In the wake of the 2008 financial crisis, communities across the nation have been asking critical questions about how the financial sector can more effectively work for the public good, instead of private interests. These questions are equally important in the community development sector as the financial crisis erased many of the wealth gains that had occurred in underserved communities in the preceding decade and as the sector continues to look for new opportunities to leverage resources.
So what are some of the alternatives to traditional private banks? Credit unions provide one alternative. Although some credit unions are just as restrictive with regard to lending in underserved communities, on average credit unions have higher mortgage approval rates for low- to moderate-income individuals than banks (67% versus 52%) and lower mortgage denial rates for nonwhites (22% versus 35%). These democratized, one-person-one-vote banks already involve more than 95 million Americans as participant-owners. Taken together, they hold roughly of assets — the equivalent of one of the largest US banks, knocking Goldman Sachs out of the top five.
Despite their assets, their deposit base has been limited, since until recently, cities would only make federally insured deposits up to $250,000 in credit unions. Working through this hurdle, some cities in Oregon responded to organized constituents and set in motion an effort to keep municipal money circulating locally in ways that help build the local economy. A state-led program now provides regular oversight and insurance, allowing local governments to deposit more than $250,000 safely. Cities such as Portland and Beaverton already have started shifting their money.
In total, ten area credit unions have accepted deposits of more than $27 million since the program began in April 2013 – all of which can be reinvested in the local economy under the purview of community-based democratic participation. Oregon’s treasury holds credit-union securities as collateral, monitors them monthly, and can sell them to recover any funds in case of financial-institution failure. “It makes sense for local governments to move some of their money from Wall Street to Main Street,” John Trull of the Northwest Credit Union Association, who helped facilitate the program.
Over the longer term, grass-roots momentum is beginning to build around the ideas of shifting state finances away from for-profit banks through the development of public state banks. As the New York Times noted yesterday, 22 states have introduced legislation that would replicate key features of the Bank of North Dakota, a successful public bank founded in 1919 by progressive farmers. The bank leverages $5 billion of deposits from taxes and public funds, and partners with and backs local banks, which then offer loans to small businesses, farmers and college students. In times of economic hardship, the Bank of North Dakota injects credit into the state economy, providing a countercyclical cushion; it also returns millions of dollars of profit annually to North Dakota’s general fund.
Vermont State Sen. Anthony Pollina is championing the effort to create such a bank for his home state. Pollina, quoted in The American Prospect, expressed frustration regarding the for-profit financial institution that currently receives the state of Vermont’s deposits, TD Bank: “They charge us fees; they lend our money wherever they want to lend it,” but “they don’t do that much lending in Vermont anymore.”
In California, organizations like the Public Banking Institute (PBI) have begun to advocate North Dakota-style public banking options as well, given that the state’s taxpayers pay millions in interest on bonds and loans for their infrastructure needs. PBI’s Marc Armstrong observes that if “California had had a state bank, we could have used the state bank credit to fund virtually all of that debt at very low cost.”
In a sense, public banking appeals to both conservatives and progressives: Public banks and credit unions weathered the last crisis much better than private banks, benefiting the communities they served as well. And many experts believe that it’s only a matter of time before the next financial crisis hits. To weather the next one well, we need to ensure that our individual and collective resources strengthen the types of financial institutions that are democratically accountable, economically stable, mission oriented, and that are actively helping build and keep wealth locally in our communities.