Common Misconceptions about the Proposed Municipal Bank of Los Angeles TABLE OF CONTENTS The public sector is inefficient—a public bank will squander public funds 2 Private banks already offer the same services that a public bank aims to provide 2 The public bank may be influenced by special interest groups and may be used by government officials to distribute favors, controlled by the Mayor and City Council 4 The City is looking for a blank check to create a public bank 5 It will cost taxpayers $1 billion to capitalize a municipal bank 5 The LA public bank will fail like the now-bankrupt Los Angeles Community Development Bank 7 The bank won’t be FDIC insured and we’ll have to bail it out if something goes wrong 8 The public bank will bank cannabis funds 9 Local public banks will not be diversified enough to outlast local catastrophes 9 Meeting the liquidity requirements set by the FDIC would be enormously costly for public banks and the city that funds them 10 PUBLIC BANK LA 1 Common Misconceptions about the Proposed Municipal Bank of Los Angeles CLAIM: The public sector is inefficient—a public bank will squander public funds. REALITY: Public sector banks are prevalent and successful in other developed countries, with studies indicating they are more profitable, safer, less prone to corruption, and more accountable than private banks. Globally, there are approximately 700 public banks with combined assets of $37.7 trillion. These public banks are often well-managed and play a vital role in the local economy and financial system. Examples include Germany's Sparkasse network of 400 municipally-owned public banks, which support the transition to renewable energy and have strong small business and manufacturing sectors. The century-old Bank of North Dakota (BND) is also a well-known example of a public bank, credited with helping the state maintain a robust banking ecosystem. The Bank of North Dakota has shown greater resilience and recovery in the face of economic and natural disasters compared to other states. It has a higher return on assets than Goldman Sachs, holds a better credit rating than JPMorgan Chase, and has returned over $1 billion in profits to the state through sound investment and management practices. Because of BND's financial strength and its avoidance of risky behaviors such as subprime lending, North Dakota was the only state that did not experience significant debt during the Great Recession. The Bank of North Dakota generated a profit of $144.2 million in 2021, resulting in a healthy 15% return on investment for the state. The success of the Bank of North Dakota (BND) is attributed to its responsible management and insulation from political influence. The bank's state-appointed advisory board is composed of financial experts and its executives are experienced bankers. Routine lending decisions are made by professional account managers, similar to other banks. During the COVID-19 pandemic, PUBLIC BANK LA 2 BND provided more Paycheck Protection Program (PPP) loans per capita to small businesses than any other state. BND served as a vital intermediary in distributing federal aid to small businesses through its network of over 600 local banks. Public banks focus on the community's needs and provide infrastructure for a strong economy, including clean energy, transportation, healthcare, education, parks, and affordable housing. These publicly-owned institutions use public funds to support public benefit by efficiently allocating capital. CLAIM: Private banks already offer the same services that a public bank aims to provide. REALITY: Public banking is intended to address gaps in services where the private sector has fallen short. A public bank would support community banks, credit unions, and local non-profit financial institutions. These institutions often serve unbanked and underbanked communities but may lack the capital or resources to expand their reach or offer services tailored to these communities. By partnering with smaller, local financial institutions, a public bank can provide these institutions with increased liquidity through participation loans, loan loss reserves, and loan guarantees. This enables local banks to expand their balance sheets and make more loans to small businesses, as well as offer a wider range of services in underserved areas, such as microloans. This approach is beneficial as it enhances the impact and resilience of these valuable financial partners and aligns public money with the public good. A public bank can achieve this without creating a new system but instead by supporting the institutions already in place within their communities. PUBLIC BANK LA 3 CLAIM: The public bank may be influenced by special interest groups and may be used by government officials to distribute favors, controlled by the Mayor and City Council. REALITY: The public bank will be governed by a board of directors chosen for their reputation, financial and industry expertise, and dedication to the bank's mission and stability. The bank's representatives and board will be elected by the bank's shareholders, who are local taxpayers. The bank's financials will be audited and subject to public records, and the bank will be regulated at both the state level similar to other state-chartered banks, and at the local level through regular public review processes. This governance structure does not place politicians in control of the bank or its board but instead empowers the public to select and evaluate its own commission through the election or confirmation of appointees and participation in regular, meaningful public meetings on the bank's operations. A public bank operates similarly to other civic institutions such as universities, public safety, municipal services, and utilities, where the public both directly and through