LA City Council Approves First Steps Towards Creating Public Bank

The Los Angeles City Council voted 12-0 on Tuesday to pay for consultants to look into creating a public bank within the city.

Public banks, which are banks run by a city or county, have been a hot topic in California in recent years. Public banks differ from Corporate banks in that they prioritize loans based on where the bank is located, instead of where it’s headquartered. This means that deposited money stays in the local bank and can be distributed as seen fit, with public banks generally having smaller loans and greater access compared to corporate banks that include more branches and banking options.

In 2019, Governor Gavin Newsom signed into law AB 857, which states that any public bank in California must go through the same regulations, such as being FDIC insured, like any corporate bank. The bill also makes it clear that only ten public banks can open in a seven-year trial span. While the bill authors wanted public banks for greater community reinvestment and to keep public funds local so they could be invested or loaned out locally, years of pandemic and the continued growth of online banking have generally slowed down the movement.

However, only a few months before the COVID-19 pandemic started to shut down the country, lawmakers in LA promised to become the first city in California to have a public bank. Over three years of delays later, the city finally took the first few steps towards forming a public bank on Tuesday when they voted to fund consultants for a study into the formation of such a bank.

“A study would provide details about what the bank would look like and would lay out a strategy for its formation,” said Councilwoman Nithya Raman on Tuesday. “A second-phase study would include a business plan and a formal application that must be submitted to the state. I think what’s really exciting is that we have a potential to fill the gaps that our reliance on commercial banking has left us with. I think those gaps are really felt most keenly for communities of color, and for working class people. We have the opportunity to offer banking services to underbanked and unbanked Angelenos. We have the opportunity to sidestep predatory practices and excessive fees.”

Public banking in LA

The motion, which passed 12-0 minus several votes due to vacancies and resignations on the Council, will specifically pay HR&A Advisors $460,000 to create a study into what the creation of a public bank in Los Angeles would look like. While the first study will go into policy and economic analysis, other Councilmembers hope to see possible plans on creating the bank as well. Through this, Councilmembers also hope to see which programs can help boost affordable housing in the city, reduce homelessness, provide banking to communities who don’t often use traditional banking, and other possible benefits.

With the City Council Economic and Community Development Committee also approving of the first steps towards a public bank earlier this month, supporters hope to have a public bank in the near future in LA. However, detractors of a public bank note that there are many drawbacks to such a system, and that the Council needs to address all the negatives of a public bank as well.

“Public banks are not all sunshines and roses, so to speak,” financial policy advisor William Weaver, who has advised on public banking proposals elsewhere in the U.S., explained to the Globe Tuesday. “There are some serious problems with it, especially if implemented on a city level. First off, there isn’t a guarantee they will work, and the plan to have mostly lower-income clients come aboard puts the bank at risk of going down. We’ve had multiple bank failures this year already, like Silicon Valley Bank, so we know things are shaky right now.”

“Public banks also tend to be more stripped down, so services might suffer and they’ll be behind on other banks technology wise, as they tend to be slow adopters. Even worse, public banks can be interfered with politically. You know how much regular banks complain about government interference? Well public banks will be a lot worse there. There’s just a lot of potential to go wrong, and public banks will need to do a lot to convince people who don’t trust banks to trust them.”

The LA City Council is expected to vote more on the issue soon.