New York Public Banking Act
| Company type | Government-owned corporation |
|---|---|
| Industry | Banking, finance |
Area served | Various (state, city, national levels) |
| Products | Banking services, loans, deposits, financial products |
A public bank refers to a financial institution owned and operated by a government entity, such as a state, city, or other public bodies, functioning under governmental oversight. Prominent instances include the Bank of North Dakota, Germany's Sparkassen-Finanzgruppe, and several national postal banks.
During the late 1800s and early 1900s, public banks proliferated internationally, playing a crucial role in driving industrialisation across both capitalist and socialist economies. By 2012, government-owned banks managed as much as a quarter of the world's banking assets.
Proponents contend that public banks contribute to lowering expenses for government services and infrastructure, bolster regional banking institutions, provide financial access to underserved communities, and foster economic growth aligned with societal goals. The 2015 Addis Ababa Financing for Development Action Agenda underscored their importance in fulfilling the Sustainable Development Goals. Furthermore, leading global financial organizations increasingly view public banks as instrumental in advancing a transition toward low-carbon, climate-resilient economies. Non-governmental organizations and academics also highlight their capacity to finance an equitable and just energy transition.
Definitions of public banking
According to the Public Banking Institute, a public bank is defined as "a chartered depository bank in which public funds are deposited," owned by governmental units such as states, counties, or municipalities, and tasked with fulfilling public-oriented missions that reflect community priorities.[1] Ellen Brown differentiates public banking from state socialism by emphasizing that public banking entails government regulation of credit mechanisms facilitating economic transactions rather than direct control over production assets.[2]
Public banks compared to credit unions
While public banks are owned and managed by government entities, credit unions operate as private cooperatives owned by their members. In the United States, federal regulations restrict credit unions from issuing commercial loans beyond 12.25% of their total assets, limiting their capacity to serve as primary sources of credit.
How public banks work
Although organizational models differ, public banks are generally funded through government capital injections and tax-derived revenues. Similar to private banks, they accept deposits from government bodies, generate bank credit, and provide loans at relatively low-interest rates. Unlike private banks focused on maximizing profits and shareholder returns, public banks can offer reduced borrowing costs to clients—including public institutions, local enterprises, residents, and students—by transferring cost savings directly.
Since public banks utilize state deposits that might otherwise yield higher returns if invested in private banks, there exists an implicit transfer of value benefiting borrowers at the taxpayers' expense.
Public banks frequently partner with local private financial institutions by underwriting or guaranteeing loans for projects that lack sufficient funding. This collaborative model allows public banks to function as complements rather than competitors to private lenders, as demonstrated by the Bank of North Dakota under President Eric Hardmeyer.
Public savings institutions like postal banks offer financial products such as savings accounts, bonds, and remittance services. Globally, about three-quarters of postal systems provide these offerings; notably, the United States maintained a postal banking system from 1911 until 1967.
Ancient history
In ancient times, prior to the emergence of price-regulating markets, temples played a key role in supplying and managing the standards for weights and measures necessary for trade. The legal framework in Mesopotamia incorporated price controls and established fixed interest rates based on customary public practices, such as a consistent rate of one shekel per mina, which remained unchanged for a millennium.
Medieval, renaissance and modern Europe
During the 14th century, charitable lending institutions known as Mons Pietatis (Mount of Piety) provided low- or no-interest loans secured against pawned items, aiming to shield borrowers from usurious practices. Earnings were used to pay staff and expand charitable activities, with surplus interest periodically reinvested into capital reserves or applied to reduce future loan rates. These entities functioned either independently or as part of municipal corporations.
Early forms of public banking were also found within church institutions. Scholars Elise Dermineur and Yane Svetiev observe that religious bodies such as abbeys, convents, and Mons pietatis extended credit internally and maintained transaction records, with parish wards similarly offering credit services.
Notable early public banks in Catalonia included the Taula de Canvi (1401), established to redirect deposits away from private banks and support short-term government debt; the Banco di San Giorgio (1408, 1530), dedicated to repaying public debt and advancing public banking objectives; Venice’s Banco della Piazza di Rialto (1587), created for settling public obligations; and the Banch de la Ciutat (1609), which permitted limited circulation of substandard coinage among the populace.
