Public bank
A public bank is a bank, a financial institution, in which a state, municipality, or public actors are the owners. It is an enterprise under government control. Prominent among current public banking models are the Bank of North Dakota, the Sparkassen-Finanzgruppe in Germany, and many nations' postal bank systems.
Public or 'state-owned' banks proliferated globally in the late 19th and early 20th centuries as vital agents of industrialisation in capitalist and socialist countries alike; as late as 2012, state banks still owned and controlled up to 25 per cent of total global banking assets.
Proponents of public banking argue that policymakers can create public-sector banks to reduce the costs of government services and infrastructure; protect and aid local banks; offer banking services to people and entities underserved by private-sector banking; and promote particular kinds of economic development reflecting polities' shared notions of social good. The 2015 Addis Ababa Financing for Development Action Agenda noted that public banks should have an important role in achieving the new Sustainable Development Goals. Increasingly, major international financial institutions are recognising the positive and catalytic role public banks can serve in the coming low carbon climate resilient transition. Further, international NGOs and critical scholars argue that public banks can play a significant role in financing a just and equitable energy transition.
Definitions of public banking
According to the Public Banking Institute, " Public Bank is a chartered depository bank in which public funds are deposited. A Public Bank is owned by a government unit—a state, county, city, or tribe—and mandated to serve a public mission that reflects the values and needs of the public that it represents." According to Ellen Brown, public ownership of a bank is distinct from state-socialism in that the latter is government ownership of the means of production, whereas public banking involves government oversight of the credit and debit system that facilitates economic exchange, including that of free markets.Public banks compared to credit unions
Public banks are owned and operated by governments, while credit unions are private entities collectively owned by their members. In the United States, federal law forbids credit unions from making commercial loans that exceed 12.25% of their total assets. This effectively prevents credit unions from operating as mainly credit-issuing institutions.How public banks work
Public banks come in a variety of models. A public bank might be capitalized through an initial investment by the city or state, as well as through tax and fee revenue. A public bank, like a private bank, can take tax revenues and other government income as deposits, create money in the form of bank credit, and lend at very low interest rates. Where private banks are committed by their business model to take advantage of low interest rates by charging higher rates to borrowers, a public bank has no shareholders to pay, and so can pass the low rates onto borrowers such as public agencies, local businesses, residents, and students. At the same time because much of a public bank's funding comes from state deposits that would otherwise earn more from a private bank, there is a hidden subsidy that acts as a transfer from taxpayers to borrowers.Public banks can also partner with local banks to fund projects that might otherwise go unfunded. Such partnering with local banks leads practitioners of public banking to say, like Bank of North Dakota President Eric Hardmeyer, that public banks are partners, rather than competitors, with local private financial institutions.
Public savings banks, such as postal banks, typically offer individual savings accounts, savings bonds, remittances and other services. Around three out of four postal systems worldwide offer such banking services, and such a system existed in the United States from 1911 to 1967.
History of public banking
Ancient history
In the ancient world, prior to the emergence of price-adjusting markets, temples provided and oversaw weights and measures critical to exchange. The expanded legal regime of Mesopotamia included price administration and fixed interest rates set by public custom, such as one shekel per mina, a rate which stayed stable for a thousand years.Medieval, renaissance and modern Europe
Most prominent in the 14th century, Mons Pietatis were charitable institutions of credit that lent money at low- or no-interest, upon the security of objects left in pawn, with the stated aim of protecting clients from usury. Profits were used to pay employees and extend the scope of their charitable work. The institutions took the form of either autonomous entities or municipal corporations. Periodically, net profits from interest were applied to the entities' capital reserves, with surplus profit being used to lower interest rates in the subsequent cycle.Many kinds of church banks served as early public banks. In their essay on the history of credit, Elise Dermineur and Yane Svetiev say that church structures " could extend credit and recorded the transactions in their own account books. Parish wards also extended credit."
Early Catalan public banks included the Taula de Canvi, designed to draw deposits away from private banks and finance short-term debt; the first and second Banco di San Giorgio, with mission statements reflecting goals of extinguishing public debt and steering banking practices to the public good; the Banco della Piazza di Rialto, Venice to pay public debts; and the Banch de la Ciutat, allowing the limited use of inferior coinage by the general public.
In the rest of Europe, the Bank of Amsterdam set out to simplify and standardize coins and other exchange and was soon joined by other Dutch exchange banks, many of which survived well into the 19th century. In Germany and Switzerland, many municipalities formed banks between the fifteenth and seventeenth centuries. The charter of the Basel city council stated that "our municipal bank is being founded to benefit the public good." The Bank of Hamburg was a public bank based on the Amsterdam model but with an expanded credit role and a grain store for the city.
