A public bank is a financial institution owned and operated by the government or a public entity. Public banks differ from private banks, which are owned and operated by private individuals or entities. The Bank of North Dakota is the only public bank in the United States.

How Public Banks Work 

Though their ownership is different from that of commercial banks, public banks still facilitate the flow of money throughout the economy. Instead of a city, county, or state placing funds into a commercial bank and paying fees and interest, the government manages funds in its own bank. It can then theoretically loan money at reduced interest rates for community investment. 

Services

Public banks are primarily recommended to manage local governments and agencies' deposits and other banking services.

In addition, these banks may be able to offer:

• Infrastructure lending
• Wholesale lending
• Small business lending
• Liquidity and security for other community banks

Currently, most state legislation and proposals require the public bank to limit public services. For instance, they might be required to partner with a local financial institution if they want to accept deposits from the general public. Or they might not be allowed to accept deposits from non-government entities at all.

A public bank can offer some of the same retail deposit and lending products as traditional banks, including saving and checking accounts, loans, and certificates of deposit (CDs).

However, concerns about the government competing with private businesses may limit even these services. For example, the bank may have only one location, only be available to local residents, or not offer standard features such as credit cards, online bill pay or even debit cards.

Features

A public bank is owned by the government or a government entity. Government ownership means the public has input in the bank's decisions, as elected officials or representatives help control the bank.

Public banks are focused on public interest and may be mandated to meet the financial needs of the community, city, or state they serve. Since public banks aren't necessarily focused on maximizing short-term profits, they may instead focus on the community's long-term needs.

Challenges

Establishing a public bank can be difficult because it requires a regulatory framework and startup capital to launch. Public banks could compete with existing local commercial banks, which could be counterproductive for the communities they serve.

Potential Impact

Public banks may be chartered to serve specific public policy goals. Traditional banks aren't meeting these goals, due to pressure to maximize shareholder profits.

History of Public Banks and the Bank of North Dakota

In the United States, the First Bank of the United States was established in 1791, but due to political conflict, its charter wasn't renewed in 1811. After a second attempt at a national bank failed, state governments began chartering banks. Many state banks closed after the financial panic of 1837. A new Federal banking system was established in 1863 with the creation of a national currency, and state banks slowly disappeared.

The Bank of North Dakota was established in 1919 after private banks made lending difficult for the state's agricultural industry. The bank is operated, managed, and controlled by an industrial commission, including the state governor, agriculture commissioner, and attorney general. Lending is done through partnerships with local banks and credit unions.

Campaign for Public Banks in the United States

Although the Bank of North Dakota is the only public bank in the U.S., efforts are growing to start more. In two-thirds of U.S. states, grassroots organizations supporting public banks are advocating for the unique financial institution, and in many states, legislators are introducing bills supporting public banks.

Here are a few examples: 

• California: Passed the Public Banking Act in 2019, which allows municipal public banks to be chartered. 
• New Jersey: Governor Phil Murphy created a public bank implementation board in 2019 to expand access to capital for the state's most under-served communities. 
• New York: Representatives introduced a bill to establish a committee to consider the feasibility of a public bank.

Several California cities, including San Francisco, are studying or setting up city-owned or regional banks. San Francisco’s public bank will serve low-income communities and communities of color by providing affordable housing and business financing.

Public Banks vs. Traditional Banks

Public banks offer services much like traditional banks, for instance, checking and savings accounts, deposits, and loans. However, the two kinds of banks differ in structure and operations.

While traditional banks are owned by shareholders, public banks are owned by a municipality. Instead of sharing profits with shareholders, public banks use profits to benefit their community, city, or state. Or the public banks can invest profits according to socially responsible principles.

According to advocates, public banks won’t need to expend resources on marketing and other overhead—so there’s more to invest in infrastructure and community.  

Pros and Cons of a Public Bank

Many of these pros and cons are theoretical, as public banks aren’t yet in widespread operation.

Pros of a Public Bank Explained

• Wide range of financial services: Public banks can invest in the local community's needs while also making banking services—deposit accounts, loans, credit cards, etc.—more accessible. 
• Affordable public project financing: State and city governments have more flexibility to initiate public projects without relying on expensive lending from private banks. 
• Community-focused: Public banks can choose to support community infrastructure and projects. 
• Financing during economic crises: As seen in North Dakota, public banks can lessen the effects of economic downturns or financial crises by providing funding to individuals and businesses.

Cons of a Public Banks Explained

• May not offer federal deposit insurance: Federally insured banks offer $250,000 in FDIC deposit insurance. The Bank of North Dakota notes that “deposits are guaranteed by the full faith and credit of the State of North Dakota.” 
• Weak local economy could threaten success: Public banks may be more vulnerable to local economic instability since many of their loans are concentrated in a specific area or industry. 
• Risk of fund mismanagement: Political interference, mismanagement of funds, and bureaucracy can also threaten a public bank's stability. 
• Lack of public services: Due to concerns about competition, a public bank may not serve the public or only offer limited services. 

The Bottom Line

Public banks have the unique advantage of offering banking services while serving specific public policy goals. While they can be a valuable resource for underserved communities and the specific government entity, establishing a public bank can be challenging, and there are potential risks to their stability. With growing interest in policy-focused banking solutions, several city and state governments have begun exploring public banks for their community.