Across Europe, the Bank of Amsterdam (1609) introduced standardized coinage and exchange procedures, inspiring similar Dutch exchange banks that persisted into the 19th century. Between the 15th and 17th centuries, German and Swiss cities established banks with mandates focused on public benefit, exemplified by Basel’s city council charter. The Bank of Hamburg (1619), modeled after Amsterdam’s institution, expanded its credit functions and included a grain reserve for municipal use.
Subsequently, currency-issuing public banks appeared in countries such as Sweden, England, France, Vienna, and Prussia.
Contemporary Germany
According to OECD research, Germany’s public banking sector manages approximately 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 2.9 trillion euros and employed around 75,000 individuals.
The Landesbanken are state-owned institutions primarily engaged in wholesale banking activities. The Sparkassen-Finanzgruppe operates a network of public savings banks committed to serving the public interest and fostering local economic development by providing personal banking services and loans to small enterprises and homeowners.
Wolfram Morales, executive vice president at Sparkasse, emphasizes the significant contribution of public banks in Germany’s energy transition from centralized fossil fuel reliance toward diverse renewable sources.
Finance analyst Frances Coppola points out that several Landesbanken have struggled with inefficiency and low profitability since the 2008 financial crisis, while Sparkassen banks face challenges including low returns for savers, reduced profits, and competition from online lenders. Similarly, Craig Johnson from the Public Policy Institute for Wales highlights difficulties Sparkassen encounter in producing strong investment returns. Nevertheless, Ellen Brown asserts that both Landesbanken and Sparkassen played an essential role in maintaining liquidity within local economies when private banks restricted lending due to risky practices that contributed to the 2008 financial downturn.
Australia
Established through the Commonwealth Bank Act, the Commonwealth Bank of Australia commenced operations in 1911. Prior to its complete privatization in 1996, the institution played a crucial role in the Australian economy by providing loans and credit to citizens, thereby influencing national financial activities.
Canada
The Bank of Canada began as a private entity in 1934 before being nationalized in 1938. Initially, it extended loans to federal and provincial governments, effectively rendering public debt interest-free. During the Second World War, the bank financed a substantial military build-up, contributing to the establishment of the world’s third-largest naval force. Following the war, it supported a variety of initiatives including agricultural subsidies, veterans’ education, infrastructure projects, airport development, technological advancement, pension schemes, and Medicare. From the 1960s onward, its focus shifted toward controlling the money supply to combat inflation, and by 1974 it had ceased lending directly to government bodies.
United States in the 17th, 18th, and 19th centuries
In colonial America, legislative assemblies created "land banks" that issued paper currency aimed at funding development projects and generating revenue with minimal taxation, fueling rapid economic expansion. The Bank of Pennsylvania, founded in 1793, financed state expenditures without imposing direct taxes for four decades.
By the early 1800s, numerous states established public or semi-public banking institutions to supply currency and regulate financial activities. By 1831, over 400 banks had been chartered across 24 states, often under statutory guidelines dictating loan types and credit availability. Certain state banks successfully covered government expenses; for instance, Georgia Central Bank managed all state costs from 1828 through 1842.
Susan Hoffmann highlights a broad range of state participation in these banks: ownership varied from partial stakes to full control; governance structures ranged from limited state board involvement to majority oversight including appointment of presidents. Capital sources included specie reserves, land and slave mortgages, as well as bonds issued by federal and local governments. These banks offered a diverse portfolio of commercial, real estate, and agricultural loans.
Two fully state-owned banks were Vermont State Bank and the Bank of Kentucky (which was later succeeded by the Bank of the Commonwealth of Kentucky). These institutions were entirely owned by their respective states, governed by officials appointed by legislatures, and operated based on state credit—similar in structure to later examples such as the Bank of North Dakota.
The Bank of North Dakota
The Bank of North Dakota (BND) is a government-owned financial institution headquartered in Bismarck, North Dakota. Legally operating as the State of North Dakota under the name BND, it mandates that state agencies deposit their funds with this bank.
Founded by populists within the Non-Partisan League (NPL) who advocated for "public ownership of economic infrastructure," BND emerged as a response to limited credit availability that exacerbated farmers’ hardships during the late 19th century. The NPL championed state control over mills, grain elevators, banks, and agriculture-related industries to counteract market dominance by Minneapolis and Chicago financial interests.
