Why Public Banking is Bad for Pennsylvania

Why Public Banking is Bad for Pennsylvania

Or Anywhere For That Matter

By: Allison Coccia

Public Banking

The idea of public banking has been around for centuries, but recent political landscape changes and the legalization of cannabis have brought the issue to the forefront. There is talk that a handful of Pennsylvania legislators may be interested in exploring the idea of forming a state or “public bank.”

A public bank is a state or government owned bank funded by taxpayer dollars. There is only one currently in existence in the continental United States. Formed in 1919, the Bank of North Dakota has existed for 100 years. Originally formed in a populist wave, it was created to promote economic development, but mostly to shield the state’s farmers from predatory lending practices. Today, the bank takes great steps
not to compete with other financial institutions and is largely a bankers’ bank funded by the fossil fuel industry.

“We do not advocate the use of this model elsewhere.”1 – Eric Hardmeyer, President and Chief Executive of the Bank of North Dakota.

Yes, you read the quote correctly. The quote is from a 2013 New York Times op ed written by Eric Hardmeyer, the Bank of North Dakota’s President and CEO. Even the President and CEO of the only existing public bank in the US does not think it is a viable option in any other place.

According to a study on public banking by the State of California,” approximately 29 public banks were chartered and operated between 1917 and 2017. All public banks have ceased to exist either by regulatory order, financial failure, or the state or municipality closing the public bank, with the sole exceptions of the Bank of North Dakota and the recently approved American Samoa Bank.”2

US cities, states and municipalities of all different sizes, from Vermont to California, have spent millions commissioning feasibility studies and instituting ballot measures exploring the formation of a public bank, ultimately concluding to reject the concept over and over again. Their careful study has revealed several concerns: its great risk to taxpayers; its lack of regulation and tendency to be subject to political influence/ control; and a demonstrated depression of productivity and economic growth.


As recently as December 2018, the California State Treasurer’s Office issued a scathing report as a result of their study on the feasibility of forming a State of California Public Bank to serve the Cannabis Industry, saying that such a move “would place state funds and workers at risk with no guarantee of success.”3

“Our conclusion is that no option for a public bank focused on the cannabis industry is feasible… A state-backed cannabis bank involves unacceptable degrees of legal, schedule, mission, and financial risks. Risk is internal and external, knowable and unknowable…All statebacked financial institution options should be rejected based on unacceptable risk levels, non-profitable financial forecasts, and an overall inability to achieve the desired objectives.”4

In November of 2018, voters in the City of Los Angeles rejected public banking, voting down a ballot measure in favor of forming a city-owned bank by almost 60%.5

States like Washington, Maine, Oregon, and Massachusetts commissioned their own studies and outright rejected the concept.

In late 2018, the Washington State Treasurer’s Office (OST) commissioned a $500 million study on public banking with a full review of all 29 other states’ and municipalities’ studies on the issue, finding “no new state banking system was adopted based on these studies.“ Their final conclusion? “After careful review of each study, OST fully recommends against adopting a public banking system.”6

In a Report of the Commission to Study the Feasibility of Establishing a Bank Owned by the Commonwealth of Massachusetts, the Commission recommended that the Legislature not pursue establishing a bank owned by the Commonwealth or by a public authority constituted by the Commonwealth. The reasons in part, “(1) a state-owned bank would require significant initial capital investment and it remains unclear that there is a proven need to justify the investment; (2) the only existing model of a state-owned bank is that of North Dakota which is inadequate given the vast differences in the banking industries and economies of North Dakota and Massachusetts; (3) the public funds
of the Commonwealth would be exposed to unacceptably high risk if deposited in a state-owned bank…”7

Here is more about why voters and experts are rejecting the concept of public banking over and over again.


When it comes to public banking, what should be consumers’ greatest concern? The utter lack of safety and soundness.


Most of us take comfort in knowing that our hard-earned savings rest securely snuggled under the protective blanket of our financial institutions’ Federal Deposit Insurance Corporation (FDIC) Insurance. A public bank would not be insured by the FDIC, but would be backed by the “full faith and credit” of the state or municipality. That means taxpayers take on all of the risk.