representatives play an active role. The final governance plan will be reviewed and approved by the City Attorney and the state's banking regulators to ensure that political influence does not compromise the bank's stability or its duty to its shareholders and depositors. A multi-chambered board, similar to the German national bank Sparkassen, will provide a balance of financial experts and community leaders, and all bank activities will be fully transparent for scrutiny from both the public and oversight committees to prevent potential corruption. The key distinction between this bank and existing banks is that the people of Los Angeles will have a direct impact on its priorities and leadership. Unlike traditional banks, which prioritize profit and may neglect local communities, the public bank of Los Angeles will serve and be governed by the people of Los Angeles. PUBLIC BANK LA 4 CLAIM: The City is looking for a blank check to create a public bank. REALITY: The City is not seeking unconditional authority to establish a public bank. The process of creating a public bank in Los Angeles has been carefully planned and considered. In June 2022, the Chief Legislative Analyst's office issued a request for proposal and scope of work for a feasibility study and business plan to be conducted by a consultant. The consultant is expected to begin working on the business plan in the first quarter of 2023, in collaboration with the community. If the business plan is approved by the Council, it will then be implemented with the approval of the state's regulatory agency, the Department of Financial Protection and Innovation, and federal regulators. According to state law (AB 857), the Municipal Bank of LA is required to meet or exceed the same safety and soundness standards as the city's current banks. Its operations will be subject to extensive scrutiny, financial analysis, ongoing regulation, and oversight by both banking regulators and the City. Any funds invested or secured by the bank will be subject to approval by the City Council and will be held to a public standard of fiduciary duty. The business plan for the Municipal Bank of LA will include a capitalization model to establish the bank, which will be reviewed and approved by state regulators. CLAIM: It will cost the taxpayers $1 billion to capitalize a municipal bank. REALITY: It is not accurate to say that it will cost taxpayers $1 billion to capitalize a municipal bank. There are several ways to capitalize a public bank that does not require the use of taxpayer dollars. One option is to utilize a portion of the City's current investments, which total $10 billion. By using a small portion of these funds to capitalize the Municipal Bank of LA, we can recognize the contribution that each taxpayer has made to support the public good. This capital can then be lent out or leveraged to support the city's economy, and through sound management and investment, the Municipal Bank of LA has the potential to PUBLIC BANK LA 5 return substantial profits back to city coffers while also expanding credit to the City and to working Angelenos. Another option is to issue bonds to capitalize the bank, and then earn a direct return from bank operations to offset new debt service expenses. This method would allow the City to capitalize the bank without using taxpayer dollars, and it would also offer the City a multiplier effect on its general fund, helping to pay off a bond and bolstering growth in local economies. The capitalization of a public bank could also be achieved through a reappropriation of now well-funded reserves to public bank securities with the same return and risk profile as existing city investments. By using these funds in this way, the City would be able to derive a return on its investments while also supporting the growth of local economies. Additionally, revenue from taxpayers and other sources that are currently deposited into private banks can be used to capitalize a municipal bank. Currently, approximately $10 billion of our public assets and upwards of $45 billion in investments for pensions and other funds are managed through accounts primarily held at Bank of America and JPMorgan Chase. These commercial banks use the large pools of funds from public entities and pensions to achieve tremendous leverage on their own investments and derive private profit from public funds, often at the expense of the public good. And for these services, those banks charge the City over $1 billion per year in fees and interest! By investing these public funds in a public bank, the City's expenses would be lower because the funds would be reinvested in local communities. It is worth noting that there is no minimum amount of capital needed to start the Municipal Bank of LA. However, with more startup funding, the bank can take advantage of economies of scale and generate greater revenues for the city through its investments and services. PUBLIC BANK LA 6 The Municipal Bank of Los Angeles could initially operate as a "banker's bank," servicing the needs of the municipal government by holding City deposits and handling its day-to-day banking needs. As a "banker's bank," the bank would not have branches, ATMs, or any associated brick-and-mortar costs of traditional retail banks. It could also serve as a market-maker for public debt, including the often expensive debt for school districts, which pay outsized fees to brokers just to finance their operations. Furthermore, the Municipal Bank of Los Angeles could serve as a public partner and deal-enabler for existing community financial institutions and credit unions. It could stand in as a guarantor or investor for loans underwritten and serviced by existing CDFIs (Community Development Financial Institutions) and community-focused lenders and financial service