At its inception, BND encountered questions regarding its legitimacy and faced opposition from Minnesota-based and East Coast banks. During 1931–32, loan delinquencies reached as high as 66% of total outstanding debts.
Currently, BND plays a vital role in North Dakota’s economic growth by promoting agriculture, commerce, industry, and supporting local financial institutions. Approximately half of its loan portfolio consists of business and agricultural loans originated by community banks with partial financing from BND. This approach enhances local lending capacities while reducing reliance on out-of-state banks. Additionally, BND provides funding for disaster relief efforts, public infrastructure projects, educational institutions, and student loans. The interest earned is returned annually to the state treasury as dividends.
In 2017, BND achieved record profits for the fourteenth year running.
A 2011 analysis by Yolanda K. Kodrzycki and Tal Elmatad from the Federal Reserve Bank of Boston concluded that replicating North Dakota’s banking model in larger states like Massachusetts would be expensive and complex—requiring capital equal to roughly one-fifth of that state’s general obligation debt—and suggested alternative public banking structures might better address localized market challenges elsewhere.
The Reconstruction Finance Corporation
From 1932 until 1957, the U.S. government-operated entity known as the Reconstruction Finance Corporation (RFC) provided financial assistance to state and local authorities, while also extending loans to banks, railroads, mortgage companies, and various enterprises. The loans issued by the RFC were designed to be "self-liquidating," meaning they were repaid through income generated by projects such as toll collections on bridges and tunnels funded by the RFC. Significant infrastructure undertakings supported by the RFC included the San Francisco Bay Bridge, California Aqueduct, bridges spanning the Mississippi River, and the Pennsylvania Turnpike.
Public banking movements in the United States
Since the Great Depression, numerous states have attempted to establish public banks through legislative efforts or ballot initiatives, often encountering resistance from private financial sectors like state chambers of commerce. For instance, during the 1970s, a proposal by the New York State Assembly to create a state-owned bank was thwarted by opposition from both the New York Chamber of Commerce and the New York Stock Exchange.
Between 2016 and 2017, various political candidates nationwide campaigned on platforms advocating for public banking, with some notable victories such as that of New Jersey Governor Phil Murphy. A revived interest in municipal public banks has led to initiatives in cities including Los Angeles, Oakland, Seattle, Santa Fe, and San Francisco. Furthermore, moves toward cannabis legalization at the state level—which complicate traditional banking access for cannabis enterprises—have intensified calls for public banks tailored to serve this industry. This momentum resulted in California’s enactment of legislation in 2018 to facilitate the creation of such banks, with Governor Gavin Newsom signing it into law in October 2019.
Public banking efforts in California
On September 13, 2019, California’s legislature passed AB 857 (the Public Banking Act), which Governor Gavin Newsom signed into law on October 2, 2019. This legislation authorizes local governments to form public banks, permitting them to lend public credit and hold stock ownership with the aims of reducing costs, boosting local economies, supporting community economic growth, and addressing infrastructure and housing challenges. The bill was championed by the California Public Banking Alliance—representing ten municipalities—and introduced by Assemblymembers David Chiu and Miguel Santiago. It received widespread backing from approximately 180 labor unions, civic organizations, 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—adopted resolutions endorsing AB 857.
In 2018, Measure B was proposed by the Los Angeles City Council to establish a municipal bank. Spearheaded by Public Bank LA—a volunteer advocacy group—the measure garnered 44% of votes despite limited funding and a brief campaign period. This outcome was notable given the common difficulties progressive ballot measures face when competing against well-financed opponents. While the Los Angeles Times Editorial Board criticized public banking as potentially risky and expensive, other analysts pointed to successful examples such as North Dakota’s Bank of North Dakota and Germany’s established public banking system. They contended that dominant mega-banks have failed to adequately support housing or small businesses in Los Angeles and emphasized that committed local investment requires new public financial institutions.
In March 2019, San Francisco’s Treasurer’s Office published a comprehensive 151-page feasibility report exploring three potential models for creating a public bank within the city. The study projected that achieving breakeven would necessitate investments ranging from $184 million up to $3.9 billion but indicated that timelines would vary based on factors like costs, revenues, and growth trajectories. Modifications in these variables could either shorten or lengthen the period before the bank reaches an annual breakeven point.
