The movement for a public bank in San Francisco took a big step forward Monday with the release of a set of draft plans from a consultant concluding that a city-based Municipal Finance Corporation could start off with as little as $20 million in start-up capital and could be financially solvent within three years.
That could turn into a public bank, with $50 million in capital and $188 million in funding by year three.
“This is critical, because it shows that our ideas are feasible and getting taken seriously,” Jackie Fielder, vice-chair of the Local Agency Formation Commission and a leader in the public-bank movement, told me.
The situation, as the reports note, is a bit complex. The Federal Deposit Insurance Corporation, a key bank regulator, has no experience with public banks, and is going to be a bit dubious.
That means the initial plans might involve the MFC, which wouldn’t take deposits from the public and thus wouldn’t need FDIC approval. Once the city shows that model can work, the city could use the MFC to create a public bank.
There’s little doubt about the need. From one report:
The fundamental need for a City-owned MFC stems from the historic inability of traditional financial institutions to equitably serve the needs of low-income communities and communities of color and to deliver financial services that are not extractive or damaging to those same communities. There are two faces to this issue. The first is a lack of access to quality financial services that provide residents, businesses, and others with the instruments to better their lives. The second are the consequences of that lack of access, which has caused worse outcomes in economic, employment, health, and environmental outcomes that continue to this day.
This large gap in the local financial market, which the MFC seeks to fill, amounts to billions of dollars a year. This gap is spread across the MFC’s priority lending areas. The City projects that affordable housing development will require more than $400 million dollars a year through 2030 in addition to funds it has already committed. Affordable homeownership will require additional funds. Local enterprise lending for small businesses unsupported by traditional banks and other financial institutions likely runs to several tens of millions of dollars annually. Lastly, green investments constitute a vast and urgent need for San Francisco. The City has established an ambitious Climate Action Plan to reach net zero greenhouse gas emissions by 2040. The University of California, Berkeley’s Center for Law, Energy, and the Environment estimated that implementing this plan could require up to $21.9 billion—approximately $1.3 billion per year.
Traditional banks, which currently account for 65% of all loans issued in the City, have played a significant role in discrimination through the historic practice of redlining. This now-illegal practice involved denying loans or credit to certain neighborhoods based on the racial makeup of the area, and has contributed to historical patterns of discrimination and limited the ability of communities of color to purchase homes. This has led to concentrated areas of poverty and overcrowding and perpetuated the gap in homeownership between Black and white populations, which remains at the same level it was in 1890. Data from the Census Bureau’s 2020 American Community Survey shows that in San Francisco, the homeownership rate in neighborhoods that were redlined in the past was about 25%, compared to an average of 40% in city as a whole.
“As we continue to chart a path to economic recovery, we must include reinvestment, and a public bank is one of the best ways to ensure that our city dollars are used to reverse inequities, not perpetuate them,” said Supervisor Dean Preston. “The draft plans are a huge step forward in turning the public bank concept into a reality.”
I was struck in reading the proposals at how little money the city would need to front (and yes, potentially risk) to get this operation going. Mayor London Breed just announced that she’s asking for a $25 million special appropriation to pay for police overtime; that’s less than the initial capitalization needed for an MFC.
In fact, the city is paying out more than $20 million to plaintiffs in police-abuse cases. That alone would fund the start-up costs.
The MFC, and eventually the public bank, would work with existing community-based lenders and financial institution, the reports say, and could help provide small-business and housing loans that go beyond what existing nonprofits can handle:
Existing providers have gaps in various products and services, particularly in growth capital, lines of credit, and credit enhancements for CFIs that serve small businesses. These include, but are not limited to, the following:
• Banks do not offer loans and revolving credit products at or below $150,000, especially for sole proprietors and very small businesses.
• Small businesses need bridge loans to cover the period between contract award and first payment received.
• More flexible underwriting rules are needed that recognize that different businesses’ potential ability to repay is not tied to financial history, current assets, or other factors that have historically been used by the financial industry and that have correlated with reduced access for people of color.
It would also seek to fund green investments, in an equitable way:
The transition to a sustainable energy future is crucial for addressing the pressing environmental challenges facing our world today. However, it is essential that this transition is not only environmentally sustainable, but also socially just. This means that investments in electric appliances, solar power, energy storage, and other green technologies must be directed towards addressing the environmental injustices faced by communities of color across the City. Unfortunately, and judging from the past, existing financial institutions, such as private banks, that continue to fund fossil fuel projects and have a history of neglecting investment in minority communities, will not address this need effectively. Therefore, new and innovative models of financing and investment must be developed that prioritize the needs of historically marginalized communities. This include community-based and socially responsible public-owned options that ensure that the transition to sustainable energy is inclusive and equitable.
There’s a long road ahead before the city gets into the banking business, but this has also been a long time coming—and the process is moving forward.
An outside consultant with considerable experience in the field has shown that it’s possible. Now it’s a question of the political will at City Hall.