The Problem with Public Banking

By Aaron Stetter

While community banks have again proven their importance to local communities as Paycheck Protection Program leaders, public banking proponents in some states and municipalities threaten to undermine this system and its benefits to consumers. 

Several states are considering establishing taxpayer-funded public banks. Unfortunately for local communities and taxpayers, these proposals contain considerable risks, as ICBA lays out in a new customizable op-ed that community bankers and affiliated state association executives can use to spread the word. 

Flawed financing 

Public banks are often touted as ways to remove government deposits from large Wall Street banks. But 53 percent of state and local deposits and 31 percent of federal deposits are held by community banks, meaning public banking would displace locally based community banks. 

Further, public banking would subject consumers to bureaucratic inefficiencies and public bank executives to political pressures by the elected officials that appoint them.  

Risky business 

Neither is public banking a safer place for consumers to park their money. Public banks are likely to be less regulated than private banks because they would not be supervised by a federal banking regulator. 

And any public bank that forgoes FDIC insurance would be backed by the full faith and credit of a state or municipality, shifting the risk from the bank-funded Deposit Insurance Fund to state and local taxpayers. Further, a cash-strapped state or municipality would provide little support against unexpected losses at the bank, and it could be tempted to draw on the bank's capital cushion. 

Taking action 

To truly empower consumers, small businesses and agriculture borrowers, policymakers should focus on ways to support the 5,000 community banks meeting their needs today. Community bankers can speak out against these misguided plans with ICBA's custom op-ed.

Aaron Stetter is ICBA executive vice president of policy and political operations.