Public banking initiatives in New York
In 2019, New York State Senator James Sanders Jr. put forward the public banking legislation S5565C, which would permit the establishment of public banks, outline their operational framework, and mandate their registration as a benefit corporation.
Interest
Interest charges contribute to higher prices for goods and services, with some critics estimating that interest-related expenses account for 35% to 40% of retail prices due to financing supply chains. Additionally, governments incur substantial interest expenses when funding infrastructure and capital projects. Public banks, which do not prioritize shareholder profits, have the potential to lower interest costs associated with public investments and specific private sector projects.
Money creation
Contrary to the common perception of banks functioning solely as intermediaries, numerous experts argue that banks generate money through lending beyond the scope of their deposits. Robert C. Hockett from Cornell Law School asserts that this capacity justifies treating banking as a public utility instead of a private business.
Banks maintain reserves that are smaller than their deposit liabilities, thereby effectively increasing the money supply via fractional reserve banking. Central banks manage this expansion by adjusting interest rates and enforcing capital requirements, although reserve requirements have become less emphasized in developed economies.
The Bank of England and other regulators recognize that banks produce new money by issuing loans that simultaneously create corresponding deposits in borrowers’ accounts. Susan Hoffmann observes that legislative institutions have historically found it challenging to address this embedded process of money creation. This understanding traces back to the 17th-century Bank of Amsterdam’s acknowledgement that lending deposits results in additional money circulation.
Research conducted by Professor Richard Werner validates the credit creation hypothesis, confirming that banks possess the ability to generate money independently. Former officials from the Federal Reserve Bank of Minneapolis describe fractional-reserve banking as a form of "private money creation."
However, some economists—especially those aligned with the Austrian School—reject the notion of bank-created money, arguing that only one party can hold a deposit at any given time and that lending merely records existing transactions instead of producing new money. Others clarify that while loans create money initially, repayment processes eliminate it, preserving equilibrium within the monetary system.
Proponents such as David Korten advocate for decentralizing money creation by empowering local community banks to democratize access to financial resources.
Influence of Public Banks on Economic Expansion
An analysis conducted by Svetlana Andrianova, Panicos Demetriades, and Anja Shortland, examining data across various nations from 1995 to 2007, revealed that substantial government stakes in banking institutions can promote more rapid economic advancement compared to scenarios with limited state involvement.
Conversely, Mark A. Calabria from the Cato Institute highlights instances of corruption within Fannie Mae and Freddie Mac as illustrations of financial mismanagement in the public sector. He contends that the achievements attributed to the Bank of North Dakota are exaggerated and maintains that public banking typically obstructs economic progress. Calabria concludes that government-owned banks tend to emphasize political objectives at the expense of economic efficiency. The Public Banking Institute disputes this viewpoint, asserting that Calabria’s critique lacks a thorough comparative analysis between public and private banks, overlooks key performance metrics of the Bank of North Dakota, and bases conclusions on insufficient evidence.
In a 2000 study, Harvard Kennedy School scholars Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer observed that government ownership of banks is prevalent, particularly in countries characterized by low income per capita and less developed financial infrastructures. Their findings indicate a negative association between extensive government bank ownership and the pace of financial system development, economic growth, and productivity improvements.
Argentina
Australia
Belgium
Bolivia
Brazil
- Caixa Econômica Federal
- Publicly controlled enterprises:
- Development finance entities:
Canada
- ATB Financial (Alberta Treasury Branches)
Chile
China
- Principal state-owned banks:
Costa Rica
France
- La Banque Postale (founded January 1, 2006, through the transfer of La Poste’s financial services)
- Caisse des Depots et Consignations
- Crédit Municipal de Paris
Germany
Iceland
India
Government-owned banks with respective ownership percentages 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 precedent: Tavola Pecuniaria (15th century)
- Principal entities:
Kenya
Established in 1968, National Bank of Kenya operates as a commercial bank, publicly traded on the Nairobi Stock Exchange, with the Kenyan government and the state-run National Social Security Fund holding a combined majority stake of 70%.
Malaysia
Mexico
New Zealand
Previously, the New Zealand government owned both Bank of New Zealand (1945–1992) and PostBank. The latter was divested to ANZ New Zealand in 1989 as part of the privatisation process of New Zealand Post.
Norway
Portugal
United Kingdom
- NatWest Group (the UK Government retains a 48.15% ownership stake)
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