December 27, 2011

Why not municipal banks?

Huffington Post - The idea of creating a [San Francisco] local municipal bank has been around for a long time. It was a demand of the 1975 San Francisco Community Congress, and the San Francisco Board of Supervisors commissioned a Legislative Analyst Report at the bequest of supervisor Matt Gonzalez on the issue in 2001.

Only two totally government-owned banks exist in the United States, neither of which are under the jurisdiction of an individual city. Around the world, a handful of cities (Berlin and Jakarta, for example) have been running their own banks for years with some success.

San Francisco currently divides its nearly 200 bank accounts between three massive financial firms: Wells Fargo, Union Bank of California and Bank of America. Wells Fargo and Union Bank are based in the city, and Bank of America, founded by an Italian immigrant who set up a table on a San Francisco street corner after the 1906 earthquake and started making loans, is now based in North Carolina after a mid-1990s acquisition by Nations Bank.

A municipal bank would do away with those relationships in favor of something more closely resembling the model of the Bank of North Dakota.

The Bank of North Dakota was created in 1919 amid a populist uprising not unlike the current Occupy protests. "Basically it was a very angry movement by a large group of the agrarian sector that was upset by decisions that were being made in the eastern markets...deciding who got credit and how to market their goods," said bank president Eric Hardmeyer in an interview with Mother Jones.

By law, North Dakota deposits all of its money into the bank, which then partners with local banks to make loans within the community. The loans are issued by the private banks and, as a result, those banks are on the hook for a portion of the loans in the case of a default. Requiring the private bankers to put some skin in the game incentivizes them to hopefully make prudent decisions instead of excessively leveraging themselves at the government's expense.

1 comment:

Bank Lending Criteria said...

Municipal Banks are extremely limited in their operations and may not offer services to individuals other than to pay interest on deposits, which are typically those of council employees and pensioners. So they would want their status be change.