Currency-issuing public banks later appeared in Sweden, England, France, Vienna, and Prussia.
Contemporary Germany
According to OECD studies, the German public banking system controls 40% of total banking assets in Germany. According to the Association of German Public Banks, the total assets of public banks in Germany at the end of 2016 was 2,900 billion euros, and German public banks have 75,000 employees.The Landesbanken in Germany are a group of state-owned banks primarily engaging in wholesale banking. Sparkassen-Finanzgruppe banks are public savings banks operated with a mandate of public service and local development. Anyone can open a personal account in a Sparkassen bank, and they provide loans for small businesses and home buyers.
Sparkasse executive vice president Wolfram Morales has pointed out that public banks played a major role in Germany's transition from centralized fossil fuel energy to diverse renewables, and that Germany's Sparkassen banks have been significant contributors to the renewables transition.
Finance writer Frances Coppola argues that Germany's Landesbanken are in various stages of "zombification," inefficient and poorly profitable, following the global economic crisis of 2008. Coppola also argues that the Sparkassen banks are suffering from low returns to savers, low profits, and increased competition from online lenders. Writing for the Public Policy Institute for Wales, Craig Johnson similarly argues that Sparkassen banks have had problems producing profits because of its inability to give robust returns to savers. However, Ellen Brown writes that the Landesbanken and Sparkassen have supplied local economies in Germany with liquidity when private banks stopped lending and instead engaged in risky behaviors, behaviors which helped cause the 2008 global economic downturn.
Australia
The Commonwealth Bank of Australia was established by the Commonwealth Bank Act and opened in 1911. Prior to privatization, the bank could issue the credit of Australia to citizens in the form of loans.Additionally, all six Australian states had established government-owned banks, most notably the Queensland Government Savings Bank, the State Bank of Victoria, the State Bank of South Australia, the State Bank of New South Wales, Bankwest, and the Trust Bank of Tasmania.
Canada
Established as a private bank in 1934, the Bank of Canada was nationalized in 1938 with a mandate to lend to the federal government and the provinces. This lending made public debt interest-free. In the Second World War, the Bank of Canada financed a large war effort, helping create the world's third largest navy. Following the war, the bank subsidized farmland and education for veterans, funded infrastructure, airports, and technology, and helped the government establish pensions and Medicare. Beginning in the 1960s, the Bank of Canada began restricting the nation's monetary supply to curb inflation, and by 1974 the bank was no longer lending to the government.United States in the 17th, 18th, and 19th centuries
In the 17th and 18th centuries, governing colonial assemblies in the thirteen colonies began taking on the lending functions of banks to generate revenue and finance farming and development. The governments would establish offices called "land banks," and would issue and lend paper currency. The loans would return on a regular payment schedule to prevent inflation and ensure adherence with English sterling. The low taxes resulting from these public finance mechanisms were partly responsible for the rapid economic expansion of the colonies. The Bank of Pennsylvania, chartered in 1793, allowed the state to use its dividends to finance government expenses without any direct taxes for the next 40 years.In the early part of 19th century America, before the Second Bank of the United States was closed, states scrambled to establish fully public or partially-public banks. There was considerable variation on how much public and how much private was in their design. In nearly all cases, state legislatures created central banks to provide money and regulate other banks in their states. By 1831, over 400 banks had been chartered through acts of specific legislation in the 24 existing states. In many instances, legislatures made policy decisions about the types of loans and credits these banks were to provide. Some of these state-run institutions duplicated the success of colonial assembly land banks in meeting government expenses. For example, the Georgia Central Bank covered all the state's expenses from 1828 to 1842.
Concerning the various state-owned or state-involved banks in the United States during the first half of the 19th century, Susan Hoffmann writes:
Between the two extremes of mostly private commercial banks and almost entirely public state central banks there existed just about every arrangement imaginable. The state shared in ownership of some banks but not in governance. When the state was involved in a bank's governance, its representation on the board of directors ranged from minimal to a majority plus public selection of the president. The capital of state banks consisted of various combinations of specie, mortgages on land and slaves, and bonds issued by the chartering state, other states, or the United States. Banks were authorized to provide different proportions of commercial versus real estate and agricultural loans.
At least two state banks were entirely publicly owned: the Vermont State Bank, and the Bank of Kentucky. These banks, like the Bank of North Dakota later, were owned entirely by the state, governed by legislatively-appointed officials, and banked on the credit of the state.