational institutions, and student loans. The interest earned on these loans is returned annually to the state as dividends.
In 2017, BND achieved record profits for the fourteenth year running.
A report published in 2011 by the Federal Reserve Bank of Boston observed that replicating BND’s structure in larger states such as Massachusetts would involve substantial costs and complexities—requiring startup capital equivalent to roughly one-fifth of that state's general obligation debt. The report also indicated that differing market conditions might call for alternative public banking frameworks.
The Reconstruction Finance Corporation
Between 1932 and 1957, the U.S. government-operated entity known as the Reconstruction Finance Corporation (RFC) extended financial assistance to state and local governments while issuing loans to banks, railroads, mortgage institutions, and various businesses. These RFC loans were designed to be "self-liquidating," repaid through revenue generated by projects financed by the RFC, including infrastructure such as the San Francisco Bay Bridge, California Aqueduct, bridges spanning the Mississippi River, and the Pennsylvania Turnpike.
Public banking movements in the United States
Following the Great Depression, numerous states pursued the creation of public banks through referenda or legislative measures, often encountering resistance from private financial entities like state chambers of commerce. For instance, in the 1970s, attempts by the New York State Assembly to establish a state-owned bank were thwarted by opposition from the New York Chamber of Commerce and the New York Stock Exchange.
During 2016 and 2017, candidates across the country promoted public banking as part of their platforms, with notable victories such as New Jersey Governor Phil Murphy. This revived enthusiasm has sparked initiatives in cities including Los Angeles, Oakland, Seattle, Santa Fe, and San Francisco. Furthermore, difficulties faced by cannabis-related enterprises in accessing banking services amid legalization efforts have intensified demands for state and municipal banks to support this industry. In response, the California State Senate passed legislation in 2018 authorizing the establishment of such banks, which Governor Gavin Newsom signed into law on October 2, 2019.
Public banking efforts in California
On September 13, 2019, California’s legislature enacted AB 857 (the Public Banking Act), which Governor Gavin Newsom approved on October 2, 2019. This law authorizes local governments to create public banks, permitting them to extend public credit and own bank shares with aims to reduce costs, bolster local economies, promote community economic development, and tackle infrastructure and housing challenges. The bill was crafted by the California Public Banking Alliance—a grassroots coalition representing ten cities—and introduced by Assemblymembers David Chiu and Miguel Santiago. It received widespread endorsement from approximately 180 labor unions, civic groups, and the California Democratic Party. Seventeen cities and counties across California—including Los Angeles, San Diego, Oakland, Long Beach, Berkeley, Richmond, Santa Cruz, Huntington Park, Eureka, Watsonville, Alameda County, Santa Cruz County, and San Francisco—have adopted resolutions supporting AB 857.
In 2018, Measure B was proposed by the Los Angeles City Council to permit establishing a municipal bank. Spearheaded by Public Bank LA—a volunteer advocacy organization—Measure B achieved 44% voter support despite limited financial backing and a brief campaign timeframe. Although it fell short of passing, this performance was significant given the usual obstacles progressive ballot initiatives face against well-funded corporate opposition. The Los Angeles Times Editorial Board criticized public banking as potentially risky and expensive; however, proponents pointed to successful examples like North Dakota’s state bank and Germany’s long-established public banking system. Advocates argue that a municipal bank could enhance local investment opportunities to improve housing availability and support small businesses in Los Angeles.
In March 2019, San Francisco’s Treasurer’s Office published an extensive feasibility report spanning 151 pages that evaluated three potential models for launching a municipal bank. The analysis projected initial capital needs between $184 million and $3.9 billion to achieve break-even operations. It also highlighted that reaching profitability depends on variables such as expenditures, income streams, and growth rates—all factors that can be managed to expedite financial sustainability.
Public banking initiatives in New York
In 2019, New York State Senator James Sanders Jr. introduced the public banking legislation S5565C, which would permit the establishment of public banks, outline their operational framework, and mandate their formation as benefit corporation entities.
Interest
The cost of interest payments contributes significantly to the pricing of goods and services, with some critics estimating that financing accounts for 35% to 40% of final prices. Similarly, government-funded capital projects such as infrastructure and educational facilities face substantial interest expenses. Since public banks do not prioritize shareholder profits, they have the potential to lower interest charges on public infrastructure and selected private sector investments.