Backed by the full faith and credit of the Commonwealth of Pennsylvania? Pennsylvania is not exactly known for its credit worthiness, having been downgraded six times since 2017, amid numerous budget fights. Also consider the debacles that are the state-run programs of today: PSERS
pensions, state budgets, school funding. The list goes on and on.


A public bank would likely not be supervised by a federal regulator and therefore not subject to the same safety and soundness standards as traditional banks. The Pennsylvania Department of Banking & Securities requires that entities acting as financial institutions be federally regulated. “A bank, a bank and trust company, an interstate bank and a savings bank that receives money for deposit shall insure such deposits with the FDIC or any other Federal agency authorized by law to insure deposits.”8 A statutory change would be required to allow a public bank to operate without FDIC insurance or federal supervision.

The lack of regulation by an independent federal regulator would make a public bank subject to political whims. In the Journal of Financial Intermediation, a piece entitled Why government banks underperform: A Political Interference View says, “once government banks undertake political interference, their financial performance deteriorates.”9

The FDIC has an opinion on public banks too. “Because of their ultimate control by the political process, such institutions could raise special concerns relating to management stability, their business purpose, and their ability and willingness to raise capital (particularly in the form of true equity rather than governmental transfers)”10


Public banks don’t have a great track record. “Nearly all failed, usually because of political interference that resulted in making risky loans or operating with too little capital (or both), then collapsing when boom times ended.”11


Public banking has a negative impact on economic growth.

In a 2013 New York Times Op-Ed, Mark Calabria, then director of financial regulation studies at the Cato Institute, expressed his concerns with public banking saying, “the most comprehensive study finds that higher government ownership of banks is associated with slower subsequent development of the financial system, lower economic growth, and, in particular, lower growth of productivity.”12 Calabria is currently the new Federal Housing Finance Agency (FHFA) Director.

The John F. Kennedy School of Government Department of Economics Harvard University Faculty Research Working Paper on Government Ownership of Banks said, “We find that higher government ownership of banks is associated with slower subsequent development of the financial system, lower economic growth, and in particular lower growth of productivity. Controlling for the traditional variables in the growth regressions, government ownership of banks has a negative impact on subsequent economic growth. We also show that government ownership of banks is especially common in poor countries, as well as in countries with poorly defined property rights, heavy government intervention in the economy, and underdeveloped financial systems.13

Pennsylvania is not a third world country.


The creation of a public owned bank just doesn’t make sense for Pennsylvania. The fact of the matter is, the risks are far too great for a system that has proven to be unnecessary, unsafe, politically motivated and a detriment to economic growth.

1 https://www.nytimes.com/roomfordebate/2013/10/01/should-states-operate-public-banks/why-public-banking-works-in-north-dakota
2 https://www.treasurer.ca.gov/comm-external-urls/cannabis-feasibility-full-report.pdf
3 https://www.pressdemocrat.com/business/9111157-181/cannabis-industrys-hope-for-california
4 https://www.treasurer.ca.gov/comm-external-urls/cannabis-feasibility-full-report.pdf
5 https://www.latimes.com/business/la-fi-public-bank-fail-20181107-story.html
6 https://tre.wa.gov/wp-content/uploads/Public-Banking-Report-Study-of-the-Studies.pdf
7 https://docs.digital.mass.gov/dataset/report-commission-study-feasibility-establishing-bank-owned-commonwealthpdf/resource
8 http://www.governing.com/topics/finance/tns-blame-pennsylvania-credit-downgrade.html
9 https://www.dobs.pa.gov/Documents/Statutes/Banking%20Code%20of%201965.pdf
10 https://www.sciencedirect.com/science/article/pii/S1042957311000271?via%3Dihub
11 https://www.fdic.gov/regulations/laws/rules/5000-3000.html
12 https://thehill.com/opinion/finance/412278-a-public-bank-is-risky-business
13 https://www.nytimes.com/roomfordebate/2013/10/01/should-states-operate-public-banks/public-banking-hurts-economic