providers, thus expanding credit and resources for truly affordable options for constituents. Such lending support has existed at the state level for over 25 years and was a vital way of expanding small business lending during the pandemic. By enabling and enhancing responsible financial services in the city, a public bank could help small businesses, often overlooked or unfairly targeted by larger lenders, compete. CLAIM: The LA public bank will fail like the now-bankrupt Los Angeles Community Development Bank. REALITY: The Los Angeles Community Development Bank which closed in 2003, was not in fact a bank—it was a loan fund designed to support banks and other lenders, providing loans to LA-based small businesses with higher credit risk. 1 It served a similar function as SBA loan guarantee programs and allowed for more lending to LA-based small businesses. It was designed to lose money so that banks wouldn't need to, and it was not subject to the same regulatory requirements as traditional banks. 1 Abramowitz et al., 2010. “Community Development Finance in Los Angeles: Challenges and Responses” https://community-wealth.org/sites/clone.community-wealth.org/files/downloads/paper-abramowitz-et-al.p df PUBLIC BANK LA 7 In contrast, the Municipal Bank of Los Angeles would be a traditional bank, run by seasoned bankers who are fully mindful of credit risk, interest rate risk, and the quality of assets. It would also be regulated like other banks, requiring it to maintain capital reserves rather than simply spending down its funds. The Bank of North Dakota, which has operated successfully for over 100 years, is a good example of a successful public bank. It has consistently achieved strong financial results and has provided numerous benefits to the state of North Dakota. CLAIM: The bank won’t be FDIC insured and we’ll have to bail it out if something goes wrong. REALITY: The California Public Banking Act (AB 857) allows cities and counties to establish their own banks, but these banks must obtain FDIC insurance before being approved by the state. This means that public deposits at the Bank of Los Angeles will be protected in the same way as those of private banks, and the bank will be subject to the same regulations. The bank will also have access to the same deposit protection benefits as private financial institutions. Unlike private banks on Wall Street, the solvency of the Bank of Los Angeles is not dependent on stock market fluctuations. Instead, by investing in goods and services that benefit all Angelenos, such as affordable housing and green jobs, the bank can act as a "counter-cyclical" economic force, providing stability to the City even during downturns. The Bank of North Dakota, which has operated successfully for over 100 years, serves as a good example of a public bank that provided economic stability during past recessions. PUBLIC BANK LA 8 CLAIM: The public bank will bank cannabis funds. REALITY: There is significant interest in providing banking services for the cannabis industry in California, as many legal distributors currently lack access to reliable financial services. While public banks have been proposed as a solution for cannabis business banking, they will likely not be able to provide services to these businesses as long as cannabis remains a Schedule 1 drug under federal law. This is because providing services to the cannabis industry could impede the approval process with the FDIC and the Federal Reserve System. CLAIM: Local public banks will not be diversified enough to outlast local catastrophes. REALITY: In the event of a disaster such as an earthquake or a pandemic, the public bank is mandated to act in the public interest. The Bank of Los Angeles would follow the model of the Bank of North Dakota, which has proven to be an efficient conduit for distributing federal or state disaster loan assistance during times of crisis. For example, during the COVID-19 pandemic, the Bank of North Dakota distributed more PPP loans to local small businesses than commercial banks did in other states. By building local relationships with small businesses and other lenders, the public bank will gain a deeper understanding of the local economy and be better equipped to provide administrative support and technical expertise to connect smaller institutions with federal and state funding programs. This can help ensure a timely and effective response to emergencies, ultimately reducing the overall loss incurred by the City and all Angelenos. Over time, the public bank can expand its capacity to respond quickly to emergencies and further mitigate losses incurred by the City and its residents. PUBLIC BANK LA 9 CLAIM: Meeting the liquidity requirements set by the FDIC would be enormously costly for public banks and the city that funds them. REALITY: If banking were unprofitable and too risky to be worth it, banks would not represent such a large portion of the global economy and trillions in investments across the globe. The FDIC's liquidity coverage ratios would apply to deposits held at the Municipal Bank of LA, just as they apply to other banks. Public funds deposited with the bank would be collateralized by qualifying assets in excess of 100% according to California law. Through sound management, the Municipal Bank of LA can gain efficiencies on its balance sheet and support community financial networks through non-competitive partnership banking services. It would also be able to benefit from additional federal services that local municipalities cannot access, allowing the bank to maintain the same level of safety and security as other banks of its size at a comparable cost of capital. By taking these steps, the bank can ensure that it is able to meet the liquidity requirements set by the FDIC and operate safely and efficiently. PUBLIC BANK LA 10