Money creation
Contrary to the common perception of banks merely acting as intermediaries lending out deposits, many scholars contend that banks generate money through lending beyond their deposit reserves. Robert C. Hockett from Cornell Law School argues that the capacity of banks to extend credit independent of deposits supports viewing banking as a public utility rather than a purely private business.
Through fractional reserve banking, the money supply exceeds the total deposits held, with central banks regulating this expansion via interest rates and capital requirements. Although reserve requirements have diminished in importance in developed economies, institutions like the Bank of England recognize that banks create "new money" by issuing loans that simultaneously produce corresponding deposits.
Supporting the credit creation theory, Professor Richard Werner's research concludes that banks effectively create money "from nothing." Former officials from the Federal Reserve Bank of Minneapolis describe fractional-reserve banking as a mechanism of "private money creation."
However, some economists, particularly from the Austrian School, challenge this view by asserting that lending merely duplicates existing money units rather than producing new ones. Others highlight that while loan issuance creates money, its repayment effectively destroys it.
Proponents such as David Korten advocate for shifting money creation authority towards community banks to democratize financial influence and resource distribution.
Public banks and economic development
An analysis conducted by Svetlana Andrianova, Panicos Demetriades, and Anja Shortland covering multiple nations between 1995 and 2007 revealed a positive relationship between increased government ownership in banking and accelerated economic growth.
Mark A. Calabria from the Cato Institute points to corruption scandals involving Fannie Mae and Freddie Mac as illustrations of mismanagement within public-sector finance. He contends that the success attributed to the Bank of North Dakota is exaggerated and argues that politicization of lending decisions under public-sector banking impedes economic progress. Calabria states, "When governments control banks, lending choices become driven more by political agendas than economic rationale." The Public Banking Institute disputes Calabria's conclusions, noting his analysis lacks comprehensive comparisons between public and private banking models and relies on insufficient case studies.
In a 2000 study, Harvard Kennedy School researchers Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer observed widespread government ownership in banks, particularly in countries with low income per capita and less developed financial markets. Their findings indicate that higher levels of state ownership correlate with slower financial system development, diminished economic growth, and notably reduced productivity increases.
Argentina
Australia
Belgium
Bolivia
Brazil
- Caixa Econômica Federal
- Public companies under government control:
- Institutions focused on development finance:
Canada
- ATB Financial (Alberta Treasury Branches)
Chile
China
- Principal state-owned banks:
Costa Rica
France
- La Banque Postale (formed in 2006 through transfer of La Poste’s financial services)
- Caisse des Depots et Consignations
- Crédit Municipal de Paris
Germany
Iceland
India
Public sector banks with government majority ownership as of June 2021:
- Punjab & Sind Bank (98.07%)
- Indian Overseas Bank (96.4%)
- UCO Bank (95.39%)
- Bank of Maharashtra (93.33%)
- Central Bank of India (93.08%)
- Union Bank of India (83.5%)
- Bank of India (81.41%)
- Indian Bank (78.86%)
- Punjab National Bank (73.1%)
- Canara Bank (69.33%)
- Bank of Baroda (64.0%)
- State Bank of India (55.0%)
Italy
- Historical example: the 15th-century Tavola Pecuniaria
- Present-day entities:
Kenya
The majority government-owned (National Social Security Fund) National Bank of Kenya, established in 1968, holds 70% ownership and is publicly traded on the Nairobi Stock Exchange.
Malaysia
Mexico
New Zealand
Previously, the New Zealand government owned both the Bank of New Zealand from 1945 until its privatisation in 1992 and the former postal savings institution, PostBank, which was separated from the postal service and sold to ANZ New Zealand in 1989.
Norway
Portugal
United Kingdom
- The UK Government retains a 48.15% stake in the NatWest Group
Russia
United States
- Bank of North Dakota
- Export–Import Bank of the United States
- Puerto Rico Government Development Bank
- Territorial Bank of American Samoa
Vietnam
See also
- State Ownership
- Social Ownership
- Postal Bank
- History of Banking
- Modern Monetary Theory
- Community Development Bank