The California state legislature passed AB 857, the Public Banking Act, on September 13, 2019, with Governor Gavin Newsom signing it into law on October 2, 2019. The new law provides a pathway for cities, counties (and joint powers authorities) to start public banks. For the first time in history, California cities and counties can have their own banks, allowing taxpayers’ money to flow back into our local communities, rather than increasing Wall Street shareholder profits.
How public banks serve communities
Unlike Wall Street privately-owned banks, which are focused solely on private shareholder returns, public banks will leverage their deposits and make loans that benefit the local community. These banks will be able to focus on lending to resolve pressing local needs, such as affordable housing, small business loans, and public infrastructure projects, including rebuilding after wildfires and floods. Besides improving community lives, these investments in communities are also fiscally prudent.
The law requires a public bank to apply for a banking charter from the California Department of Business Oversight (DBO), following all the same financial and regulatory requirements as commercial banks. In addition, public banks will be subject to the Brown Act and Public Records Act, thereby ensuring their transparency, good governance, and commitment to the public interest.
How the banks will be formed
The legislation requires a city or county to create a business plan to be presented to the public and then approved by their local legislature. Public banks will be organized as a nonprofit public benefit or mutual benefit corporation, owned entirely by cities and counties, governed by independent boards of directors, and run by professional bankers. After the Orange County bankruptcy in the mid-1990s, the California Legislature passed laws requiring funds deposited by a local agency to be protected by additional collateral requirements. AB 857 applies these collateral protections to public deposits in a public bank as well.
AB 857 will be initially implemented as a pilot program, with no more than two licenses to be issued each year, up to a maximum of ten licenses, over a period of seven years. After that time the DBO will conduct a study on the efficacy of the banks. The pilot program is intended to demonstrate how public banks benefit California’s local communities and governments. After a successful pilot program, the law may be made permanent, so all California communities can benefit from public banks.
Public banks will also be required to partner with local community banks and credit unions to provide retail services within their jurisdiction, thereby strengthening local financial institutions to make socially-beneficial loans into the local economy. These public banks, like credit unions, will be exempt from taxes and, like public agencies, will be subject to the Brown Act and the Public Records Act.
How transparency and safety will be assured
Public bank oversight will be conducted at four levels:
1) an independent board of directors of the bank
2) the city or county owner of the bank
3) the Department of Business Oversight
4) the Federal Deposit Insurance Corporation.