May 13, 2021

Could a Public Bank Provide the Boost Small, Minority-Owned Businesses Need?

 

“It’s not the cure-all for all issues, but part of the success of a public bank will be the growth of small businesses in the City of Philadelphia.”– Councilmember Derek Green

Philadelphia may become home to the nation’s third public bank, if Councilmember Derek Green and the Philadelphia Public Banking Coalition have it their way. In January, Green introduced legislation that, if approved, would create the Philadelphia Public Bank Authority. The goal: To provide access to capital for small businesses, particularly black and brown business owners, who traditionally have been disenfranchised through racist practices like redlining.

“One of the bigger challenges that our city has is our high level of poverty,” says Green. “To me, the best way to address poverty is by growing jobs. And the best entity that can grow jobs are small businesses. One of the challenges small businesses have is access to credit. A public bank is an entity that can help businesses get access to credit, which will allow them to grow, create jobs, and help us address poverty.” 

Green first witnessed these challenges, which particularly affect entrepreneurs of color and African-American-owned businesses, right out of college as an assistant branch manager and small business lender for Meridian Bank in North Philadelphia.

“I really got an understanding of how the banking system works, and I saw some of the historical inequities in banking,” Green recalls. “In Philadelphia, only 6 percent of the businesses with employees are owned by African Americans. Considering the fact that the city has an approximate population of 43 percent African Americans — that’s a huge gap. The challenge that these businesses have, especially in communities of color, is that they’re not able to grow because they can’t get the access to credit. So how do we find ways to grow these businesses?”

That’s where a public bank can help. 

“The public bank comes in as an intermediary to work with credit unions, community development financial institutions, and larger banks to provide that kind of credit enhancement to allow these small businesses to get access to credit that will enable them to grow,” Green explains. 

Stan Shapiro, co-founder of Philadelphia Neighborhood Networks and the Philadelphia Public Bank Coalition, believes the prime purpose of a public bank is to remedy issues like redlining and counteract predatory lending. His coalition has been spearheading the more than eight-year movement pushing for a public bank and issued recommendations that informed Green’s bill.

“One of the bank’s very fundamental reasons to exist is to overcome the horrible effects of systemic racism and practices like redlining by safely, soundly, and efficiently offering credit to folks who have not been able to get it for reasons that have nothing to do with their creditworthiness,” he explains.

So…what is a public bank? As defined by the Public Banking Institute, “it is a chartered bank owned by a state, county, city, or similar government unit, serving as a depository for public funds.” As such, it is mandated to serve a public mission reflecting the values and needs of its community. Which stands in stark contrast to what large, privately-owned banks prioritize, Shapiro adds.

“The public bank doesn’t have to respond to the needs and interests of shareholders to make money for them,” he says. “Instead, it is directed to look at what is in the interest of the public that owns it. In our case, that would be the people of the City of Philadelphia.”

The country’s first and oldest financial institution of this kind is the Bank of North Dakota (BND). Established in 1919, it has since been heralded as the model institution for this ever-growing public banking movement. The BND’s set-up is simple: All of the state’s financial assets and revenues are deposited in the bank, its dividend is returned to its only shareholder—the people of North Dakota. Instead of running its own network of branches, the BND partners with private banks to provide a secondary market for loans, mortgages, and supports local governments by buying municipal bonds at low interest rates.

And the bank seems financially viable. In the past decade, the BND has returned over $300 million to the state’s general fund, helping to create annual budget surpluses and reducing the danger of cuts for public services. 

“In North Dakota, that bank actually makes pretty good profit on business loans. This could be a source of additional revenue for our city as well,” says Shapiro. “The funds could be used to create more affordable housing or support small businesses in areas that were traditionally redlined.”

A city-commissioned feasibility study by the New York-based HR&A Advisors was released in September to further inform last month’s legislation. According to the report, the city could establish a bank as a city-controlled authority which — by lending money to small businesses — could become financially sustainable.

“A public bank differs from existing city financial programs in that it empowers the city to directly control a large flow of capital and could do so without being beholden to the city’s annual budgeting process,” the report said.

Accordingly, Green’s legislation sets out to first establish the structure for a public bank as an authority vs. a state-chartered financial institution. This authority would serve as a “guarantor” in partnership with private banks, credit unions, and community development institutions to primarily provide capital to those entities that are often marked by private banks as “hard-to-lend.” Most often co-ops and minority-owned small businesses. 

“Let’s say there is a beautician, a barber — someone that’s provided continuously a good or service, but they want to go from working for someone to starting their own business that provides that good or service. Well, you have to have resources to start that business, which they do not necessarily have,” says Green. “Especially in communities of color and the African-American community, they may not have the equity of a home, friends, or family. Over 80 percent of entrepreneurs start their businesses with funds from these sources. By not providing them with access to credit, the city is being robbed from the opportunity for that person to create a job and bring revenue back to the city.” 

The bill also details how the authority will be governed: A 13-member board of directors, including nine appointees selected by the mayor and council, plus the mayor, the council president, the city treasurer, and a chief executive officer elected by the board. The authority would be audited annually by the city controller and be subject to oversight from state or federal regulatory agencies. Fears that a public bank, instituted and run by the city, could be open to corruption or political favoritism are rebuffed by Shapiro. 

“I reject the idea that the public sector is inherently more corrupt than the private sector, and that our money is somehow safer in a commercial bank,” he says. “The truth is that the big banks in this country have been fined repeatedly to the tune of hundreds of billions of dollars for fraudulent, corrupt, and self-interested dealings. Think about what they’ve done over the last ten years to rip off their customers, not to mention the crash of the housing market, when they took down the entire economy just 15 years ago. So our money is not safer with commercial Wall Street banks.”

In the future, the authority could also perform other banking functions, issue tax-exempt bonds, and finance city construction projects. For now, the legislation is still undergoing vetting to ensure it is in compliance with state and federal law, as well as to answer questions about the initial capitalization and other tasks the bank may perform. Additional drafts and hearings on the bill are to be expected before it can be voted out of the city’s finance committee and sent to city council for a final vote. 

“We drafted this in a very deliberate, broad way. We’ve been working with the law department and the city treasurer’s office to allow us to get to this point that we can introduce the legislation,” explains Green. “Now we are issuing an RFP for outside legal counsel to help us navigate some of the open issues and questions regarding implementation of how, once this legislation gets passed, do we take this concept and create an actual entity.” 

The success of the Philadelphia Public Bank will be measured by the support it will provide to small, independent businesses. 

“It’s not the cure-all for all issues, but part of the success of a public bank will be the growth of small businesses in the City of Philadelphia, which will help us reduce our poverty rate,” Green concludes. 

And the Philadelphia Public Banking Coalition will continue to ensure that these goals become reality — and hold officials accountable if they don’t. 

“Just passing legislation really is not terribly meaningful, unless you continue to pay attention to what happens after it gets passed,” says Shapiro. “We fully intend to to see this through the ribbon-cutting and beyond.”

To learn more about the Philadelphia Public Banking Authority and its progress, go here. 

Words by Andrea Leonhardt

Imagery by Zoe Lowry